Collection factories: the next challenge for treasury teams?

Collection factories, using centrally managed account functions and virtual accounts, are gaining momentum among corporate treasurers. With some successful collection factory implementations coming to fruition, a number of corporates are now able to demonstrate how they benefit from efficient cash collection and are thereby increasing their cash reserves. As a result, they are turning to the market and seeking ways to capitalise on increased cash holdings.

One of the key drivers for improving the collections process and a focus on creating collections factories, is the maturity of, the single euro payment area (SEPA), a payment initiative for the simplification of euro transfers. With 28 member countries, the single payment and collection instrument for the euro using a single format means the complexity of former “cross border” payments is now removed, as euro payments within the member states are treated more like domestic payments/collections.

“SEPA enables more than 500m citizens, over 20m businesses and European public authorities to make and receive payments in euros,” says Guillaume Flies, head of collections, BNP Paribas.

“This represents a strong case for corporates to ensure their collections processes are as efficient as possible and while there are tax and legal considerations, reconciliation and operational challenges, these are not insurmountable. Maximising the cycle of payments and collections with automation is key to optimising the return on cash, particularly in today’s negative rate environment.”

Learning from the past: Payment factories

The financial technology sector has been awash with payments initiatives and solutions for some years. With the maturity of these technologies – and the realisation of the promised benefits as implementations come to fruition – corporates can now measure cost savings gained through operational efficiencies, bank account rationalisation and improved liquidity management.

It is well documented that many corporates have successfully implemented a centralised approach for their payments commonly referred to as payment factories, using the payment-on-behalf-of model (POBO); whereby payments are made on behalf of other entities and funded from accounts in the name of the regional treasury or centralised in-house bank (IHB) facility. Individual business units are relieved of time-consuming financial processing activities and are thereby realising cost savings from moving to fully automated transaction processing and the rationalisation of bank accounts.

These projects, particularly in large organisations with operations in multiple countries across the globe, have taken some years to complete and many valuable lessons have been learned. Impacted by global and local market fluctuations, organisational growth – be it organic or through mergers and acquisitions, geo-political changes as well as internal organisational issues of restructuring, people management and adoption of new technologies – there is a wealth of knowledge and experience available that can be applied to the next wave of innovation, collection factories for collection-on-behalf-of (COBO).

Receivables go hand-in-glove with collections. At a recent BNP Paribas-hosted event in London, clients gathered to discuss the challenges and opportunities of collection factories. While there are some similar challenges to those associated with establishing payment factories there are also significant differences. Payments are data-rich transactions and predictable in their nature, receipts are very different and special tools are needed in order to be able to deliver a net benefit to the organisation’s working capital, so considerable thought must be given to managing increased levels of cash.

The technology behind payment factories highlights the benefits of local execution of global processes with transparency, control, management of data and – ultimately – improved visibility. The value of automation incorporating industry standards has come into its own and been widely embraced by business. Collection factories can benefit from these already-proven technologies and they will help to form the basis for developing new and more focused tools for the complex instruments and processes that are involved in collections.

Collection factories: Recognise the benefits

Corporate treasurers are, by nature, effective at consulting with their peers to determine the best approaches – and pitfalls to avoid – in areas that are common to them all. No-one wants to reinvent the wheel, but it is acknowledged that there is no “one size fits all” and different organisations in diverse industry sectors will face different challenges.

It is generally agreed that the key benefits include, but are not limited to:
• Improved control over collections process and data across the business.
• Efficient reconciliation for all credits.
• “Virtual accounts” are data-rich, identifying both payer and payee.
• Amalgamation of data into single invoicing to suppliers.
• Fewer bank accounts = reduced fees.
• A straight-through process saves time.
• Reduced processing costs and time.

With these potential benefits in mind, there are opportunities to build a solid business case and produce quantifiable savings, particularly when using metrics from case studies of those collection factories that have already been implemented.

Challenges require careful consideration

Areas that have been highlighted to be key challenges in a collections factory project are:
• An enterprise resource planning (ERP) system will help facilitate centralised collections, however entities that do not use a central ERP system may require additional tools.
• Regulatory and tax reporting obligations and requirements for local entities need to be considered, together with often complex withholding tax requirements.
• Complex receivables processes may not be easily incorporated into the project and need to be highlighted for special attention.
• Not all customer collection methods are the same.
• COBO also presents unique challenges including the fact that there no standardised formats for receivables information today.
• Organisational change is inevitable and communication across the teams involved requires focus from the very beginning of the process.

There is no doubt that projects of this nature are complex. The implementation timetable needs to factor in many aspects from scoping the requirements, building the business case, obtaining management buy-in, establishing key process owners and communication mechanisms to keep all stakeholders engaged, the education process internally to build understanding and trust for the new approach. All of these are important aspects of a successful end result.

There are many touch points both internally and externally including banks, customers and suppliers. It’s not an undertaking for the faint-hearted, but it can bring tremendous rewards and successful organisations recognise the collections process is an area where there is much to be gained through automation. Improvements in reducing the cost and time for collections, improving reconciliations and establishing fully automated processing can all deliver tangible benefits, which every business can realise.

A final thought

A recent BNP Paribas survey circulated at a customer event highlighted the most important objective of an organisations’ cash investment policy: for 68% of survey respondents this was safety.

One of the benefits of efficient collections is naturally increased cash or liquidity levels and therefore treasurers are paying close attention to maximising the cash held. With current interest on deposits at record low rates, generating positive yields on excess cash balances is more challenging than ever and this is where the strength of bank relationships is being tested.

Gaining a return on increased cash reserves is clearly a challenge in today’s environments, but this is unlikely to always be the case. Organisations that have optimised their collections will in future be able to reap the benefits of greater returns from investments made once the markets return to a more stable situation.

Implementing collection factories today prepares an organisation for a future where more significant investment returns on cash reserves is the norm.

Corporate clients are looking to their bank partners to be reliable through all the ups and downs of business. Banks must be continually innovating to support their clients and right now, how best to deliver a return on excess cash with access to those deposits when required. It is an area where we and our industry peers believe we are able to meet our clients’ requirements and where we hope to prove our worth as a trusted partner.

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