Treasury Today Country Profiles in association with Citi

Industrialising payment processing

Increasing numbers of corporates are setting up payments factories as a way of replacing labour-intensive, repetitive payments processes with more capital-intensive, centralised ones. And with greater connectivity to SWIFT and the implementation of SEPA, this trend towards the ‘industrialisation’ of payments processes looks set to continue.

Payments factories have been around for about a decade, and to date they have been adopted mainly by very large corporates. But now two forces are driving increasing interest in payments factories: connectivity to the SWIFT financial messaging system and the implementation of the Single Euro Payments Area (SEPA).

Definitions of a payments factory vary, but the common theme is that it centralises payment processing. Greenwich Treasury Advisers defines a payments factory as a process whereby a multinational corporation’s accounts payable (AP) centre sends disbursement files in a uniform format to a global bank for payments. These payments can be in-country, cross-border, in cheque or any electronic wire form, and involve local and foreign currency. The global bank then converts the cheques to automated clearing house (ACH) payments, cross-border wires to ACH, or converts the payments into a single large FX transaction rather than many small ones.

Deutsche Bank says the idea behind a payments factory is to ‘industrialise’ labour-intensive, repetitive processes and replace them with more capital-intensive, centralised ones. However, whereas the goals are similar, a shared service centre (SSC) has the broadest scope, while a payments factory has the narrowest. Deutsche Bank defines payments factories as SSCs that are focused on the accounts payable function. Often, they are part of an in-house bank. The goal is to simplify and automate accounts payable, which is “an ideal candidate for centralisation”, says Deutsche Bank, because invoice receipt and processing are often paper-based and labour-intensive processes. Likewise, collections factories are centralised collections processing centres that are focused on the accounts receivable (AR) function. Most definitions of payments factories would also include collections within the remit of the factory.

Citi identifies two different definitions of payment factories. One describes a payments factory as the result of fully centralising both AP processes and staff into a single location (as within a SSC). On the other hand, some organisations would consider a payments factory to be a centralised hub, solely responsible for the execution of payments to banking partners and facilitated by decentralised accounts payable processes.

“For most corporates, a payments factory involves payment centralisation, moving to a single platform to manage all accounts payable and treasury payments across the organisation,” says Andrew Owens, Senior Vice-President, enterprise payments and payments factory expert at SunGard. “A payments factory is a way to replace multiple electronic banking systems with a single solution. It brings a level of visibility that companies don’t have with existing electronic banking systems.”

On a more granular level, Owens differentiates between payment hubs and payment factories: “The difference between the two is how payments are treated as they flow through the system. If a corporate wants to just have a standard workflow that validates payments and acts as a consolidation and bank connectivity layer, that is a hub. A factory goes further and tends to be more sophisticated, touching payments as they go through, by, for example, enriching them with back office data such as instructions for the bank, warehousing payments and also intelligently routing payments to the most cost-effective channel.” A payments factory is tied to improved cash management and enables treasurers to manage payments that are not related to treasury accounts.

Why a payments factory?

A payments factory will provide a number of benefits to corporations. One of the most important in the ongoing environment of cost cutting, is lower costs. A payments factory enables rationalisation of bank relationships and accounts and therefore lowers costs and fees. For example, a payments factory will enable a corporation to net payments and FX transactions for the same suppliers in different locations, considerably reducing external bank costs.

Additionally, by centralising payment activities a corporation can reduce its internal headcount and IT costs. For example, a single payments platform will require less IT attention than multiple electronic banking systems with myriad interfaces. By centralising processes, payments factories deliver improved liquidity management and simpler, more visible cash positions. A corporate treasurer will gain better visibility as to who is making payments within the organisation. This improved visibility will also enable treasurers to optimise liquidity management as they have better control of funding arrangements. Centralisation also improves the quality and speed of payments processing and streamlines account reconciliation. Harmonised payment and collection processes and procedures are another benefit, along with fewer IT interfaces and file formats. Finally, risks can be reduced because internal controls can be strengthened and IT security is also increased.

SunGard’s Owens defines the benefits of payments factories as ‘hard’ or ‘soft’ returns on investment. A hard return includes savings made from decommissioning e-banking infrastructure and bank connectivity systems. There are also savings to be made from fewer errors that in turn lead to reduced bank charges because the corporate is not attracting payment repair fees. A soft return could be the value derived from gaining an earlier and more accurate daily cash position.

Who should build a factory?

Payments factories are a part of the “very visible trend” towards centralisation of treasury activities, says Paul Stheeman, independent treasury executive and consultant, based in Germany. “Payment factories are suited to lower-value treasury activities such as making or collecting payments, particularly for large companies or those that deal with many payments of low value.”

Most of the pioneers of payments factories were very large corporations, seeking reduced costs and more efficient treasury processes. A decision to implement a payments factory will be influenced by a number of factors, including the nature of the business, its trading model, the location of the buyers and suppliers with whom the company interacts, the bank relationships and the extent of existing centralisation of processes, operating currencies, bank connectivity and services, and the status of the corporation’s IT and ERP systems. For this reason, each corporate will be assessing whether or not to set up a payments factory from a different viewpoint.

Owens says payments factories are most suited to companies with at least $5 billion in revenues. Such companies have relationships with many banks, and the rationalisation that a payments factory project brings will result in a good return on investment. Stheeman agrees that the largest companies will reap the most benefit from a payments factory exercise but that should not preclude medium-sized companies from considering such an approach.

How to start

The best way to initiate a payments factory project is to assess the company’s cash visibility, says Marcus Hughes, Director of Business Development at Bottomline Technologies. “By looking at where money is in the company – even money in accounts that are outside of treasury – a company will get a better handle on cash and will be able to manage working capital more efficiently.”

Improving cash visibility can deliver big rewards; one company Bottomline worked with found £20m in hidden cash, which more than paid for the payments factory project. Once a company has assessed its cash visibility it should then consider the impact on payments processes.

The chief financial officer should initiate a project, appointing the treasurer in a key implementation role. Procurement, AP and AR, supply chain management along with IT, legal and tax personnel should all be involved at some stage. It is also important to get the support of subsidiaries in other countries. Subsidiaries typically deal with one or two banks in the country via e-banking systems and may struggle to understand the value of moving to a payments factory. Explaining the bigger picture across the entire company in terms of the cost savings and efficiencies that will be gained from a payments factory should help to bring staff on board.

Around 90% of companies implementing a payments factory will be doing so for the first time, says Owens. For this reason, they should seriously consider engaging a speciality payments consultancy to gain the required expertise. Without this external input companies may be in danger of developing a payments factory that is based on outmoded AP/AR processes and formats. A successful payments factory will ensure that a company’s payments processes are future-proofed.

Citi says there are important questions that need to be asked at the set up phase of a payments factory project. These include:

  • How are payments processed today?

  • How many banks are providing payment services?

  • How does communication take place with these providers?

  • What are the core currencies for the organisation?

  • Are incoming collections funding payments activities?

  • Is there visibility and control across payment activities?

  • How efficient is the funding process?

  • Where is working capital trapped?

The structure of a payments factory will depend on a company’s existing payment set up and future cash management strategy. Companies with decentralised, multi-banked environments will typically focus on control, visibility and standardisation of payment flows. This can be achieved with a shared banking application or a system that facilitates the receipt of instructions from business units and creates payment files for onward delivery to banking partners. All external payments are sent and all bank statements are received through a single delivery channel.

Companies with centralised payments processing will be more focused on achieving further process efficiencies through improving straight through processing (STP) rates, improving funding efficiency and automating processes. These companies, says Citi, will also look to build structures such as in-house banks, netting, and payment-on-behalf-of (POBO) structures to facilitate inter-company activities, manage cash positions and aggregate payment obligations.

Citi says there are a number of factors companies should consider when setting their priorities for a payments factory. These include:

  • Scope

    – the locations of the business units and the processes, staff numbers and inter-company activity to be covered.

  • Banking strategy

    – preferred number of payments processing partners, bank capabilities and requirements for local account services.

  • Liquidity management

    – currencies, preferred account structures and locations, funding arrangements, aggregation of liabilities and business unit control.

  • Connectivity and file formats

    – preferred method of bank communication, relative importance of bank agnostic channels and formats such as ISO 20022 XML.

  • Internal readiness to support changes in processes

    – the changes in technology that are required, the ability to support changes in desired timelines, conflicting projects, cultural hurdles such as local business unit autonomy.

  • Legal and tax

    – any changes to account structures, tax implications, reporting requirements.

SWIFT connectivity

Many payments factory projects are run in parallel with SWIFT onboarding projects. Corporate interest in connecting to the network run by the Brussels-based financial messaging co-operative has grown. Nearly 900 corporates, representing 25,000 separate entities, are registered on the SWIFT network, which offers users standardised connectivity to SWIFT’s member banks, of which there are currently more than 9,000 in 200 countries.

The benefits of SWIFT connectivity are closely related to the goals of payments factory projects. SWIFT:

  • Enables corporates to gain global visibility on cash, receiving end-of-day or intraday reporting directly from all banks in a standard format.

  • Lowers financial transaction costs by enabling channel rationalisation and higher STP rates.

  • Enables treasurers to control payment initiations and increase security.

The SEPA influence

In Europe, SEPA has driven many payments factory projects. At the most sophisticated level, corporates are looking to leverage the investments they have already made in complying with SEPA to set up a factory that can handle inter-company payments linked to an in-house bank and payments-on-behalf-of (POBO) and collections-on-behalf-of (COBO).

SEPA instruments contain fields for POBO and COBO transactions. SEPA is a significant enabler in the passing of information through to the end client, helping corporations and their suppliers to reconcile payments more efficiently and quickly. It is driving a big push towards POBO in Europe, and some North American corporations are establishing POBO structures initially in Europe because SEPA helps them to do this easily.

Owens says SEPA has triggered payments factory projects, particularly as the initial migration deadline of February 2014 has now passed (although a six-month extension has been allowed for financial institutions and companies to become compliant). “Those companies with existing payments factories found SEPA easier to implement because they had more efficient processes and fewer bank interfaces and relationships,” he says. With the deadline having passed, many of the corporates who had taken an initial tactical approach to SEPA are revisiting it and looking to capitalise on the ability to reduce their bank account burden, Eurozone footprint, and implement POBO schemes. SEPA is an enabler of all of these capabilities, says Owens.

Challenges

A payments factory project is not for the faint-hearted. While not necessarily costly in terms of cash, such projects can be very time-consuming.

Stheeman says one of the main deterrents for corporates setting up a payments factory is the time-consuming nature of such projects. Not only do internal staff need to be deployed, but a company must also include third parties, such as banks and software providers, in the project. Depending on the scope of a payments factory project, this can take a lot of time.

Resistance from subsidiaries is also a challenge. Bottomline’s Hughes says companies must be careful to segregate duties within a payments factory in order to establish audit trails. “For political reasons, it is often helpful if some of the responsibility remains with local units. Some organisations realise that local people’s expertise is important and they need to know what is going on. Finance professionals in local subsidiaries play a key role in cash forecasting.” Companies should allow them to initiate some of the payments, while the higher value payments should come under the remit of the treasurer in the payments factory.

Outcomes

Some companies are now undertaking payments factory replacement projects – a sign of the maturity of the industry, says SunGard’s Owens. Early adopters have now had factories in place for around a decade and are refreshing their set-up in order to gain new functionalities.

For example, in 1998 Philips’s treasury introduced the Philips Payment Factory (PPF). The model for the PPF had been based on a bank-styled inter-company current account that could be used for initiating POBO. The PPF operated accounts in 25 countries and 15 different currencies.

Despite the many benefits, the PPF did not work for all subsidiaries and payment methods so Philips maintained a separate global cash management and payment processing infrastructure. To remedy this, the company implemented the Next Generation Philips Payment Factory (NGPPF) project, with SAP, BBP (a SWIFT service bureau), consultancy Zanders, and bank partners Citi and Bank of America Merrill Lynch. The new platform delivered visibility on all bank balances, control over bank account infrastructure, transparency on local payment processes, more accurate information on trade credit, and improved ability to spin off or integrate new businesses.

Global pharmaceutical company UCB implemented a payments factory to move away from a costly structure based on separate in-country payment teams. One of the key goals of the project was to establish POBO capabilities that would enable the central treasury team to make payments for their subsidiaries, eliminating the need for business units to hold foreign currency accounts. With a payments factory, UCB was able to rationalise its cash management structures and banking systems, standardise formats and achieve greater economies of scale.

T-Mobile uses SWIFT as its messaging platform to support an in-house bank and payments and collections factory, processing payments and statements for its European subsidiaries. Before it moved on to SWIFT the mobile operator had its own bank interfaces and formats across four countries, with a total of 15 different systems in place. The costs of operating and maintaining the interfaces were very high and the company also found it difficult to control its payments flows. T-Mobile has estimated the net benefits of its move to SWIFT to be about €4.5m over five years (it connected to Swift in 2007) and a financial return on investment of 182%.

Reader Comments 

Please login or register to submit your own comment