The corporate marketplace is changing. In Europe in particular, we are seeing a significant shakeup as new single euro payments area (SEPA) legislation, especially the SEPA Direct Debit (SDD) instrument, shifts the responsibility for managing customer payments from banks to corporates. We are also seeing changes in other regions, as businesses across the world continue to recover from the financial crisis and global economic growth picks up pace.
Many organisations are now looking at an exciting period of diversification, expansion and development. As part of this, corporates are considering rationalising and streamlining their business at all levels, including treasury. Many are taking a view on consolidating payments systems and processes to find new efficiencies and ensure they are ready for a period of economic growth – and, as a result, are looking at the implementation of a payments factory.
Drivers for Consolidation
There are a number of drivers behind the increasing uptake of corporate payment factories. Many find that there are rewarding economies of scale to be found in a consolidated approach. Some corporates have 20 or 30 accounts payable (A/P) units, the majority working in the same currency. A high proportion of these payments may well be running through the same few suppliers. Clearly, by consolidating these payment operations into a single factory and ensuring that currency exchange and supplier payments are made en masse where possible, corporates will save money.
Many firms are also looking to gain additional insight from their treasury services and use this to find further ways to rationalise and reduce costs. With multiple siloed systems, it can be difficult to build a picture of payments patterns and find opportunities for consolidation and cost savings without resorting to complex offline processes and spreadsheets. With a single payments factory, businesses can gain a bird’s eye view of all processes, timelines, suppliers and costs – and use this to both find new efficiencies and more accurately forecast cash flow. In addition many treasury divisions are now seeing the value in being able to manage liquidity and risk across their whole organisation, whereas in the past this activity would typically be performed on a decentralised basis.
Further from this, corporates are realising that a payments factory solution is more scalable and flexible than multiple siloed systems. Many firms are looking to expand as the global economy recovers and markets, particularly in Europe, become more open. The treasury department systems within these organisations often consist of a collection of disparate processes, which were tacked on as needs developed and the organisation grew. This can cause issues as firms expand their reach across new territories and market sectors – while mergers and acquisitions (M&As) can also be difficult, with the payments systems of a newly acquired company further increasing the number of systems to maintain. By implementing a payments factory at the beginning of a growth period, corporates can overcome these issues. Expansion will be far easier with a rationalised, consolidated system, while the payments schemes of newly acquired organisations can simply be integrated into the existing infrastructure.
Building a Business Case
Those treasurers wishing to convince senior decision makers of the need to implement a payments factory internally will find a plethora of ways in which such a project can help improve wider business operations.
First, reputation is a key consideration. This includes the reputation of both the treasury department internally, and the company as a whole externally. Many treasurers find that consistently making payments on time and managing cash effectively is seen as business as usual. One mistake, though, can result in the loss of customer trust. This is a particular issue when the ‘customer’ is a state body requiring tax payments, as failing to deliver on time can result in huge fines for the organisation. Just to be seen as working to a normal level, treasurers need to deliver 24/7. By implementing a payments factory, with clearly defined service levels and the rationalised structural efficiency to deliver them, treasurers can move far closer to ensuring that their department lives up to these high expectations.
When continuous and uninterrupted high perform is considered ‘business as usual’, though, how can treasurers achieve excellence in payments and treasury? A payments factory will allow treasurers to move beyond managing cash flow and offer real business intelligence to high-level decision makers. By bringing together all strands of a firm’s cash flow and payments processes into a single system, a consolidated solution allows for a much more comprehensive view of corporate cash positions. This means that treasurers can forecast cash flow to management in a far more accurate way. It also means that risk can be reduced, with liquidity managed much more effectively – without the need for a ‘golden cushion’ of cash kept unused to allow for cash flow forecasting margins of error. This money can instead be put to more effective use within the business. Better visibility of cash flow also brings other benefits, such as a reduced risk of fraud, more consistent controls and improved auditability.
Finally, quantifiable benefits can be found in reducing the number of banking relationships an organisation holds, resulting in economies of scale and increased cashflow visibility. This will also reduce numbers of costly audits – and corporates will save money if they can lower the number of proprietary bank-supplied connections they need to maintain. Working closely with a bank, though, is integral to a successful payments factory implementation. This means that corporates should carefully choose a banking partner that can offer a full range of services, and whose own payments infrastructure is equally as sophisticated as that being implemented by the corporate themselves.
Challenges in Change
While there are clear benefits for corporates who choose to develop a payment factory, there are also challenges – primarily the calculation of the return on investment of the project.
While a payments factory does offer measurable benefits, such as minimised bank fees and reduced headcount, when considering these benefits alone such a large project can take in the region of four to five years to see a return. However, taking into account the benefits discussed above, such as a reduced cash float and minimised volumes of payment errors, many treasurers find that they will see a return in the region of one to two years.
Proving the more qualitative benefits of a factory approach, though, particularly to more senior and sceptical decision makers, can be difficult. Calculations can be made in terms of opportunity cost – for example, the losses incurred by production shutting down due to an unpaid supplier not delivering raw materials. However, treasurers would be best advised to calculate strong, verifiable figures based on the more sustainable benefits, use these as their primary business case, and discuss the wider business benefits in a more qualitative sense.
When discussing the impact that the payment factory approach will have, it’s important to look at the role that the solution will play in different geographies.
While these solutions will become increasingly common globally, it’s in Europe that we should expect to see the greatest pickup. This is partly because SEPA is pushing corporates to adjust their existing payments solutions – but also due to the fact that Europe is unique as a global region in its grouping of sophisticated technology-aware corporates with an array of differing domestic markets. Despite European attempts to create a single common market, each country still operates a variety of dissimilar domestic instruments. Cultural variances also mean that different countries need to be managed in different ways.
In North America, payments factories can still bring benefits to larger corporates – but these firms have far fewer territories to manage, and hence supplier relationships and cash streams are often already relatively simple. Some global corporates note that this causes issues – with a US head office not understanding the European perspective and drivers for change. It is important that European treasurers in this situation ensure that US decision makers have a full understanding of the specific benefits that a payments factory can bring.
One region to keep an eye on for the future is Asia-Pacific – the most fragmented of all global marketplaces, with a plethora of technologically and culturally diverse territories and no overarching programme of regional financial standardisation. In this region, however, territories are currently generally served by regional corporates, who are themselves served by regional banks. Not just this, but those corporates are also much more focused on paper-based processes than their European counterparts. This is slowly changing though, and Asia-Pacific will begin to see increasing uptake of sophisticated consolidated payments solutions as corporates, and the banks that serve them, become more international.
A New Model for Treasury
Ultimately, payments factories have clear benefits for large corporates – for treasurers and the wider business alike. It’s not always going to be an easy journey implementing such a large project, and treasurers would be wise to invest time drawing up an effective rollout strategy before beginning to discuss the implementation with the wider business. For those who want more control over their cash flow and wish to rationalise a system that is often a headache to maintain, a consolidated solution offers a scalable lifeline. As the world continues to recover post-financial crisis and corporates expand into new spaces, expect to see more talk of payments factories and the opportunities they bring.
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