Cash & Liquidity Management

Optimising global payment structures

Published: Nov 2010

Corporations with subsidiaries around the globe are faced with the issue of how best to structure their foreign currency payments. The chosen payment model will have implications in terms of regulation, risk management and balance optimisation. In this Business Briefing, Treasury Today explores the argument for moving to a more streamlined account model and the benefits that can be achieved by such a move.

Since the outset of the financial crisis, treasurers worldwide have been more focused than ever on streamlining operations across the board. By making the most of funds within the business, treasurers can reduce the need for external funding.

Cash pooling is a tool used by treasurers to optimise the interest on surplus balances – or to remove the need for external finance. But for corporations with subsidiaries around the world holding accounts in a range of local currencies, their existing account structures may not allow them to concentrate cash as effectively as they might do.

Many corporates have a decentralised structure whereby local subsidiaries make payments in local currencies. Such structures may not allow the level of visibility that a treasurer requires in the current market, which in turn can limit the corporate’s ability to manage counterparty exposures. “If it takes a week to get a view of where balances are, by the time it’s reported you know it’s out of date,” comments Seamus Desouza, Executive Director, Foreign Exchange, J.P. Morgan Treasury Services. “With some of the market movements we’ve had in recent years, taking a week to understand your counterparty risk is no longer a viable option.”

The issues

Treasurers operating a decentralised account structure may encounter the following issues and challenges:

  • Transparency.

    For companies managing foreign currency payments in a variety of currencies, transparency can be a significant challenge. This is particularly the case when it comes to restricted currencies. Treasurers may struggle to get answers to questions such as: what was the rate achieved? When was the payment actually received by the beneficiary? How should such payments be formatted?

  • Balance management.

    Are subsidiaries overfunded? If payments in local currency are made from local accounts, it is likely that the corporation will have balances in a number of different currencies, which may or may not be earning interest.

  • Risk management.

    In a decentralised account structure, currency exposures may not be managed as effectively as they could be on a more centralised basis. A diverse range of banking relationships at the local level can also imply greater counterparty risk.

  • Inefficient processes.

    The more complex the payments process, the greater the likelihood that payments will be delayed or lost.

Multiple accounts, multiple currencies

The use of multiple local currency accounts for both payments and receipts is widespread. However, this practice brings with it certain disadvantages. Using local accounts for both payments and receipts increases the complexity from a cash flow forecasting point of view, which often means that forecasting is carried out by local subsidiaries, making overall visibility of projected cash flows problematic.

Models for funding subsidiaries’ payments

When a corporation needs to fund local subsidiaries, it may choose either to send funds in the company’s functional currency, or to send funds in the local currency. Broadly speaking, there are four different models, which can be used in various combinations:

  1. Fund with hard currency into local accounts

    Based on publicly available rates, the treasury centre pays euro or dollar into the local account. Currency conversion into local currency therefore takes place at the local level. This model is used commonly by smaller US corporates or occasionally by corporates in Western Europe.

    For companies which choose to send funds in local currency, there are several different models:

  2. Fund with local currency into local currency accounts

    This may be appropriate when there are local currency receipts and most payments are in the functional currency of the business unit being funded. Cash management takes place locally.

  3. Fund positions in local currencies ‘just-in-time’

    When the total payable amounts are known, and are periodic rather than daily, payments can be made via a local provider who carries out an FX transaction on-shore and then feeds back the total hard currency value for the funding movement to be executed ‘just-in-time’ for the local disbursements.

  4. Pay local currencies cross border from a hard currency account directly to the suppliers

    Used by all corporates to one extent or another, the fourth model gives the central treasury the greatest degree of certainty and control. This model may offer the following benefits:

    • Balance management.

      While this arrangement may not result in improved FX rates, it reduces the likelihood of having surpluses in some accounts and overdrafts in others, or of small balances in a number of different currencies which may not be earning interest.

    • Counterparty risk.

      By reducing the balances held by local providers – and the length of time that balances are held – counterparty risk may be reduced.

    • Currency exposure management.

      Depending on corporate policy, a more centralised payments process enables currency exposures to be carried out centrally and more effectively.

    • Simpler to structure intercompany arrangements for currency exposures.

      As payments are coming out of an account denominated in the group functional currency, the treasury centre has improved flexibility in terms of deciding how those exposures are to be hedged. In comparison, if each unit is holding a balance in different local currencies, this exposure is generally managed using FX swaps.

In reality, corporates tend to use a mixture of these different models depending on the nature of their operations. However, supporting all of the different models can prove to be a challenge. The fourth model, if used comprehensively, can offer a more streamlined overall solution, as outlined in the schematic below:

Diagram 1: Cross-border payments in local currencies from a hard currency account
Diagram 1: Cross-border payments in local currencies from a hard currency account

Furthermore, rather than holding multiple local currency accounts, it can be more efficient to hold a single account for global foreign currency payments.

“A lot of treasuries are now looking towards the single account model, rather than holding multiple accounts in multiple currencies for payments,” comments Seamus Desouza. “Even if they hold accounts in multiple currencies for receipts, they don’t necessarily want to use those accounts to make payments.”

Often the purpose of such a model is to increase control from a balance management point of view. In contrast to the multiple account approach, funds from a local account which is for receipts only can simply be concentrated up to a header account.

Case study

Plan International

Portrait of Annemarie Moore

Annemarie Moore

Group Treasurer

Plan International is a children’s development organisation that works to promote child rights and alleviate child poverty in 48 developing countries across Asia, Africa and the Americas. Three years ago it initiated a major change in the way money transfers were made between its international headquarters and the countries in which it runs programmes. Now, with most of the changes in place, the NGO is enjoying massive improvements in time, savings and efficiencies.

Plan International has an annual turnover of over €500m, which is raised by member organisations in 20 countries including UK, Australia, Canada, USA, Norway, Japan, South Korea and Ireland. Each of these separate legal entities raises funds locally, in local currencies. These funds are sent to the central treasury, which consists of four full time employees. The central treasury then remits funds to the programme’s countries in accordance with their budget and their cash flow forecast to minimise the risk of large balances in-country.

“For an international charity, the timely receipt of funds can have implications beyond the financial health of the organisation,” explains Annemarie Moore, Group Treasurer. “Once we needed to get medication to a group of refugees, and in order to get the medication we needed to purchase fuel for the van,” she recalls. “Funds arriving late and with good value really doesn’t help in that situation, because by that time you haven’t got the fuel, you haven’t got the medicine and you can’t help the refugees.”

From in-country currency conversion to centralised procurement

Until 2007, in order to distribute funds from Plan International’s central treasury to its expenditure countries, annual budgets were drawn up for all of these countries in US dollars. Once the budget was approved, throughout the year the organisation’s hard currency receipts were sold up to 15 months forward in exchange for US dollars. The central treasury then remitted US dollars to each country in accordance with the predetermined budget and cash flow forecast. Each country would convert the US dollars on receipt to local currency at the prevailing spot exchange rate.

This process had some serious disadvantages. Due to exchange rate fluctuations, none of the non-USD spend or pegged receiving countries could be sure how much local currency they would receive during the course of the year. This discrepancy was welcomed by staff working in countries with depreciating currencies. However, those based in countries with appreciating currencies often found that the US dollar funds they received did not buy enough local currency to meet their committed programmes.

Consequently, the decision was taken to change the process in order to draw up budgets in local currency and to deliver funds to each country in local currency where possible. For the central treasury, this meant that expenditure on currency exchange rate moves would need to be hedged to ensure that local currency budgets could be fulfilled.

The migration

The first step was to revisit the company’s banking arrangements. Whereas banks had previously been appointed on a by-location basis, a regional banking programme was put in place in consultation with staff in the individual countries. The intention was for each country in a particular region to bank with the appointed bank. This was approached on a region-by-region basis, shortlisting banks which best matched Plan’s geographical footprint and then assessing their operational capabilities in order to identify the appropriate bank for each region.

On a central basis, rather than continuing to use two separate banks for US dollar and euro payments, the corporation appointed J.P. Morgan as its main central bank for non-regional payments, due to its strong capabilities in both currencies.

Part of Moore’s intention was to eliminate the use of correspondent banks in the payments routing process. “I wanted smooth routing, eliminating these partner banks along the way, which means there is less opportunity for funds being delayed,” comments Moore. “The solution was to bank centrally with the same regional banks so funds move from the treasury bank account to the programme country’s bank account with minimum intervention by third party banks.”

After migrating each country to the new banking arrangements, the next step was to determine which countries could receive funds in local currency. “We drilled down to see which currency each country was spending, whether it could be bought outside the country and whether it would be a slower transmission in local currency,” says Moore. The chosen countries were migrated to local currency delivery in batches of up to five. “I didn’t want a big bang approach, because if something went wrong we would then have a lot of payment issues to resolve all at once and many countries waiting for funds,” Moore explains.

Today, each programme country budgets in local currency, with around 45% of the countries receiving local currency from the group treasury and another 5% due to migrate to this model. The budget expenditure is hedged centrally using Non-Deliverable Forwards. FX pricing, which was previously opaque, is now transparent and banking arrangements are centralised wherever possible.

The project is now 95% complete, with a regional bank yet to be appointed for Central South America. Summarising the ingredients that have made the project successful, Moore comments, “It is important to have a good project management team in the region, as well as a good project team at the bank. One key point is to ensure that you are driving the project, which I achieved by having weekly phone calls that incorporated both teams in the region, ours and the bank’s, plus myself and the bank’s representative in the UK. If you don’t communicate regularly, the project can easily go on everyone’s back burner.”

Making the move

When it comes to moving to a more efficient payments model, Desouza observes a marked difference between industries. “The oil companies have moved fastest and many of them, regardless of whether or not they are paying ‘on behalf of’, have moved to a position where they substantially make all their foreign currency payments from a single currency.”

Other large corporates are now looking to take the next step in payments optimisation. When re-engineering the company’s payments structure, treasurers should consider how local currency balances are currently managed, how many accounts are being kept open and how many employees have access to these accounts. Desouza offers the following advice to companies looking to make the move:

  • Talk to your main payments bank – it can probably distribute more currencies than you realise.

  • Understand what local accounts are being used for. Even if accounts are just used for payments and receipts, taking payables centrally might simplify the overall process, even if the accounts need to be kept open for receivables purposes and swept periodically.

  • Have a close look at your reporting mechanisms. If these are not efficient they will be weakening your ability to manage counterparty risk.


The first potential obstacle to consider when streamlining a company’s foreign currency payments structure is the arrangements and capabilities offered by the chosen bank. Is the bank able to accept instructions for both freely tradable and restricted currencies in the same way, as far as possible? While no single bank is able to offer full capabilities across every country in the world, there is more scope for achieving consistency by using agents and partners. Corporates should be looking for a consistent service at the point at which the instruction is executed – although minor variations will be inevitable in certain markets.

Local regulations can also represent an obstacle. In particular, the following may have implications for the treatment of payments:

  • Resident vs. non-resident.

    Different conditions may apply depending on whether the remitter and/or the beneficiary are designated as resident or non-resident in their respective countries.

  • Corporate vs. individual.

    Different conditions may apply depending on whether the beneficiary is a corporate or an individual.

  • Reason for payment.

    In some jurisdictions, different types of regulation will apply according to the payment type, with capital movements and investments typically attracting more regulation than trade flows. The remitter may need to provide information clarifying that a particular payment is for the payment of an invoice.

Other considerations may also need to be factored in. For example, if centralising activities or reducing the number of accounts held by a local unit puts the local unit into a weaker position in terms of bank negotiations, this may create internal resistance to the migration. Furthermore, in some cases, the beneficiary is subject to deductions for cross-border payments.

The way forward

“We’re certainly nowhere near the end state,” comments Seamus Desouza. “Corporates still face difficulties in this area, mainly due to large variations in local practice, regulations, and payment standards.

Going forward, Desouza believes, only the banks offering the largest scale and comprehensive solution will be able to provide treasurers with a globally consistent payment process from the point of initiation. “If a treasurer wants to make a payment in currency X and one in currency Y, they want the process to be the same in both cases – or they risk losing a lot of the benefits of going to one provider. The providers which will continue to prevail are the ones that are most experienced at selecting in-country partners and agents. That’s how they are able to offer consistency to their end clients.”

J.P. Morgan Treasury Services

Portrait of Seamus Desouza

Seamus Desouza, Executive Director and Senior Product Manager for Foreign Exchange at J.P. Morgan, Treasury Services is responsible for managing strategy, financial performance and product development for the EMEA region.

Seamus has over 20 years experience of developing and implementing ERP systems and treasury management solutions for multinational corporations. Prior to joining J.P. Morgan, he led consulting projects at PriceWaterhouseCoopers specialising in the cash and risk management needs of corporates and service offerings from banks. Engagements also included the evaluation and design of high volume payment solutions for central government departments in the UK.

Seamus has held various management positions in the systems and corporate treasury divisions of ExxonMobil in Europe.

Contact details:
Seamus Desouza

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