Payment Factory 2.0: Reshaping Treasury Efficiency

In the past two years much has been published around the financial crisis and its implications for corporate treasury. The demand for efficiency gains is stronger than ever before and has become a catalyst for treasury departments across the world to undertake the necessary strategic and tactical changes in their treasury processes and infrastructures. New generation payment factories can contribute by reshaping treasury to address today’s challenges and build confidence for the future.

Let’s first look at these challenges and drivers before examining the possible solutions.

The term ‘cash is king’ has been a well-known phrase in the treasury world but its popularity gradually moved to the background in the past decade in favour of other cash and treasury themes. This is clearly changing again with cash and liquidity being in the spotlight. Getting visibility on enterprise-wide cash is a crucial stepping stone to enable control and make your cash work. Disparate systems hinder accurate visibility and solid forecasting.

This leads to a closely related topic: cost containment by efficiency in payments processing. Straight-through processing (STP), standardisation and centralisation are elements that require serious attention in order to strive for operational excellence. Many corporates’ bank-branded electronic banking systems are combined with local tools offered by local clearing systems or software providers. While these tools are efficient for their sole purpose, the one-to-one connections they introduce become a stumbling block when organisations want to reap benefits of standardisation and centralisation within payments processing.

A third dimension that is gaining fast recognition is auditability and risk management. Organisations need to be able to trace payments end-to-end: from the point that an invoice is received up to the point that the processed payments are reported on the bank statements. All the steps within this process related to changes, authorisation, intermediate feedback from the bank and so on should all be linked to a particular payment transaction.

Another very important element is the increased awareness in relation to counterparty risk. The turmoil in the financial markets has provided more evidence that corporates should not put all their eggs in one basket. Reducing bank dependency, and the ability to quickly access multiple banks, has become an even stronger requirement.

Lastly, treasury technology should comply more and more with the corporate IT standards. A myriad of platforms has led to a situation where they are poorly integrated and therefore operational costs (maintenance, upgrades and training) increase exponentially. Further, cash and treasury technology should be able to swiftly anticipate changes linked to regulatory changes and possible acquisitions.

Bring Processes Together in a Payment Hub

If organisations want to move efficiency, control, security and standardisation to the next level, then payments should be brought together in a payment consolidation model, or payment hub. There are many names for this type of solution, with payment factory being the most commonly used term. Despite its wide usage within the treasury domain, its appearance can differ significantly.

At a high level, there are two types of payment factory. The first one focuses on optimising payment flows enterprise-wide. All enterprise-wide payment flows (batch and manual) are routed through the payment factory and all bank communication takes place from here. Communication with the banks is done centrally, leveraging the same bank interfaces for all payment types and operating companies.

The second type not only consolidates the payment flows but also optimises them. Examples of this optimisation are the transformation of cross-border payments into domestic and smart (re)grouping of payments. Due to tax and legal implications this setup typically also requires the implementation or leverage of an in-house bank.

So how can a payment factory allow an organisation to respond to the above-mentioned challenges?

Flexibility to gain fast access to multiple banks

Companies should be able to plug into local and regional cash management banks as fast as possible without impacting the other processes. SWIFT is increasingly becoming a strong option for bank connectivity and there are over 600 corporates using the SWIFT network today. The introduction of the Standardised Corporate Environment (SCORE), which reduces the administrative burden; the launch of Alliance Lite, which provides a cheap entry level; the support from the banks, instead of pushing their own proprietary channels; and the maturity of the SWIFT service bureau offerings are strong catalysts for further growth. Besides SWIFT connectivity, a payment factory should also provide strong and robust host-to-host capabilities to exchange large volumes with your main cash management banks.

Ability to standardise payment processes

In today’s environment with multiple electronic banking platforms, enterprise resource planning (ERP) and treasury systems, payment processes cannot be standardised. Within a payment factory the payments processes (batch payments, direct debits, manual payments, etc) are all standardised no matter which country they are originated from or need to be routed to. Formats, workflow and security can all be standardised, bringing very substantial benefits.

Central control

Without changing local responsibilities related to invoice handling and approval, corporate treasury is able to gain central control over outgoing payments. When and what will be paid can be controlled in real time. The timing of the submission of the payments is set by treasury which will ensures close alignment with the forecasting process.

Visibility of cash

What applies for payments equally applies to bank positions. With the real time access and central receipt of all end of day and intra-day bank information, visibility on cash moves to a higher level. As all outgoing payment flows are centralised and optimised, liquidity management becomes much easier.

Reduce bank and transaction costs

Besides the benefits mentioned above, further optimisation potential can be achieved. One of the most evident benefits is the STP validation and enrichment to ensure that payment instructions can be processed correctly. Another area that drives major efficiencies is the optimisation of payment flows whereby cross-border payments are re-routed to domestic payments. In these situations another entity (e.g. corporate treasury or another local operating company) will take over payment processing responsibilities. These scenarios also known as ‘payments on behalf’ and are supported by an in-house bank.

Centralisation of expertise

By consolidating all payment flows in a payment factory, payments will become a core competency instead of being just another activity. This allows organisations to better set and monitor key performance indicators (KPIs).

Future proof

With all payment processing consolidated in a payment factory, the effort needed to anticipate changes in the market also becomes easier to cope with. Changes no longer have to be deployed in all electronic banking channels, but rather are concentrated in one area leading to further efficiencies. It is important to look for solution providers with active product roadmaps that allow you to reap the benefits of future product enhancements.

Cost containment

The elimination of electronic banking systems and related security devices combined with the reduced administration effort will lead to clear cost reductions. Dependent on the country and usage, the yearly operational costs to support an electronic bank platform easily exceed €10,000. A mid-sized multinational typically has hundreds of individual user profiles that need to be maintained in the electronic banking systems, as well as with the individual banks (authorised staff). This process is not only very time consuming but also introduces risks. The consolidation of user access within the payment factory brings down both elements and also introduces the opportunity to capitalise on new initiatives like electronic bank account management (eBAM).

What to Look For: Close Integration with Your Financial Supply Chain

Undoubtedly, payment centralisation within a payment factory helps corporates address internal and external challenges. At the same time there are many ways to centralise payment flows and many different solutions are offered by a large number of local and global vendors. In the past decade, many organisations have already consolidated (parts of the) payment flows (e.g. bank communication) on a local or regional level. For these organisations, as well as organisations that have not yet centralised payment processes to date, it is important to ensure that the payment factory is closely aligned with other strategic platforms within the organisation.

It is particularly this latter element that is increasingly prioritised within the selection process. In the past, the addition of an increasing number of isolated payment and treasury software packages contributed to further complexity in terms of maintenance, integration and costs. Organisations have come to realisation that the most valuable and beneficial integration for payment factories is to link it with its existing or strategic ERP system. Although the majority of organisations have a strategic preference for a particular ERP backbone, reality is that multiple administrative systems remain in place. For this reason the payment factory should closely integrate with the strategic ERP platform, but at the same be able to integrate with other ERP or treasury management systems that are being used within the organisation.

Next generation payment solutions have made inroads into the market by providing specialist payment solutions that are completely integrated within leading ERP packages such as SAP. Beyond the earlier mentioned generic benefits, a range of strong advantages are offered by these payment factory 2.0 solutions:

  1. No need for complicated interfaces between ERP and the payment factory.
  2. More secure and better auditable processes. No longer are payment files exported to external systems. The entire process from invoice approval to payment authorisation and release is all done within a single system. Even manual payments can be done in a single integrated environment.
  3. Close integration with the booking process. Manual payments that are entered in the payment factory are automatically booked within accounting.
  4. Leverage ERP master data. No duplication of supplier data is required in external systems. The latest supplier bank account information can be used when entering manual payments.
  5. Easier reconciliation. Payments that are rejected by the bank are automatically reversed within accounting, while single payments from a batch can be removed within the payment factory without complicating the reconciliation process.
  6. Lower total cost of ownership. No separate hardware or software is required and the investments made in the ERP environment are capitalised to the full extent.
  7. Easier to operate. Updates or upgrades of the payment factory software are conducted similarly to the other ERP modules. Training is easier due to re-usage of ERP features.

Evolution, Not Revolution – Achieving Best-in-class Payment Processing

Regardless of organisational maturity or existing levels of payment process centralisation, a payment factory will allow treasury organisations to meet the challenges of today’s environment but also enables organisations to anticipate the known and unknown dynamics in the market.

Specialist ERP-embedded payment factory solutions provide a unique opportunity to closely integrate within the entire financial value chain. All of this can be realised while capitalising on the investments made and strategic direction of the company providing an evolutionary migration path towards the optimal set-up.

If your organisation wants to drive efficiency, security and get prepared for the future changes, the time is right to reshape your payments and cash management domain.


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