Treasury Today Country Profiles in association with Citi

Best in class payments and collections

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Many treasury departments already benefit from payment and receivables on behalf of (POBO and ROBO) structures. However, many others are still striving to reach this level of sophistication. Here, we go back to basics to find out how these structures work and how treasury teams can adopt them.

Payments and collections are bread and butter processes for treasury departments around the world. Yet for many treasury teams, these processes still remain burdensome, costly and inefficient.

There is good reason for this: payments and collections are riddled with complexity, especially when the organisation is operating in multiple jurisdictions with many bank accounts and currencies. But there are solutions that, in some parts of the world, have enabled corporates to centralise their payments and (sometimes) collections processes to drive efficiency and cost savings.

On behalf of structures (OBO) are not a new concept, especially to those organisations that have centralised their treasury operations in an effort to drive efficiency. But it is a space that is evolving and a structure that many corporates could benefit from.

In focus: OBO

A payment on behalf of (POBO) or receivables on behalf of (ROBO) – sometimes also known as collections on behalf of (COBO) – structure is a single point of payment or collection, which is set up as a separate entity and administered from a commercially convenient location for the benefit of other entities within a group of companies.

Instead of each entity owning and operating its own external bank accounts, a single legal entity sits at the heart of the company, often supported by an in-house bank (IHB) that manages collections and all payments on behalf of participating entities. The structure enables treasurers to consolidate bank accounts and transactions across the group by using a standard payments process and streamlined bank account structure.

“OBO structures are typically introduced within many corporates with the objective of cutting costs by significantly reducing the number of bank accounts they operate,” explains Cédric Derras, Global Head of Cash Management at UniCredit. “Forward thinking organisations will also use this as an opportunity to better manage their liquidity as money will be concentrated in one physical account without the need to use pooling structures and without the costs and haste of making intercompany transactions.”

As a result of these benefits, OBO structures have crept up the corporate to do list, especially since the financial crisis. Derras notes that regulatory developments have also facilitated the proliferation of OBO, especially in Europe.

“SEPA really triggered this trend,” he says. “It gave corporates the opportunity to standardise and rationalise their multiple bank accounts and payments formats, potentially down to just one for the entire SEPA zone.” Increased automation of payments processes has become a very real prospect under SEPA too, especially with the homogenisation of electronic direct debits and credit transfers facilitated by the across-the-board adoption of ISO 20022/XML payments standards.

In Asia Pacific (APAC) there has also been movement in the direction of POBO/ROBO, with numerous international banks helping their most sophisticated clients adopt the structure – although this is not without its challenges.

The journey to OBO

As companies develop, collections and payments commonly start with local execution by subsidiaries. From here, regional centres of liquidity may evolve to include shared service centres (SSCs). An IHB banking structure may extend the centralisation programme, replacing most or all external bank accounts for subsidiaries with one in-house operation.

With the technical and operational structure of an IHB in place, the next logical move is to establish a regional payment factory. With a change in the internal bank account structure, a POBO operation may be deployed so that the company can make payments using a single bank account per currency or country for all participating group entities.

“POBO/ROBO are tools that can be deployed in structuring treasury flows which can bring about tremendous benefits for treasurers,” says Shirish Wadivkar, Global Head of Payments and Receivables at Standard Chartered. “POBO is really the penultimate step on the journey – one account for payments in one currency is a very neat structure. ROBO is the last leg, although very few corporates, even in Europe, are there yet. Such initiatives typically require a deep understanding of the client’s corporate structure and various local regulations.”

“Whilst there is a common path to putting in place an OBO structure, there is no one route. “How these structures look and how they are used is very much dependent on how the group is organised in the first place, its business model and level of treasury sophistication,” says Jeffrey Ngui, Head of Regional Sales Asia, Cash Management at BNP Paribas. “Simply putting an OBO structure in place without considering how it might impact all areas of the business is unwise, as the change can be drastic and it will shock the organisation.”

The problem with POBO

Despite delivering numerous benefits, POBO is still not the complete solution that corporates are seeking – even in Europe, notes Francisco de Barros, EMEA Regional Treasurer at AbbVie.

Following the spin-off of AbbVie from Abbot Laboratories in 2013, the company inherited over 500 bank accounts spread across over 25 banking partners. Payments were typically managed at a local level by affiliates. This was clearly inefficient on many levels and the treasury set a goal: to create a simple and streamlined best in class treasury organisation that allowed our affiliates to focus on their core competencies.” The team set about doing this by building an IHB that included local accounts for each of the major currencies used by the company.

Surprising difficulties

Core to AbbVie’s plans was a POBO structure. The treasury had many positive conversations about the solution and its benefits with its banking partners and peers. However, when implementing the solution, de Barros admits that he was surprised by some of the limitations that exist around POBO, even within the Single European Payments Area (SEPA). Even more surprising was that these were not discovered until the structure was being implemented. “Most of the banks, which are big advocates of the solution, or papers on the topic, often don’t talk about these limitations or how to address them,” comments de Barros.

Within the SEPA region, the main problem arose from the fact that some institutions in a number of countries, including Italy, Portugal and Spain, do not allow or recognise payments made on behalf of by a sister company.

These are mainly payments related to taxes, regulatory agencies or payroll related items, says de Barros. “Also, despite the SEPA mandate, we still see some of the local institutions mandating older legacy formats or payments being made from accounts in-country, meaning that these cannot be included in our POBO structure.”

Outside of SEPA, the hurdles around OBO structures are more well known, but de Barros found that these were still not well communicated by advocates of the solution. “A good example is China where under certain structures cross-border POBO is allowed, but domestic POBO is still regulated,” he explains. “Also, the standardisation around bank coding and payment formats needs to be improved and standardised further for this to be truly effective for corporate treasury. In fact, across many of the emerging markets, the regulatory environment is one of the key impediments for POBO.”

Taking the solution forward

The result of these issues is a solution that doesn’t deliver on all its promises. And for de Barros it may take some time for these to be resolved because there is “little to no open discussion with the different authorities to find a path forward”.

“By now most treasury organisations are aware of POBO and its advantages. We now need to move towards highlighting the issues so the discussions around the topic can start,” says de Barros. “At this point, however, I have not seen any discussions around the issue, nor workgroups to attempt to address it.” He also calls for more standardisation in payment formats and regulation so that the needs of corporate treasuries can be better met.

Setting it up

Therefore, before undertaking any OBO project a number of elements should be in place to ensure success. Having a centralised treasury and all participating entities on the same IT systems is nice to have, but not essential. What is critical, though, is to ensure that all the centralised payments and reconciliations processes are standardised and controlled by one process owner.

The starting point of a POBO operation will usually be a payments factory, which manages a centralised standard payments process for participant entities. With the technical infrastructure and processes in place, a single legal entity will be established to pay the third-party debt obligations of another legal entity in the group. The process requires the exchange of external bank accounts owned by the group entities for IHB accounts (owned by the payment factory) per country and/or currency.

ROBO has a similar structure, requiring entities to substitute external accounts for IHB accounts. In this set-up, a central collections factory initiates a claim on behalf of a group entity for payment from a third party. The third party will make the payment into the relevant central account for the currency country.

Corporates must also consider the tax implications of their OBO structures. Some areas to consider include assessing whether withholding tax and thin capitalisation rules are applicable for a proposed OBO operation. There may also be issues around transfer pricing and Controlled Foreign Companies legislation. In addition, VAT and stamp duty may impact the feasibility of an operation or the entities it covers.

“To put either a POBO or ROBO structure in place, the corporate needs to work closely with a bank who understands the structure of the corporation and how it operates,” notes Derras. “There are so many nuances involved – especially when doing this in multiple countries – that it is vital that the banks understand relationships between the holding companies and subsidiaries, their legal structures, and what the group is trying to achieve overall.”

Virtual accounts

When talking about OBO, it is hard to avoid a discussion about virtual accounts, a solution that all banks are currently keen on discussing. And there is good reason: they facilitate OBO structures.

Although virtual account solutions vary slightly from bank to bank, with some nuanced functionality, they largely operate in the same way. Essentially each account is a ‘subsidiary’ or sub-account of the client’s own physical account with the bank; they cannot exist outside of that immediate relationship, hence they are virtual. The key to a virtual account is thus the virtual account number/identifier.

“We have virtual IBANs in every country that we have a branch in,” says Dick Oskam, Global Head of Sales for Transaction Services at ING. “These enable our clients to route their payments from their main bank account through these virtual IBANs. This means that the payment is still centralised but the routing mechanism makes it look like it is a domestic payment from a domestic account, so the supplier can understand better who is paying them.”

Virtual accounts can also help on the collections side. “ROBO is more challenging for corporates because of the reconciliation issues that exist,” says Oskam. “We have therefore deployed our virtual account solution to enable our clients’ customers to pay to local IBANs, which then route the payment directly to the corporates header account. This includes information about who has paid and for what.”

Regulatory complexity

Even if a company has a highly sophisticated IT structure, uses a centralised treasury function with a highly streamlined bank account structure and is leveraging virtual accounts, it doesn’t mean that OBO will definitely be possible. This is especially true in APAC where the regulatory and taxation landscape prohibits OBO structures in many of the region’s markets as it translates to inter-company borrowing. Further if the OBO structure is envisaged to be cross-border then it ends creating cross-border capital flows too. “If it is hard to set up an OBO structure in Europe, it is more challenging in Asia,” says Standard Chartered’s Wadivkar.

“If you look across the markets in Asia there are only a few that are liberal in nature,” adds Shi Wei Ong, Global Head, Cash Liquidity Management Products at Standard Chartered. “So whilst you can do OBO to some degree in Singapore, Hong Kong, Australia and Japan, it is nearly impossible to get the full benefit by setting up a regional programme.”

The regulatory challenges differ from one country to another. Some have capital controls, for example. Others come with onerous conditions, such as per-transaction reporting, that add another layer of complexity to an already complex structure. “We support numerous regional treasury centres in Asia and very few are in the POBO/ROBO space,” says Ong. “It is the holy grail in Asia.”

BNP Paribas’s Ngui agrees that true POBO/ROBO is hard to achieve in Asia. The bank has clients which operate hybrid structures whereby true OBO structures are deployed in the countries where this is possible. “In the more restricted markets where POBO is not allowed, ‘payments in the name of ‘can be applied,” he says. “This is quite similar to POBO and sees them operate an account belonging to the entity in the country from a centralised location. This doesn’t offer the full benefits of POBO but it does help, to an extent, and there are savings in terms of resource, IT deployment and economies of scale because it is still a shared service centre style model.”

Making the change

OBO clearly has many benefits if done correctly. But the big issue for corporates is the sheer amount of work required to get there. And although this is a solution that can benefit many corporates, it may just be one step too far for some.

Ultimately though, the decision to head in this direction should be made as part of a broader structural overhaul of the company. The project will touch all corners of the business and all impacted departments must be intimately involved from the start if it is to deliver the desired results. But if the work is put in, the reward may be a truly best in class treasury department.

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