Martin Schlageter, Head of Treasury Operations, Roche:

At Roche, we had already established an in-house bank (IHB) and centralised our treasury operations for many years, so developing a collections-on-behalf-of (COBO) structure was the next logical step. When we were setting up our COBO in assorted countries, it was very helpful that subsidiaries were already used to working with the IHB and therefore had trust in our services. They needed confidence that we can collect customer payments at least as well as they can, and that we run reliable and robust IHB-processes.

In regards to COBO, the key point is fast and automated reconciliation of accounts receivable (AR). If a company runs one central euro account for many countries, in order to reconcile payments it has to be able to identify which customer is paying which subsidiary.

Thanks to Deutsche Bank, we were able to put in place a virtual account structure that ultimately feeds all euro-payments into our central euro account. With this solution, each customer makes payments using a unique International Bank Account Number (IBAN), allowing Roche to identify which customer is paying which entity. For us, this was the vital component to establishing a reliable COBO structure. In the meantime, this solution won this year’s Treasury Today Adam Smith Award for the Best AP/AR Solution.

We did encounter some local obstacles to setting up a COBO structure. For example, the Federation of Finnish Financial Services (FFFS) defines standards to optimise payments between corporates and banks, including a barcode system for invoices, allowing the customer to make an automated payment. But this barcode system only works with a Finnish IBAN. As a result, we are not able to reroute the collections of one of our Finnish entities to our central euro account outside Finland. It is an obstacle which conflicts with the concept of the Single Euro Payments Area (SEPA) – which is supposed to harmonise the payments environment in the euro area – and one which we are currently engaging with the regulators in order to overcome.

Basak Toprak, Director, Citi Treasury and Trade Solutions:

The main challenges around COBO structures are similar to those that corporates face with POBO. Having said that more corporates have established POBO structures to date. The main reason for this is the fact that corporates have advanced quicker in centralising payments versus collections. Collections are generally handled by local businesses, where the knowledge of customer relationships exist. Companies have now started looking at how to further benefit from their shared service centres (SSCs) by centralising their receivables processes, and COBO is a natural part of this evolution.

In a COBO structure, the agent (usually the IHB entity) collects the assets belonging to other entities. A COBO set-up helps to achieve not only bank account reductions but facilitates centralisation of reconciliation activities and can lead to better credit management. There are several structural considerations related to COBO set-ups, which can be grouped into four themes:

1. Legal, regulatory and tax considerations:

   It is important for the corporate to find out whether the participating entities are allowed to operate under a COBO model, and what if any are the reporting or central bank approval requirements. In some countries in Asia or CIS, for example, the regulators simply do not permit COBO.

2. Accounting:

   Companies who set up POBO/COBO structures do so in an IHB environment. The IHB act as a single entity under which all the business units perform their financial transactions. POBO/COBO structures result in inter-company loans, so these need to be accounted for in an IHB structure.

3. Reconciliation:

   Automatically identifying who has paid for what invoice is a challenging area for corporates even without a COBO structure. With a COBO structure, you have the added complexity of receiving funds into a single account and therefore you rely on the sender to include details as to which entity they are paying to. Banks and technology companies can provide solutions to support this process in the way of reconciliation tools, such as data enrichment and matching services, as well as virtual accounts, where each debtor is given a unique account number into which they make their payment. Furthermore, SEPA introduces Ultimate Creditor (UC) and Ultimate Debtor (UD) fields which support POBO/COBO payments.

4. Technology:

   Companies who embark upon setting up POBO/COBO structures typically have a single instance ERP environment, which helps to support inter-company reconciliation, as well as real-time updating of assets and liabilities based on payment information.

The migration to SEPA in particular has increased the number of companies exploring COBO. However, to date live implemented examples of COBO are very limited. We expect that once companies meet the migration requirements of SEPA, they will look at leveraging SEPA to introduce further efficiencies to their working capital management structure. At that point, COBO will be a key topic.

Ad Van der Poel, Head of Payments and Receivables, EMEA, Global Transaction Services, Bank of America Merrill Lynch:

Corporates will likely encounter a number of obstacles when attempting to set up a COBO structure. Firstly, receivables have always been local processes and, as a result, corporates will still have to implement different receivables instruments in different jurisdictions, which would reduce the benefits that could be gained by centralising them.

With the arrival of SEPA, however, this is now changing. With SEPA Direct Debit (SDD) for example, in principle there is one standardised receivables instrument across the Eurozone. So as a result, more companies are beginning to explore the COBO concept.

A second obstacle is the resistance that is often encountered within an organisation. Local sales entities, which are focused on revenues, will often resist because they want to retain some form of control over their revenues through receivables. Therefore, in my opinion, an internal education process needs to happen. It is for that reason that COBO has not developed as fast as payments-on-behalf-of (POBO).

Thirdly, the big incentives for centralising receivables are efficiency improvements, better rates and improved reconciliation. But many of these benefits take time to realise, whereas some businesses want the benefits to materialise immediately. To get it right companies need to fine-tune the process and establish the structure step-by-step.

When companies overcome these obstacles they may encounter more practical difficulties. A company that is introducing a COBO structure will have to consider how they are going to do mandates-on-behalf-of and what the language requirements will entail. As a corporate, it might be easier for mandates to be in one language, such as English. However, there may be regulations that require it to be in the local language. This is just one of many practical issues which may arise once a company begins attempting to implement a COBO structure.

Arn Knol, Treasury Consultant, Zanders:

In recent years many corporates have set up payment factories, enabling them to implement POBO structures. Unfortunately, implementing a POBO model does not necessarily reduce the amount of external bank accounts required by the various business units – these accounts are not only used to make payments but also to receive funds. It is very common for corporates to have centralised their payment process in an IHB and/or payment factory, but still leave the management and responsibility of receivables at the local business unit level.

The COBO model can be used to overcome these issues. In this structure, a single bank account is used to receive funds for multiple business units. When the POBO and COBO model are both applied, a corporate will only require one single account per currency and/or country for all commercial payments and receivables across the group. This would enable massive savings in managing external bank accounts and the associated fees alone.

However, whereas the POBO model has been adopted by many corporates, the COBO model is not nearly as popular. What are the reasons for this? The biggest problem with the COBO model is that, when examining the IT infrastructure at most large corporates, the receivables data is maintained at the local business unit level. This creates a massive challenge. If one bank account is used for collections for multiple business units, which must execute the reconciliation at the local level, how do we then determine which receivable belongs to which business unit?

The COBO model, therefore, requires a far greater level of change compared to the POBO model. One of the strengths of the POBO model is that it can be implemented at the centre with relatively little impact on the local business units. This is not the case for the COBO model, which requires more centralisation and is therefore more difficult to implement.

Does this mean that a company should not consider the COBO model? No, the gains in efficiencies and the possible savings that can be achieved using the COBO model are clear. As it stands today, for many corporates the POBO model represents the “where we are”, while the COBO model represents the “where we want to go”.

Violeta Negruta, EMEA Market Manager, Cash Management, RBS International Banking:

Over the past few years, corporate treasurers have been on a constant quest for improved operational efficiency, working capital management and, most recently, increased enterprise-wide co-operation to create value.

With the advent of new technologies, standardised payment methods in Europe (ie the Single Euro Payments Area (SEPA)) and improved capabilities in ERP/TMS systems, treasurers have started exploring opportunities to consolidate payments and accounting functions into one payment/collection factory solution.

Corporations that have successfully centralised their payments into such a structure have certainly achieved significant benefits, including a single euro fund account structure, improved controls and risk, standardised processes, visibility over cash, and, of course cost reductions.

Today, through the standardisation of collection methods in Europe, driven by SEPA, corporate treasurers are seeking the next level of enterprise-wide operational efficiency. Historically, the centralisation of collections had been considered very complex, due to differences in collection methods across jurisdictions in terms of execution times, indemnities, mandates and refunds.

But the implementation of SEPA will now allow treasurers to operate one single collection process within the EU for both domestic and cross-border collections, reducing their costs in the process.

This single solution can therefore not only streamline European payments and collections via SEPA B2B and B2C direct debits, but also domestic and international payments, thereby empowering treasurers with collection predictability. Such a centralised treasury model is increasingly key to improving corporate cash flow and optimising working capital.

Receivables outstanding and their reconciliation (ie who has and hasn’t paid and on whose behalf the collection has been made) have their own challenges as the information is not always transmitted end-to-end, resulting in an inability to automatically execute a specific transaction. As a result, existing credit lines to a customer may be tied up.

The ISO 20022 XML format, however, provides an ‘on behalf of’ (OBO) structured field to identify the entity on whose behalf a collection is being processed, enabling automated reconciliation without the need to query the collection. This enables treasurers to improve collection rates, reduce receivables outstanding and ensure timeliness of payments across jurisdictions from a single collection location. It also allows central treasurers to move towards a single euro account structure, streamlining their collection processes and reducing costs.

However, there are still some differences in countries’ domestic payments processes, which will continue beyond the 1^st of February 2014 in the eurozone; so, full centralisation may not be achieved immediately.

The centralisation of credit management and the ability to handle the entire direct debit lifecycle of the collection factory – from issuing the pre-notification and creating the direct debit mandate, through to documentation, calendar, customer correspondence and rejections – will enable a corporate’s sale force to realise significant additional cost benefits, as they will have more capacity to focus on strategic business development and customer relationships.

For a successful collection factory set-up, one of the first steps is to identify all corporate bank accounts, banking connectivity channels, credit, collection and reconciliation processes across the globe – a process that more often than not provides new cash visibility and delivers an early win for the project.

Introducing OBO collections requires corporate systems infrastructure – usually a single ERP/TMS for one-time change – recognise fields correctly, apply cash to the correct bank account and post it to the respective intercompany account. Replacing multiple, diverse accounts receivable (AR) operations with a single source of information, enables a business to be far more efficient in terms of moving money to where it can be most effective, reducing errors, fraud and operational risk, improving days sales outstanding (DSO) and exploiting working capital.

The implementation of OBO, supported by a corporate’s in-house bank, requires an agreement between the central treasurer and its group’s businesses to determine the ownership and deployment of its cash. Additionally, the organisation and legal structure of the group are important to determine the legal and tax implications of OBO collections.