Getting on Top of Payments with a Factory Approach

In the face of a stagnant economic environment, payment factories are gaining new momentum. The importance of cash and liquidity has been driven up the corporate agenda with finance executives assessing the effectiveness of operations across accounts payables (A/P) and accounts receivables (A/R). Corporates are looking for greater control and visibility of cash flow, which is also putting increased emphasis on customer and supplier risk analysis.

That’s where payment factories come into play. By centralising and optimising business functions across A/P and A/R, a payments factory approach can provide businesses with a bird’s eye view of payment flows, processes, timelines, suppliers and costs. This enables corporates to accurately forecast cash flow, find new efficiencies and reduce the risk of error in detecting potential overpayments, improper payments and fraud.

With numerous measurable benefits, it’s no surprise that globally the majority of corporates have shifted towards the implementation of a payment factory. However, this is not the case everywhere, with European companies lagging behind their US counterparts1.

Motivators and Barriers to Implementation

A key barrier to implementation in Europe is the fact that many corporates are not fully aware of the benefits. With the changes being forced on corporates from the introduction of the single euro payments area (SEPA) and with the SEPA end date now confirmed for 1 February 2014, the pace of implementation is picking up. Rather than stitching together an in-house solution, payment factories speed up the implementation process and reduce risk. They also represent an opportunity for companies to overhaul and transform their wider payments processes and increase efficiency.

Increased globalisation and the growth of international trade, both of which contribute to a rise in payments volumes, will also likely contribute to an increase in payment factory implementation. In addition, technological advances such as service-based platforms have made the implementation of centralised structures much quicker and easier to facilitate.

Building a Business Case

While a payment factory offers easily measurable benefits, treasurers often struggle to build the business case. Not only is it a time-consuming process, there will be many key stakeholders across the business which will need to be ‘on side’ to get it adopted. When considering the benefits alone, such as reduced bank fees and smaller headcount, such a large project can take three years or longer to see a return. This can make or break the case for change. However, this is often overly simplistic as it doesn’t capture the true value accruing from improved cash visibility, reduced risk and increased control. For instance, how much would it cost a business if a production had to shut down due to an unpaid supplier not delivering raw materials?

Further quantifiable benefits can be found in payments factories. For example, in reducing the number of banking relationships, resulting in economies-of-scale savings and assisting cash visibility. This is still true within SEPA’s drive for corporates to use a handful of key bank partners to manage their euro payments and collections.

Considering the Options

Along the road towards centralisation, corporates can turn to a range of choices: build in-house, outsource to a payment processor, outsource to bankers, or employ ‘other’ solutions such as a hybrid model. Market adoption rates and indications suggest that the majority of corporates are implementing in-house payment factories. As ever, however, in-house solutions can be very costly in terms of time and money spent and often rely heavily on internal IT resources which are usually occupied with numerous core operational activities. Often, only the very largest firms can afford this amount of internal resource.

Corporates that outsource to a third party vendor or adopt a software-as-a-service (SaaS) model can potentially benefit from cost savings and reduced implementation time. Despite this, few corporates outsource to third party payment processors, and even fewer to other implementation models. Notably, European companies rarely outsource to bankers. Perhaps now is the time for that to change and new models to be explored as SEPA is imminent.

The Rise of the Payment Factory

Implementation of payment factories is increasing. The introduction of SEPA is undoubtedly a primary catalyst for this in Europe, with corporates quickly realising the advantages when preparing for the switchover, but it is not the only driver.

Other drivers include the modest signs of economic recovery in some parts of the world, not particularly Europe, which has prompted some corporations to consider expansion plans again, presenting an ideal opportunity for adopting a payments factory. Legacy systems, often designed for decentralised operations, will not be fit for purpose but if expansion or technology upgrade projects are greenlighted then now could be the time to consider an overhaul.

Implementation of payment factories has been rather sluggish so far, but there is no doubt things are very much about to change. The benefits of a payments factory, in terms of reduced costs and improved visibility are simply too great to ignore for ever.

1Recent independent research from Logica.

 

10 views

Related reading