Large multinational corporations (MNCs) are usually made up of many different legal entities, be it for historical, geographical, legal, fiscal, or risk management (i.e. limitation of liabilities) reasons. This multiplicity has a negative impact on the costs of MNC treasury/banking relationships, which are often fragmented and redundant, incurring unnecessary cost.
When it comes to payments, large corporate treasuries have been trying for some time to reduce their bank fees, using various techniques, such as cash pooling, the netting of intra-group flows, or the centralisation of risk management. Most of these techniques already required the setup of an In-House Bank (IHB), where current accounts are used to account for and settle inter-company obligations within the group.
Payment factories also emerged, mainly to consolidate processes in Shared Service Centers (SSC), and reduce operational risks by centralising payment flows, usually starting from a technical point of view (payment flows remain independent functionally, but share a common IT processing and communication platform).
Payments-on-behalf-of (POBOs) are a tool that treasurers equipped with an IHB and a payment factory can leverage to further reduce their banking fees and simplify their cash management, through:
- The reduction of the number of foreign currency accounts held within a group (by consolidating them at the treasury level).
- The reduction of cross-currency payments (by leveraging local accounts whenever possible).
- The economies-of-scale that a consolidation of payments flows allows.
Practically, the concept consists in having one legal entity, named the debtor (for example the central treasury) pay a third-party (such as a supplier) to settle the obligation of another legal entity of the same group, named ultimate debtor towards that same third-party. This can be done using a ‘star-model’ (where central treasury pays on behalf of all subsidiaries), or a ‘web’ model (when the Chinese subsidiary pays all renminbi (RMB) payments, for example, wherever the originating subsidiary lies). While many choices have to be made, the processing of POBOs usually requires the following steps to be followed in the payment factory:
- Filter payments that are candidates for POBOs.
- Allocate the best disbursement account to be used for each of them.
- Optional: split and rebulk the original payment batches.
- Notify the IHB, to account for the intra-group obligation created between the ultimate debtor and the debtor.
- Generate a payment file using a modern and well accepted format such as ISO 20022, which can contain all necessary information (ultimate debtor and debtor, high-quality remittance information to allow reconciliation at the receiving side).
- Communicate the payment to the bank and track the payment’s execution.
- Optional: notify the remitting enterprise resource planning (ERP) systems (payment tracking, choice of allocated account, etc).
POBOs pose several challenges. The most obvious ones are already well-known by central treasurers: compliance issues, bank monopoly constraints, tax implications, increased liability of the group and its funding partners versus the subsidiaries). Another challenge is linked to the increased operational risk that treasury is taking when processing the payments of others: who should investigate, and be responsible for issues at the bank side? How do you build a resilient IT system able to process a massive amount of transactions? But the most important and new challenge is linked to reconciliation issues:
- On the ultimate debtor side: how to track the execution of payments when the original batches have been split? How to manage bank reconciliation when the ERP does not know upfront which bank account will be used to settle an obligation?
- On the third-party side: debtor information cannot be used anymore for matching purposes, potentially raising a problem. This requires that information about the ultimate debtor and/or detailed, high-quality remittance information, is made available along the whole settlement chain, from the payment initiation message, though the banks and clearing systems, up to the account statement of the third-party.
These challenges require a state-of-the-art, yet highly flexible, payment factory tool that can adapt to the exact context of the corporate treasury.
Payments-on-behalf-of are no silver bullet, as their setup brings complexity, and therefore cost. And depending on the structure of the group, they may prove applicable, or not. But what is certain is that the progressive disappearance of legal constraints and the continuously lowered cost of technology already make it accessible to mid-caps. Once corporates finally realise the benefits they can gain from the impending single euro payments area (SEPA) environment by consolidating all their European disbursements in just a few banks, the enthusiasm for POBOs will I expect only accelerate.
On the accounts receivable side collections-on-behalf-of (COBO) enable credit and collections managers inside the treasury or elsewhere, to essentially outsource time-consuming collections tasks while keeping the appearance of in-house collections and maintaining a level of ownership and control. Use of COBO can be integral to recovering funds owed, as the responsibility of pursuing debtors is removed, freeing up more time for employees and management to focus on the core business.
If used correctly, the COBO concept can offer a faster turnaround time when it comes to getting outstanding balances paid that may have otherwise gone unsettled.
Introducing a technology solution into COBO can counter the common problems stemming from failures in communication and collaboration. Installing COBO technology with a collaborative portal creates better visibility, automatic data flow, and can ultimately lower expenses. Gaps in collaboration between a company and its COBO team can lead to inaccuracy, poor reporting time, overly manual processes, and a lack of visibility.
Traditionally, collections can be a time-consuming process, and without complete information, time and money can be wasted chasing accounts that would pay anyway. In fact, McKinsey estimates in its quarterly report entitled ‘Best Practices for Bad Loans’ that “up to 70% of the early calls that go out to borrowers [are targeted at those] who would pay without a reminder.” By introducing a logical system integrating indicators such as past behavior combined with bureau data, companies can prioritise their focus on the 30% of accounts that need attention.
When a company initially outsources its collections, they need to prepare data for transfer to the collection agency, requiring the transmission of potentially massive amounts of information. This can even involve mailing boxes of documents in order to establish payment history and activity, leading to significant time spent and the potential for error if done manually. In addition, with collections pricing based on age of invoice, the faster the information can be transferred, the more the costs of outsourcing collections can be reduced. Implementing a receivables solution can vastly reduce the amount of time and manpower needed to transfer information while increasing accuracy and efficiency by employing automation to standardise data.
Use of a portal with a user-defined business rule engine can help remove accounts and invoices from a collections state and automatically assign them to a collector, which cuts down on time that employees spend performing this process by hand and alleviates the possibility for data inaccuracies to arise. Then, the portal will automatically transfer these files to the collector, ensuring data integrity and reducing the costs associated with reformatting data. A COBO treasury structure becomes a real possibility.
By introducing statistical modeling into the process prior to transferring materials, companies can determine which accounts should be transferred by predicting which accounts are likely to remain unpaid, thereby reducing costs by outsourcing only those accounts that need attention.
Once the information has been transferred, using a portal can vastly improve communications and reduce time to payment by improving and automating the collection of revenues that are assigned to collection agencies. A solution can manage placement of accounts and invoices, as well as put controls into place for the tracking, reporting and reconciliation of all collections data that is placed at an agency. This can positively impact an organisation by offering it a means of reducing the operational and management expenses required to monitor and manage a relationship with any given agency. It can work just as well in the internal supply chain as well.
Using an online portal can support communication in a COBO structure by providing the tools needed to identify and compare performance. Tracking how efficiently a collections agency is performing simplifies the process of determining the amount it should be paid for its service and helps determine whether a particular agency is fulfilling its purpose. The structure and its attendant web services technology can just as easily be used internally too. A portal can facilitate control by offering users increased visibility into the progression of an account or invoice.
Gaining control over accounts receivable can help a company to increase their liquidity by increasing collections. Implementing a COBO system can allow a company to focus on strategic functions rather than time-consuming logistical tasks. To maximise the impact of COBO, using a system can help maintain greater control and improved collaboration and communication.
In summary, companies would be well served to re-examine internal processes and look for opportunities to implement POBO and COBO to maximise resources, introduce greater efficiencies and reduce costs.
A decline in the return on capital employed of globally listed companies over the last decade has been noted in recent EY and PWC reports. This is despite businesses taking an increased focus on balance sheets since the financial crisis in 2008.
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?