Sponsored statement: BNP Paribas - Moving to the centre
Centralization is the name of the game in cash management, as treasuries are under continuing pressure to become more efficient.
Filipe Simao, head of client advisory and strategic marketing at BNP Paribas Cash Management
One of the most notable developments in cash management in the past year is the further advancement – and increased importance of – projects that centralize payments and collections for corporates. The economic backdrop, market changes such as SEPA and technological advances, including SWIFTNet, are combining to make it easier and cheaper for corporates to achieve their goals. "On the face of it, the uncertain economic environment should not make it a good time to reorganize the treasury, given the associated capital and project investment costs," says Filipe Simao, head of client advisory and strategic marketing at BNP Paribas Cash Management. "However, continuing tough conditions have made it more important than ever for treasury processes to become more efficient."
The two conflicting forces – a hesitancy to invest in new technologies and the need for efficiency savings – have the potential to balance each other out. "However, treasurers have adopted a more forensic approach to analyzing the cost of projects and are consequently more easily able to assess the benefits derived and more accurately calculate the break-even costs of a project," says Simao.
As a result of this new cost-benefit analysis approach, the relative attractions of centralized processes have increased. Increased corporate interest in this area is clear from BNP Paribas Cash Management’s recent activity. One in three of all pan-European requests-for-proposals received by the bank are now in relation to payments and collections centres – sharply up on previous years.
Routes to centralization
Corporates seeking to gain the benefits of centralization of payments and collections have a number of options open to them that can be used individually or mixed and matched as necessary. Using electronic banking technology, it is possible to create a technology-based virtual hub that offers many of the benefits of centralization without the physical movement of people to a single location.
Alternatively, corporates may seek to adopt a shared service centre model, where standardization comes not just through technology but by locating staff in a single location – often a low-cost but high-skill location in Central or Eastern Europe, for example – to process all accounts payables and receivables for a number of national subsidiaries. At a basic level, such centralization eliminates duplication of processes and usually provides opportunities for streamlining and increases in process efficiency.
A third step for corporates seeking to gain the benefits of centralization is the centralization of account structures, perhaps through the use of in-house banking where internal operating groups and subsidiaries use virtual accounts to manage inter-company transactions or through the use of a single disbursement account. Such arrangements can have significant benefits in terms of reduction of fees and minimisation of costs associated with foreign exchange transactions, for example.
Increased corporate interest in payments and collections centres and other forms of centralization is being driven not only by the economic environment and the need for cost rationalization but also by regulatory and technology changes. "The backdrop to this desire by corporates to centralize is important," says Simao. "Both the SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) are now operational and are having an impact on corporate thinking."
Uptake of the SCT, introduced in January 2008 and the SDD, introduced in November 2009, has been slow, with just 10% of all domestic payments conducted by SCT as of early 2010 and less than 1% of direct debits conducted using the SDD. However, there is hope that the uptake of SEPA instruments will increase sharply as a timetable for end dates of national instruments become clearer.
In mid-December, the European Commission (EC) – for the first time in the decade-long SEPA project – proposed a framework to set firm deadlines for the migration of credit and debit transfer systems to SEPA: 12 months (for credit transfers) after the entry into force of the relevant regulation and 24 months for debits. The EC’s proposal must now be approved by the European Parliament and the European Council, which is expected later this year.
"The prospect of a firm deadline could significantly change the dynamic for companies seeking to implement centralization projects in the near future," says Simao. BNP Paribas’ acquisition of Belgium’s Fortis in 2009 enabled the combined bank to adopt the best technology solutions offered by the two banks: BNP Paribas’ SCT engine is now available to all clients while BNP Paribas customers have gained the benefits of Fortis’ SDD engine.
"When a decision on SEPA end dates is made, change could come rapidly given that it will be in the form of a regulation and therefore not require national parliament ratification," explains Simao. "Therefore, the need to migrate to SEPA instruments could become imperative." To help overcome some of the complexities associated with migration, BNP Paribas has invested in new technology: for example, the bank is able to convert Belgium’s DOM80 direct debit format to XML to enable pan-Europe direct debits without the need for costly changes to corporates’ legacy systems.
BNP Paribas is working with corporates to help them see SEPA not as a means of payment but as a business opportunity. "For the treasury, it is an easier pitch to highlight that the SDD, for example, can be used to accelerate sales by speeding up allocation of cash collection to a client’s account – freeing up clients to place new orders," says Simao. "Another approach is to emphasize the benefits of a more standardized payments and collections structure for forecasting ability, which can become more accurate and precise."
Dealing with legacy instruments and payment types
Similarly, despite increased use of electronic payments, in some markets paper payments remain a significant part of volumes. "In France, for example, cheques remain 18% of payments," says Simao. "Companies need to decide if they want to process such payments or whether they would rather outsource." BNP Paribas offers a full outsourcing service, including collection of cheques from PO boxes and automatic dating, preparation of remittance information and sending of information to accounts receivables systems.
Similarly, greater centralization helps to enable the broader benefits achievable from regional and multi-regional cash management solutions. "BNP Paribas is in 32 countries in Europe and the Middle East," notes Simao. "We are investing significantly in developing our Asian footprint in order to provide the fullest cash management capabilities globally in response to our customers’ growth into new markets."
As customers expand into new markets it becomes ever more important to offer capabilities that include central access to information to enable effective control. BNP Paribas’ Cash Customer Service, which currently covers operations in Europe, the Mediterranean region and North America, means that treasurers can telephone a dedicated central contact based in Paris who has access to all global systems. "Issues such as value-dating can be important for liquidity management and Cash Customer Service means that a treasurer can address such issues with a single contact point wherever he does business," says Simao.
Technology driving change
Technologies such as SWIFTNet and the use of XML standards to initiate payments are helping to foster economies in information technology and are driving centralization. "Clients have found that break-evens for centralization projects are now as little as two years based on a saving of €600,000 a year, for example," explains Simao. "The cost benefits can be realized sooner than in the past given decreases in the costs associated with implementation."
Similarly, falling technology costs have made centralization worthwhile not only for multinational companies but also for smaller companies – those with turnover of just €450 million a year can benefit. "The advent of SWIFT service bureau means that companies no longer need to directly connect to SWIFT," explains Simao. "They can share connectivity provided by technology companies and a handful of banks, including BNP Paribas – dramatically reducing both their set-up and recurring costs."
Meanwhile, electronic banking standards across Europe are being reformed, with the introduction of Isabel 6 in Belgium, the decommissioning of Etebac (Echanges télématiques entre les banques et leurs clients) in France in 2012 and the evolution of Germany’s MultiCash to incorporate the Electronic Banking Internet Communication Standard (EBICS).
"Clearly, for companies that operate in multiple markets, SWIFTNet – as a common standard – is an ideal global solution," says Simao. "However, for corporates in just a handful of markets the reform of electronic banking standards to include some degree of commonality, such as the use of EBICS standards in France and Germany, for example, helps to advance the argument for greater centralization." For companies that work with a single bank provider, many of the benefits of standardized technology are provided by their bank without having to adopt new systems or connectivity.