The Payment Factory 2.0: A Key Component of the Financial Supply Chain

For many corporations, the payments process was considered a prime candidate for centralisation into a shared service centre (SSC). As a core transactional process in every accounts payable (A/P) function, the payments process was typically managed by each subsidiary. Creating payment instructions was done by the subsidiary’s A/P system. Creating the files in the correct format for each bank was often not possible without customising the payments programmes in each A/P system. With each subsidiary having to do this, historically it was a costly exercise for multinationals to create and maintain these customisations. Additionally, this silo-based approach led to higher transaction costs and banking fees as it was impossible to leverage economies-of-scale savings to negotiate lower costs with transaction banks.

The creation of SSCs allowed centralised payments processing. Rather than having to deal with payments at each subsidiary, payment instructions are centralised, formatted and dispatched to the banks from a central location. The central process is often backed by dedicated ‘payment factory’ software. These solutions support payment workflows and formats and offer secure interfaces to enterprise resource planning (ERP) and other systems, particularly bank partner software. The technology is based on customisable rule engines to route payments to the relevant bank and convert payment types when necessary. By supporting these functions, large corporations can significantly reduce payment processing costs while increasing their business intelligence around the process because all payments are stored in a central database.

The advent of standardised banking channels, such as the SWIFT network, accelerated this trend, as it became possible to integrate with many banks via a single connection instead of through many proprietary channels. Bank connectivity has always been a major hurdle to multibank cash management solutions, so overcoming this hurdle was a major break-through.

Additionally, international payment standards such as ISO 20022 payment initiation messages were introduced over the past few years, making it easier to consolidate messaging formats across multiple domestic and international payment types. This is particularly relevant when you consider that a typical large corporation (annual revenues exceeding US$5bn) has more than 11 payment initiation systems1. Initiatives to create common implementation guidelines for these messages, such as SWIFT SCORE and Common Global Implementation (CGI), continue to be adopted by forward-thinking corporations to simplify payments processing and reduce costs.

In addition to lowering processing costs, an important benefit of payment factories is increased visibility of cash flows. As all payment transactions flow over the same platform, it is easy to translate these transactions into their corresponding cash flows and then integrate this into the overall cash and liquidity position. Another common driver for payment factories is the increased flexibility to react to new payments requirements, such as regulatory compliance drivers like the single euro payments area (SEPA). Rather than having to implement new functionality in each ERP system, these requirements can be addressed in the payment factory, making it cheaper and quicker to implement new payment functionality.

Payment factories also help corporations become more independent from their banks. By adopting standardised processes that can work across multiple banks, it becomes easier to add or switch banks.

From Payment Factories to Corporate Transaction Banking Platforms

Once SSC were in place and payment factory solutions rolled out, corporate treasurers started to look at other adjacent processes. As the payment factory was already connecting to the various banks, other banking transactions that could be managed by adding workflows became the next target, including account statements, intraday reports, debit and credit advices, direct debits, status messages, treasury, and trade confirmations.

Account statements are a particularly interesting process. Typically, large organisations have many bank relationships and hundreds of bank accounts. It is often a real challenge to get timely information on balances and transactions posted on these accounts. Previous day and intraday account statements are the primary source of information to update cash positions in treasury management systems and are often the only source of information to reconcile cash transactions in A/P and accounts receivable (A/R) systems. This means that account statements have to be routed and dispatched to various departments and back office systems.

As the payment factory is already connected to the bank, it made sense to add dedicated workflows for account statements, to help ensure that the relevant information ends up in the appropriate place. Messaging functions to route and dispatch the account statements have been added to payment factory software, along with relevant business validations. Examples include checking the sequence of statement numbers, consistency checks between balances and transactions, and enriching of transaction information based on rules.

Additionally, functions have been added to enrich the data on account statement transactions with the goal of this being able to add processing information on the transactions posted by the bank. This data helps facilitate processing of bank account statements in back office systems. A typical requirement has been to filter out customer payments from the account statements and send them to the A/R system, to allocate the cash against outstanding invoices. This requires payment factory software to recognise incoming customer payments based on certain criteria such as references and other remittance information on the bank statement. By adding these cash allocation functions, the payment factory evolved into a ‘payments and collections’ factory, relevant to both A/P and A/R functions.

Direct debit (DD) is another transaction type that has been added to the payment factory. DDs are cheap collection instruments that help standardise and automate the collections process, significantly reducing operational costs, speeding up collections procedures and lowering days sales outstanding (DSO). A key efficiency feature of DD instruments is the establishment of pre-determined collection dates. Rather than having to wait for a customer payment, a DD instruction can be sent to the bank with a defined and clear due date. Having the exact dates of the collections increases the visibility of cash flows for better liquidity management, while also reducing credit risk. By adding or implementing DDs into a payment factory, the collections process across various DD schemes and formats can lead to the same operational benefits as mentioned for traditional payments processing.

More Than a Payments Hub

As additional transaction types and related workflows have been added to payment factories, they have become much more than mere payment processing hubs. They have evolved to become corporate transaction banking platforms that help corporations standardise all corporate-to-bank and bank-to-corporate processes, becoming a key component of the financial supply chain (FSC). Corporations can now use these solutions to tap into transaction banking solutions offered by their cash management banks. The corporate transaction banking platform helps corporations pay, receive, and manage liquidity by enabling transactions that can be executed in a safe, efficient, and transparent way for all entities of the group and across all banks.

Breaking up the individual components of the above definition is helpful to define the required functionality of a corporate transaction banking platform:

  • A corporate transaction banking platform should facilitate paying. The platform should offer best practice payment workflows for a multitude of payment types and instruments.
  • A corporate transaction banking platform should facilitate receiving. The platform should include DD instructions which can be processed using dedicated workflows.
  • A corporate transaction banking platform should facilitate liquidity management. The solution should include best practice workflows for receiving, validating, and routing intraday and previous day account statements, including available balances and posted transactions.
  • A corporate transaction banking platform should help ensure transaction safety by providing a number of security features. These features include: audit trails, user security, change approval rules, secure interfaces, digital signatures, safe and secure channels, and fine-grained signing rules.
  • A corporate transaction banking platform should help ensure transactions are efficient. Examples of this include optimal account allocation, least cost routing based on decision tables, business validations on account statements and payments, status feedback reporting in case of rejects, and notifications in case of problems.
  • A corporate transaction banking platform should help ensure transactions are easy by supporting a multitude of domestic and international formats, best practice workflows, and notifications (and associated resolution options) in the case of exceptions.

Conclusion

Payment factories have significantly evolved since their introduction and are now able to process much more than just payments. They can easily be deployed to process all transactions flowing from and to a corporation’s various cash management banks. As such, factories have become corporate transaction banking platforms that streamline corporate-to-bank flows. They enable corporations to tap into critical transaction banking information, such as available balances and posted transactions. They allow payment instructions and DDs to be validated, enriched, approved, and sent to the banks across entities, regions and other banks.

In addition to efficient and low cost processing, a corporate transaction banking solution can create greater independence from banks. A key component in the FSC, a corporate transaction banking system enables corporations to pay, receive, and manage liquidity by executing transactions in a safe, efficient, and transparent way for all entities of a corporation and across all its banks.
 

1Source: AvantGard Global Payments Study, 2009.

 

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