Treasury Today Country Profiles in association with Citi

Bringing the pieces together

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Internal and external cashflow management – and the data associated with these two pieces of the cashflow puzzle – have proved difficult to bring together. But greater integration of the in-house bank and payments factory with liquidity management and planning solutions, are making it possible for companies to get a clearer picture of their group-wide liquidity.

Companies continue to look at ways to increase the efficiency of their liquidity usage. While this has long been a trend – one accelerated by the global economic and financial crises – many companies are now looking to move beyond simply improving efficiency in individual processes and instead, are working to integrate broader management of internal and external cashflows and payments management with liquidity management, and use the aggregated information to improve forecasting and planning.

As such they are bringing together technologies that have previously existed in isolation in order to create a single, unified system for managing inter-company transactions and external payments. By bringing together a payments factory with an in-house bank and combining that with good data integration, companies can achieve global visibility and a liquidity management solution able to manage working capital from end-to-end in near real-time.

This has long been discussed, but it is only now that systems and companies are at a point where it can really happen. The result is reduced payment costs, fewer payments to process, greater scale, and better capital management planning.

Centralisation enables cashflow transparency

The first step is centralisation. Centralising liquid assets and payments makes cash management easier. There are fewer external banking connections to pay for and manage, and the fewer financial transactions the group’s companies have, the more effective cash management will inevitably be.

Data gathered in a payments factory is invaluable in helping companies improve accounts payable (AP) management. With this data, companies can:

  • Extend credit periods.

  • Make sure payment is not made early.

  • Take discounts if cost efficient.

Tapani Oksala, Product Manager – Payments and SEPA, at system vendor OpusCapita, notes: “Maintaining a single, centrally-managed payment processing solution means less manual work when interfaces are run automatically.” This reduces operational risks and can provide a consolidated view on payments and cashflows from all of the group’s banks.

This is also being pushed by broader market and regulatory developments. In Europe, for example, SEPA and the UK faster payments initiative are big drivers for change in terms of payments management. Notes Oksala: “Companies want to justify their investments in SEPA and are searching for more benefits to gain from them.”

As a result of the drive for better liquidity usage and in order to take the most advantage of investments they are already making, companies are increasingly establishing payment factories and shared service centres, along with in-house banks, all of which help increase automation throughout the payments management value chain. But the next step, which some companies are indeed taking now, is to bring all that together.

The most important aspect of automation is to get all source systems linked together. This requires some sort of overlay system or integration tool to map data, convert material to and from the different formats produced by each system, and also to integrate with external systems and banks.

“With intelligent interfaces that will also perform conversions from different systems to a uniform format, companies can handle all their payments in a uniform way.”

With intelligent interfaces that will also perform conversions from different systems to a uniform format, companies can handle all their payments in a uniform way. This may involve file conversion by a solution service provider – for example as part of a payment factory solution – or it may involve already-standardised formats.

Banks and service providers are helping with this by working together to create and support industry standards for corporate-to-bank messaging. The creation and usage of the common ISO 20022 XML standard is making a huge difference in connecting different solutions and allowing for better data transfer and integration with disparate systems. It has helped corporations centralise payment services, as once it is implemented, corporate and bank systems speak the same language for all payments messaging.

In addition, the common global implementation (CGI) forum allows financial and non-financial institutions to work together on the many corporate-to-bank implementation issues that remain with the use of ISO 20022 messages and other related activities in the payments domain.

Moving beyond data collation

Companies want to move beyond simply gaining visibility into cashflows and make use of that information to drive greater efficiency across the working capital chain.

Having an in-house bank – where group companies have an account with the in-house bank, which handles intergroup funding and group-wide account aggregation and liquidity management – is a natural next step after setting up a payment factory. It reduces idle cash, improves control over outgoing and incoming cashflows, and enables centralised or decentralised processing of account statements.

It also decreases external banking IT costs as there is no need for software maintenance and bank connections at group companies – connections are managed centrally through the in-house bank. In addition, not having to pay transaction charges for internal payments generates instant savings and bank-specific value dated losses are not incurred either when account entries are made in the in-house bank. In addition, it enables cost-efficient internal financing, and interest can be calculated both for internal and external accounts.

The following transactions are typically routed through an in-house bank account:

  • Financial inter-company transactions.

  • Commercial inter-company payables and receivables.

  • Third party payments and receipts made by the in-house bank or by a local payment centre on the entity’s behalf.

Netting reduces vendor payments

Once the payments factory and in-house bank are integrated, the key to increasing efficiency is netting. By using the in-house bank to net and manage flows internally and then netting payments to vendors across different business units through a payments factory, companies generate the maximum benefits from the two arrangements.

By consolidating payments across multiple legal entities, companies not only create a single payment to each vendor, but they can also then manage FX conversion on just a single payment – rather than the many payments that might have been made in the past. Lisa Rossi, Managing Director at Deutsche Bank, says: “You could have had ten different legal entities making payments to one vendor. Now you have one payment going out to that vendor. You can see that this leads to a great reduction in charges incurred.”

For example, industrial manufacturer SKF manages payments centrally – through SKF Treasury Centre – and uses a netting solution connected to its AP and invoicing systems to net payments to different vendors. By managing centrally and acting as an in-house bank, each group company works with a single counterparty and holds positions just in their functional currency – central treasury acts as the counterparty and makes all payments on behalf of group companies.

“Netting internal and external positions with different vendors allows you to reduce the number of transactions with each vendor.”

Thus, with the netting solution, the treasury centre not only drastically reduces total payments to external counterparties, but also, can consequently vastly reduce currency exposures and increase control over FX positions. SKF uses a netting solution from OpusCapita.

Explains Rossi: “Netting is a simplification solution. Netting internal and external positions with different vendors allows you to reduce the number of transactions with each vendor. It also provides greater control, as you don’t have little fiefdoms each managing their own payments.”

Examples of the simplifications are:

  • The total volume and number of payments are minimised, reducing both remittance and exchange costs.

  • Incoming and outgoing payments in the same currency are matched, reducing foreign exchange costs.

  • Float is decreased, which reduces interest costs.

  • Work procedures and other administrative procedures for inter-company transactions are simplified.

  • Settlement discipline is improved.

  • Short-term liquidity planning becomes more reliable.

In addition, the netting system becomes a source of information for management control systems.

Solutions for netting transactions and bringing together in-house bank functionality with a payments factory are now available from a few of the big transaction banks, such as Deutsche Bank – as part of their broader payments solutions; from treasury workstation vendors such as Wall Street Systems; and from independent vendors, such as OpusCapita – which also often provide white-labelled systems to banks and treasury workstation (TWS) providers.

Enabling better forecasting

To get the true picture of cashflows, it is critical to get information from all internal systems, subsidiaries and banks. That information can be automatically gathered from accounts payable/accounts receivable (AP/AR) systems, as well as from banks, through either an enterprise resource planning system (ERP) or TWS. When that information is integrated with data from the payment factory, in-house bank solution, and the netting system, it provides a wealth of data for treasurers to use in planning and forecasting – and the more integrated all these solutions are, the easier it is for that information to flow into planning tools.

Telecoms company TeliaSonora, for example, makes use of the data coming out of its in-house bank and payments factory to create a clearer picture of risk and currency exposures and better-manage payment timings. Its payment factory acts as the sole interface between central treasury’s ERP system and its external banking partners for payments, and data flows easily between the ERP and other systems – which TeliaSonora uses for planning and forecasting.

However, even the most sophisticated companies with a high-end TWS don’t make use of the high-end planning tools that come as standard. In fact, even the bluest of blue chips still often goes back to a spreadsheet when the time comes for planning and forecasting.

Deutsche Bank recently launched a solution to bring together all of this data into a simple planning and analytics tool with dashboards, which interfaces directly with its liquidity products. A company can use the dashboards to get a real-time view on all accounts globally, along with credit positions and daily liquidity needs, they can manage intercompany funding across accounts, handle FX positions and hedging, and make investment decisions on the best use of excess liquidity with FX and money market products, mutual funds, and so on.

So the first step in moving to a full working capital solution is payments centralisation. Once that is in place, companies can look to create a single view and centralised management of intracompany funding and FX position management with an in-house bank.

Then, by bringing these pieces together with a netting solution, companies can vastly increase the efficiency of their payments processes, better-manage and control FX exposures, and greatly reduce banking costs. Of course, each of the previous steps also creates cost and resource efficiencies. With the real-time group-wide position management that these create, a company can use that to implement better forecasting and planning. They can make funding and investment decisions more effectively – again in real-time – and excess positions can be either automatically or actively invested and FX exposures covered.

In addition to bringing together a payments factory, in-house bank, liquidity management solutions, and netting solutions, companies can also now connect all of this with their treasury management, invoice management, and data management solutions. All of this information is a powerful tool that can be used in many ways to help improve process efficiency and reduce costs.