The term ‘payment factory’ is used widely and is often interpreted in different ways. Broadly speaking, a payments factory refers to a corporation establishing a central hub to gain a degree of central control and management over the processing of previously decentralised payment flows. The actual structure of a payment factory can manifest itself in a number of ways with internal factors, such as configuration of processes, technology and staff, and external factors, such as bank counterparties, connectivity and account structures, leading to various implementation models.
One interpretation describes a payment factory as the construct resulting from a full centralisation of both account payables (A/P) processes and staff into a single location, as within a shared service centre (SSC). Other corporates would consider a payments factory to be a centralised hub, solely responsible for the execution of payments to banking partners and facilitated by decentralised A/P processes. Neither interpretation is wrong. It is, therefore, essential to understand the factors that influence a payments factory setup and what benefits can be realised.
Today, many corporates continue to manage their payments processing and bank accounts at the business unit level or at the subsidiary level. While these methods may offer a degree of flexibility, at the same time they can often result in poor visibility and high maintenance costs. Multiple systems, banking relationships and processes tend to introduce higher costs, lack of visibility into cash flows, complex approval processes, operational risks, reporting challenges and a general lack of standardisation.
Cash management and payments processing structures will be influenced by various factors including nature of business, trading model, location of buyers and suppliers, bank relationships and degree of centralisation of processes. Payments setup will be influenced by relationships with suppliers, operating currencies, bank connectivity and services, and the technology/enterprise resource planning (ERP) status in a firm. Thus, the starting point when evaluating payments structures will likely be different for most corporates and also the benefits of centralisation.
The pressure to reduce costs has typically lead corporates to assess their processes, but the single euro payments area (SEPA) is also now leading corporates to focus on payment factories. The European Parliament recently enacted a law which set 1 February 2014 as the end date, within the euro member states, for the migration of credit transfers and direct debits to the SEPA standards. This has focused many corporates to assess their existing euro payment flows in order to understand the impact of SEPA to their organisation and the necessary preparation activities. As part of this SEPA effort, which promises standardisation, efficiency and a reduction in euro accounts, many are taking the opportunity to evaluate their wider payments infrastructure.
What Value Can Payments Factories Deliver?
A centralised approach to payment activities can help a corporate achieve benefits in a number of areas dependent on their current activities and cash management strategy. These include:
Increased standardisation and efficiency
Gain consistency in payment processes enabling automation, higher straight-through processing (STP) rates, less manual activity and resultant cost reduction.
- Ability to reduce number of banking relationships and rationalise account structures.
- Standardisation of euro payments processing through the utilisation of SEPA Credit Transfers (SCTs).
- Harmonisation of bank connectivity and file formats utilising SWIFT and the XML ISO 20022 standard.
Increased visibility and control
- Visibility over internal payment and control over funding arrangement leading to optimisation of liquidity.
- Easier reporting for internal and regulatory purposes as payment information becomes available centrally.
- Fraud reduction through process management, visibility and implementation of control policies.
- Consolidated supplier visibility enabling better supply chain management and cost negotiation.
- Lower transaction costs with better management of banking.
- Improved foreign exchange (FX) spreads with consolidation of payment flows.
- Better utilisation of available funds as funding processes and interest conditions are optimised.
Different Starting Points Towards a Payments Factory
The structure of a corporate’s payments factory will vary depending on their existing payment setup and the future cash management strategy of that organisation. Organisations that are starting from a decentralised, multi-banked basis will likely be seeking control, visibility and standardisation over their payment flows, as their priority. This is typically achieved by either using a shared banking application or by adopting a system that facilitates the receipt of instructions from business units and creates payment files for onward delivery to banking partners. Essentially all external payments are sent and all bank statements are received through a single delivery channel.
Those organisations that have already achieved a degree of payments centralisation will be more focused on achieving further process efficiencies through improving STP rates, improving funding efficiency and automating processes. In-house banks (IHBs), netting and payment-on-behalf-of (POBO) structures are also often employed to facilitate intercompany activities, manage cash positions and aggregate payment obligations.
Some important questions that need to be addressed at this planning stage include:
- How are payments processed today?
- How many banks are providing payment services?
- How does the communication take place with these providers?
- What are the core currencies for the organisation?
- Are incoming collections funding payments activities?
- Is there visibility and control across payment activities?
- How efficient is the funding process?
- Where is working capital trapped?
Varying Corporate Priorities
Having first understood the current structure, the next step is to define a future vision for cash management and payment activities. This will inform the payment factory priorities, help drive internal and external discussions and assist the process of determining the payment factory solution. For some organisations the main focus and priority will be increasing cash utilisation, for others it will be headcount reduction or having a bank agnostic infrastructure. This vision is often driven by identifying the immediate key challenges and cost areas in the corporates payments process. Discussions with banking and technology partners can also help guide the decision-making process and help inform corporates of solutions that can support their payment factory model.
Corporates should consider the following:
- Scope: geographies and business units in scope, scope of change covering processes, staff numbers/location, intercompany activity, etc.
- Banking strategy: preferred number of payments processing partners, bank capabilities, requirements for local account services, etc.
- Liquidity management: currencies, preferred account structures and locations, funding arrangements, aggregation of liabilities, business unit control.
- Connectivity and file formats: preferred method of bank communication, relative importance of bank agnostic channels and formats SWIFT/ISO 20022 XML.
- Internal readiness to support changes in processes: changes in technology required, ability to support changes in desired timelines, conflicting projects, cultural hurdles such as local business unit autonomy.
- Legal and tax: changes to account structures, tax implications, reporting requirements.
Desired payment factory models can vary based on multiple factors. While the drive towards efficiency is common, so too is the use of technology as an enabler of payments factories. Today, corporates are using, in varying ways, ERPs, treasury management systems (TMS), online banking applications, host-to-host connections and additional middleware to achieve their payments objectives. Below are some examples of how organisations can evolve their payments factory setup.
Establishing a Payments Factory
As with any change project, establishing a payment factory requires internal scoping, planning and preparation. The participation of treasury, A/P, legal/tax, technology, and project management teams will likely be required.
The Trend Towards Bank Rationalisation
Despite the economic uncertainty and increased corporate focus on bank counterparty risk, the trend of centralisation of payments activities to core processing banks continues as corporates continue to see the value in working with fewer banks for their payments needs. Multiple bank relationships introduce inefficiency into the payments process as duplications of processes and connectivity, varying bank requirements, processing cut-off times, and so forth. All lead to higher costs, lack of visibility, control and general inefficiency.
Multinational organisations require global banking partners who can support their multiple country banking requirements, advise on payments structures, identify opportunities for efficiency and deliver payments solutions that enable corporates to achieve their cash management goals.
In summary, a payments factory can materialise in several forms but the underlying focus is universal: a drive towards greater visibility, control and efficiency. Having a clear understanding of your setup and your vision while working with the right partners can help unlock these benefits.
To read more from Citi, please visit the company’s microsite.
Why corporates should consider the multi-currency virtual account (MCVA) - a bank-offered cash product which allows them to maintain foreign currency balances and affect cross-boarder transactions where a physical account doesn’t exist in the local currencies.
Steel producer thyssenkrupp and chemicals group BASF were among the multinationals to report on their experiences at the recent SAP Ariba Live event in Prague.
Financial services and healthcare are two of the sectors on the verge of being radically transformed by the rise of artificial intelligence and robotics.
Sometimes, bank relationships simply don’t work anymore. However, changing banks is rarely straightforward - from rejected KYC documentation to technical hitches, the potential hurdles are significant. This article outlines how detailed preparation, messaging standards and a strong moral compass can help the switch go smoothly.