The concept of payment factories is not new, however their widespread adoption is far from ubiquitous. Widely regarded as one of the initial steps towards strategic value creation, particularly to bringing a global treasury function to realisation, it is possibly the most challenging step to undertake given the time, resources and investment initially required by the business to take the decision and establish the process. The business case itself must include numerous areas that are difficult to both qualify and quantify. However, the efficiencies and cost savings to be gained stem from the standardisation of process, technology, infrastructure, location, office costs, relocation costs and people.
Post-crisis, as risk management has risen to the top of the corporate agenda, the treasury function has been charged with responsibility to the board, which means it works more strategically with the business to manage operations across its entire geographical footprint. Today’s treasury function is far more integral to the running of a corporate than it ever was prior to the financial crisis with responsibility for a corporate’s financial needs, risk and cost structures. However, as the financial crisis highlighted, many treasury functions were not fit for purpose for some of the ‘worst case scenarios’.
Cash management has gone global, as corporates look for new ways to optimise their money around the world. In today’s climate, the onus is on the treasurer to make decisions on how a corporate’s cash is being managed and best used throughout its global operations. Therefore, in order to be able to provide the business with the degree of information required to make business critical and strategic decisions, the type of information and the processes required must be much more centralised in order to give treasury the best possible view. Smart goals would be to recycle cash internally in order to better use expensive credit facilities, and run thinner cash balances in order to deploy it more effectively in investments, or to pay down debt.
To do this, treasurers need to implement centralised operations. The drivers towards centralisation, starting with payment efficiencies through converting from paper to electronic payments (e-payments) and full straight-through processing (STP) and enterprise resource planning (ERP) integration, have instigated more careful consideration of payments factories as a viable option and there are obvious benefits to be gained. However, centralisation requires a certain maturity within the treasury management structure itself and with it, a long-term outlook requiring fragmentation issues and manual processing hurdles to have been dealt with. Culturally this also requires challenges around change to be overcome in order to cultivate buy-in throughout the organisation and enhanced risk management controls and efficiency.
While the evolution towards payments factories marks that first step on the road to centralisation, throughout the process, it is important that a corporate evaluates the success of each incremental element. This should encompass whether the processes to be centralised have been successfully integrated and, ultimately, whether such an undertaking is the right course of action for the individual organisation. They must also look at whether they have the right resources in place to successfully implement this approach. It is a mistake to roll out the whole process from start to finish, without monitoring whether the savings and efficiencies intended at the outset have been realised during each step and whether this supports the business case. Consolidation of the successes and re-evaluation of the drivers for the next stage will allow the corporate culture to keep pace with the new experiences and paradigm shift.
Scale is critical, and with corporates increasingly undertaking business in more territories around the world, the need to have an infrastructure that is able to accommodate this efficiently is imperative. And of course, as the world has come to realise, the one-size-fits-all approach to the global banking model is no longer viable, as corporates look to offset their concentration and counterparty risk by shunning global partnerships and opting for greater reliance on regional or local banking relationships. One could argue that this movement is juxtaposed against the centralisation approach.
As businesses, and therefore banking structures, become increasingly global to support their operations, it is also crucial to ensure that the initiative embraces centralisation throughout the processing and technology frontage, rather than co-locating similar functions for example, which creates disparity in operations and does nothing to enhance the overall goal of enhancing risk management and operating efficiency. At the initial stages of centralisation, it is essential that the focus be on creating the uniform platform rather than the functional or hierarchical context.
Global corporates are adopting a more regional approach to their banking relationships throughout their global operations, requiring greater standardisation across geographies than ever before. What hasn’t changed is that even a global provider can still offer access to local clearing and be able to facilitate local payments in each region, regardless of that market’s particular standard.
Payments architectures are historically nationalistic and defined by cross-border constraints where in country uniqueness almost always provides an obstacle to overcome. So for example, a local Swiss payment will have a Swiss format and be cleared by a Swiss clearing and settlement mechanism (CSM), and similarly payments executed in France and Germany will follow the same model. However a payments factory requires rationalisation regarding the channel through which the payment is delivered, as well as facilitating a single, standardised format for each payment. This is in order to ensure all the local payments can be delivered to the banking provider ideally in a single file for all payment types and countries.
But the flipside of making payments is not just the delivery of the service, as it goes without saying that most banks can process those that are vanilla. However, the extent and quality of transactional information that can be obtained centrally via a truly integrated structure can be integrated into the corporate’s workflow will help allow them to effectively manage their financial supply chain. The trend for STP has been realised and it is the turn of straight-through reconciliation to bring about value and reduce allocation effort. It is this data analysis and flow of information on which payments are reconciled against accounts, which will better equip corporates to manage their processes across multiple businesses and throughout all their subsidiaries. This degree of centralisation, of which payments factories provide the first step along the path to a shared services centre (SSC), is providing the catalyst for driving efficiencies and process transformations. The result is that corporates have a better grasp of their cash flows, as operations are run more efficiently by knowing exactly when a payment has been received and reconciled.
The Impact of Regulation
Regulation, as in so many areas of the financial sector right now, is also providing the impetus for change. While some regulation is labelled as ‘cumbersome’ and ‘a burden to business’, regulatory change such as single euro payments area (SEPA) is actually providing the catalyst towards centralisation and the single technical interface in terms of payment instruction formatting that is sought. Many of its benefits are aligned towards harmonisation throughout payment processes by the convergence of payment systems across the eurozone so corporates no longer have to deal with the technical inflexibility and complexities of handling a range of file formats.
Innovation is providing the cornerstone to corporate’s cash management strategies and we are increasingly seeing technology playing a key role in the evolution of the payments landscape and consistent processing of payment transactions, leveraging the benefits of an STP environment. This is in stark contrast to the traditionally fragmented payments experience where legacy systems made the monitoring of transactions in one place impossible. Technology is pivotal to underpinning this process. For example, the ability to build a payments factory, which can be located anywhere in the region in which the corporate operates along with a common, automated process, will aggregate payments to provide simplification and drive efficiencies.
Standardisation across multiple systems and numerous geographies managed through a single interface allows information from around the world to be seamlessly aggregated. As corporates contend with payments initiated from an increasing number of countries, particularly as they look to emerging markets to drive their growth, payments from a variety of systems can be standardised into the latest ISO 20022, multi-lingual interpretation and XML formats, enabling the path to global interoperability. Additionally, as payments become characterised by urgent and non-urgent to determine the priority in which they need to be handled, as opposed to whether they are a high or low value transaction, this new approach facilitates an infrastructure that can respond to the corporate’s increasing focus on immediacy and timing of execution. This plays directly to working capital management and improvements in days payable outstanding (DPO).
A centralised structure for payments can help provide the liquidity controls and visibility into funding needs that will help the treasurer with their investment decisions and ensure the optimisation of their working capital. The realisation of just how critical payments factories can be in contributing to centralisation is becoming an increasingly global view. For example, in Asia we are seeing definite interest towards payments factories and a move to into SSCs in the quest for greater cost effectiveness and operational efficiency and control as they build the base for the treasury function. It is also in this region that we see more leapfrogging of steps towards the use of SSCs from the outset.
Not only this, but centralisation ought to be a standard bearer for best practice throughout the organisation, towards fulfilment of total quality management in conjunction with six sigma improvement, which delivers the benefits it articulated at the outset of the process, along with the integration of new teams with the relevant skills to deliver on this throughout the entirety of the corporate.
Post crisis, the adoption of centralisation stems from greater emphasis on compliance by heightened risk management, increased visibility and efforts to drive better controls on cash flow. This consolidation of infrastructure increases operational efficiency and by standardising and streamlining processes, strengthens controls and mitigates risk. By offering a transparent, single, standardised view via industry standards, corporates can focus their contingency planning on one single communications channel and payments platform. Going forward, payments factories should be the catalyst for change rather than the excuse for inertia.
Treasuries should be centralised but also extend "strategic autonomy" to decentralised units because they need to be responsive and close to the customer, argues Richard Scase, author and business forecaster on global megatrends.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?