Corporates beef up internal operations amid rising bank risk
Corporates are shaking up their internal payment operations as they re-assess the risks in their banking relationship.
Corporates moving to new banking partners are taking the opportunity to overhaul their operations and maximize the potential of their implementation software.
As they are advised on better ways of working, or moving to a different software provider, they’re looking at how they can establish state-of-the-art operations.
Corporates will not stop working with banks,
but there is an appreciation that the relationship will change
The withdrawal of notable names from international and regional transaction banking services, such as RBS, has provided their former clients with a window to reassess how they manage their business before they agree on a new cash-management provider. As they look to leverage the capabilities available to them, payments factories are becoming the system of choice for MNCs.
The initial cost of setting up the technology needed to run a payment factory – a process whereby a company establishes a central unit that executes payments on behalf of one or more subsidiaries – is significant.
Many corporates have organically updated their system, but have not realized the full potential of an internationally integrated enterprise resource planning (ERP) platform, which allows an organization to use a system of integrated applications to manage the business and automate many back-office functions.
Simon Jones, head of EMEA corporate sales, JPMorgan treasury services, says: “Corporates are looking at how they can simplify the structure of their business further. They have installed ERP systems with global coverage and they want to see a return on the money that has been invested.”
The European market has created the ideal opportunity to accelerate greater use. The standardization of payments in the region has created a model for working.
Bob Stark, vice-president of strategy at corporate treasury solutions provider Kyriba, says: “Sepa was the trigger for standardization of payment formats. That standardization and globalization has continued with the transition to the ISO 20022 standard.”
This has opened up a number of capabilities to a wider group of corporate treasurers. Solutions that have previously required a lot of detailed work are now relatively easy to implement. Awareness is growing of in-house banks, but there are still greater capabilities to be found through the use of payments factories.
“The payment factories enable all transactions to go through one single legal entity,” says JPMorgan's Jones. "We are seeing potential interest increasing in Europe.
“Some corporates are using in-house banking, but they are not using the system to its fullest by reducing the number of transactions. In Europe, it is one of the main benefits of Sepa. Corporates are still realizing the full potential of what it can do for them.”
We are seeing the move towards greater use
Simon Jones, JPMorgan
Another development is the step towards usage on behalf of structures.
“We are seeing the move towards greater use of payments-on-behalf-of (POBO) and receivables-on-behalf-of (ROBO) models by corporates,” says Jones. “POBO is gaining greater traction as it is possible to send a payment to a different entity using the different fields in an ISO 20022 payment message.”
Choosing the right system is specific to each corporate to meet their own requirements. Some elements are dependent on each other to work.
Kyriba's Stark says: “Payment factories can work without having an in-house bank, but POBO requires an intercompany structure. In-house banking is the most common structure.”
The movement towards making and receiving payments in this way is being influenced by supply-chain considerations. While setting up POBO is relatively straightforward, adopting ROBO is more difficult, as each individual corporate needs to adopt this method to the benefit of their larger buyer.
More generally, the push to transform payment processes internally is not just down to the benefits of shifting to a centralized structure. It comes amid concern that the banking relationship needs to be given a higher priority in corporates' risk-management strategies.
“Risk management for corporates is top of mind,” says Stark. "Bank management is part of the risk strategy now for the corporate treasury.”
It has been recognised that the security of the bank and corporate relationship that was seen in the past might not remain so watertight. A long-term relationship is not guaranteed.
“Corporates will not stop working with banks, but there is an appreciation that in the environment post-financial crisis and around the implementation of Basel III that the relationship will change,” says Stark.
“The need to change banks is not necessarily driven by the corporate, as we saw in 2014. Corporates realize that being bank agnostic with respect to technology and bank connectivity is important to avoid business disruption should a change in banks be required."