This tidying up is referred to as a payment factory through which a central unit executes payments on behalf of one or more subsidiaries. This can either be through channelling all payments through a central treasury function or routing all payments through external bank accounts that are owned and controlled by a corporate treasury.
The benefits of such a model are numerous, including increased visibility of cash and liquidity, improved control in both the payment authorization process and in the ability to maintain bank master data at a central location, states treasury consultancy Zanders in a recent report.
A centralized payment-factory approach also means that corporate treasury operations have fewer bank relationships to manage and, further down the line, payment factories offer savings in IT and manpower.
Various corporates that prepared for Sepa [Single Euro Payments Area] early, have viewed Sepa not just as a compliance topic, but as a strategic opportunity to clean up their payment processes, says Mark van Ommen, associate director at Zanders. They have reduced the amount of payment types, cleansed their vendor master data and standardized their payment processes.
The deadline for implementing Sepa to simplify bank transfers denominated in euros was originally set for February 1. However, with a number of companies in Europe struggling to meet the deadline, and with the possibility of a liquidity crunch looming for many, the European Commission announced a further six-month transition period for the changeover due to the complexity of the new system.
Sepa is seen as a catalyst that has prompted many companies to review how their payments are executed, and has provided the opportunity to implement payment factories.
|Karin Flinspach, at Citi|
However, Zanders consultant Arn Knol points out that a payment factory requires substantial up-front investment in IT licences and systems, as well as the cost of internal and external resources. A common payback period for implementing such a project is typically between one to two years.
Over the past years, when we did many Sepa projects, a number of clients did consider the standardization of Sepa as a chance to set up a payment factory in a second step, says Michaela Quademechels, payments specialist in product management at Hanse Orga, a German software vendor that provides software enabling a payment factory.
However, the term payment factory means different things to different people. Some might refer to it as centralizing bank connectivity, while others refer to a more centralized treasury payment solution whereby the treasury function takes over payment arrangements.
The reality is that payment factories are a bespoke solution and depend on the cash-flow profile and ERP [enterprise resource planning] infrastructure of the company, says Zanders Van Ommen.
A company with large volumes of cross-border payments and cross-currency payments will have a strong business case to implement payments on behalf [of subsidiaries]. On the other hand, a corporate with mainly local cash flows might have less reason to accept the complexities that come with a POBO [payment on behalf of] solution.
Not only does the POBO payment factory reduce the number of bank accounts required but also reduces transaction and FX fees because more payments are executed as domestic payments rather than foreign payments.
There are different motivations for implementing a payment factory, says Citis Flinspach. To some it provides greater visibility of cash and control, while to other companies it can create efficiencies and enables rationalization of bank accounts.
The size of a company is not so important as the nature of their business and operating structure when implementing a payment factory, adds Flinspach, highlighting that such a change might make more sense for companies with cross-border businesses.
However, the proximity of the Sepa deadline means that including a payment factory implementation in a Sepa migration project is now less feasible for most companies. And as Flinspach points out, there is likely to be a second wave of payment factories once Sepa is up and running.
So the opportunity is not completely lost. Sepa provides treasury departments with an opportunity to review their payment processes and create a roadmap, which can outline the different changes required to implement payment factory.
We actively support the trend of process centralization, and are helping our clients determine whether a payment factory is suited to their organization, says Wilco Dado, head of cash management in EMEA at JPMorgan. The move to Sepa and other advanced treasury technologies are helping drive efficiencies, improving performance and mitigating risk.
HSBCs Tony Richter, head of business development for payments and cash management in Europe, concludes that real-time information and centralization of net company cash positions, through payment factoring, helps to identify working capital and ultimately enables a treasurer to present the board with information that contributes to a strategic dialogue.