The concept of payment factories has been around for more than 20 years; however the exact definition of the term has often been the cause of confusion. Typically a payment factory helps multinational companies (MNCs) to centralise payment processes in one geographical area. This represents a big step away from the more traditional multi-banking approach, which required corporates to foster and maintain banking relationships in several countries at any one time.
Today, payment factories are not just for large MNCs but are increasingly becoming a ‘must have’ for small and medium-sized enterprises (SMEs). At the same time the largest corporates are also centralising other functions to shared service centres (SSCs), thus keeping only 5-10% of non-sales related functions in their decentralised sales units. Payment factories assist with the automation of accounts receivable (A/R) and accounts payable (A/P) processes, with the end goal being to achieve straight-through processing (STP) by enabling synched file exchange between the banks and a corporate’s enterprise risk planning (ERP) system.
Payment Factories and the Baltic Countries
New European markets are increasingly at the forefront of the demand for payment factories. This is particularly true of the Baltic region whose countries have become increasingly popular as corporates take advantage of labour arbitrage; that is labour costs are lower. It is easier to set up a payment factory in the Baltic region than in other areas of the world, because it is a smaller, more innovative market which is keen to embrace new technology. The companies with head offices in Europe usually also establish their SSCs in Europe and in particular Eastern Europe.
During the period of booming real estate prices that preceded the financial crisis of 2008, gross domestic product (GDP) in the Baltics was at a record high and unemployment was extremely low, affecting corporates’ ability to attract staff to newly-established SSCs. After recession this challenge disappeared, giving sufficient amount of well-educated young people to the labour market. It is worth mentioning that the average age of employees working in SSCs is 27, which could also be perceived as a disadvantage in causing relatively high rotation among employees.
The recession has also focused the attention of corporates on reducing costs and running businesses efficiently, which is one of the main drivers to setting up a payment factory. By centralising payments in the Baltic region, corporates can reduce their administrative and IT costs, as well as simplify their internal processes and better control their overall liquidity. In this way, payment factories can potentially reduce costs and risk.
There are disadvantages to setting up payment factories. Establishing one can be time consuming and complicated, depending on factors including a company’s infrastructure, its ERP system(s) and whether the payment process is already completely centralised. An interesting development is that lately outsourcers especially have been working particularly well with multi-ERP clients, setting up interfaces that liaise with a multi-ERP landscape.
Conversely there are many advantages once the payment factory is up and running, including cost efficiency, reduced administrative costs and the ability to integrate bank connectivity, authorisation and security in the company’s ERP.
Format standardisation is a key trend across the Baltic countries and Poland and fulfils the requirements for payment centralisation. Standardisation has been driven by several factors including the need for flexible, compatible file formats and the increased importance of a corporate’s ERP systems. In many ways ERP providers are defining the rules of the game – dependent on the ERP system’s capabilities, companies are defining requirements towards the banks. In future, there needs to be greater co-operation between banks and ERP providers to achieve better results.
In many cases an SSC will have more responsibilities and activities than a payment factory. SSCs also offer flexibility and transparency of payment processes and, in addition, they can manage human resources (HR) processes, financial analysis, knowledge management, liquidity management and other administrative tasks.
SSCs have been the chosen child of finance; however this relationship is changing as they are growing up. Most experts in this field will talk predominantly about scale, and by spreading the model across the functions, corporates are expanding the benefits that come from volume. It has become possible to share locations, tools, have a single governance structure and leadership team and report to a global business executive, who has a direct reporting line to the chief executive officer (CEO).
The company’s long-term strategy must be a main driver for the place where the SSC is to be established. There must be at least five to 10 years’ strategy in place about the functions and volumes for which the SSC is to take responsibility, so no country is more attractive than another in that sense. That being said, in Europe Poland is a central hub for SSCs, with around 160 being set up in the country since 2004. Together they employ approximately 50,000 people, including core financial positions and also IT specialists, HR and administrative staff who support SSC activities in the country.
Initially, Poland was favoured as an SSC location due to the wealth of low-cost, qualified, university graduates who possessed extensive language skills. This pool of talent made the Polish market very attractive to corporates looking to set up SSCs. Since 2004 MNCs have increasingly opened SSCs in Poland; not only because of the calibre of graduates but also reflecting the number of qualified staff with years of SSC experience who are now available.
For example, Nordea Bank has set up an operations centre in Poland to provide back office services for its group operations as well as banking products. Poland stands out as a European location, with the right skills and experience to reliably set up and operate such a hub for performance critical activities.
While the single euro payments area (SEPA) initiative is not the main driving force for the centralisation of payments, it certainly assists the establishment of payment factories by standardising file formats and fixed payment execution rules. As a result of SEPA, the process becomes clearer and more transparent, regardless of the country where a company has its business.
But, as in most situations, there are pros and cons. While SEPA helps to decrease banking expenses for European payments and to simplify payment flows, it is still far too slow in terms of the number of clearing cycles per day. The downside of SEPA is that it does not meet all of the corporate’s needs in terms of payment types and frequency.
In addition to SEPA, the forthcoming Basel III regulation will set much tougher rules for the banks in terms of lending and risk exposures.
Looking to the Future
Corporate customers continue to request global liquidity concentration platforms. They are looking for immediate payment execution, to make the liquidity flow 24 hours a day without any restrictions. This means that banks will need to work closely with the technology companies to establish and refine such a global system.
Payment and collections and the reconciliation of account statements are in the spotlight today. In the future, it will be possible to include pre-processing the administrative detail prior to payment or before it becomes a collection, such as orders and electronic invoices (e-invoices) in a streamlined, single point of entry process. The aim is to encompass the whole corporate value chain.
To achieve this, there will have to be an end to the current silo existence, which segments invoices, payments and collections rather than integrating the processes in an integrated process flow.
Technology continues to develop at a breakneck speed and corporates must continually look ahead as to where the market will be in two or three years’ time rather than living in the moment.
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