Cash & Liquidity ManagementCash ManagementAccounts PayableThe New Generation of Payment Factories

The New Generation of Payment Factories

Payment factories are not a new phenomenon. The model has been around for a number of years but there is now renewed interest as they evolve to meet the changing needs of corporate treasurers who continue to take on more responsibilities and expand their role within the organisation. The main benefits of establishing a payment factory include better visibility into funding needs and liquidity management as well as improved control over payment timing. This is still true but what other benefits can corporates gain from new generation payment factories and what is driving this change?

Why Are Payment Factories Changing?

Traditionally, payment factories were defined as centralised payables and payment processing centres specifically focused on the payables function. Today, however, as a result of regulatory pressures, the role of the treasurer is expanding into risk management and so the payment factory model must also evolve to be able to manage risk. We therefore see the trend towards more risk management processes being integrated within payment factories. This development requires increasingly sophisticated and automated solutions that enable the treasurer to spend more time on value-added tasks instead of administering and monitoring payment flows.

Indeed, technology is a key component because payment factories need to integrate and interact with an array of interfaces in order to handle incoming payment information in multiple data formats, payment approvals and links to multiple banking systems. In the past, payment factories were based on middleware built in-house, which lacked functionality and therefore faced difficulties integrating all applications. Technology is an enabler and solutions provided by vendors in the market today are a vast improvement compared to what was available 10 years ago. The introduction of initiatives, such as SWIFTNet and XML-based standards, has also transformed the capability of payment factories.

Each payment factory differs according to the needs and structure of the company in question. The organisation will need to decide whether their payment factory should be in-sourced or sub-contracted (completely or partly) or whether they want to build a regional or global factory.

The diversified technology, media and financial services company, GE, for example, decided to set up a global payments factory based on its cash management structure. “The philosophy at GE is that cash is an asset too important to sit idle so it must be utilised within a cash pool and we have 100 cash pools in place,” says Paul Burstein, head of corporate treasury, strategic initiatives at GE. “The Business Services team helps determine what accounts we have, where they are, how they are opened and this is all tightly controlled by treasury. GE treasury is global and this really drives what we do.”

The company is structurally headquartered in the US where the treasurer and direct reports are located. The second major operation is in India, which runs European treasury operations as well as India and the Middle East. The third major operational centre is in Japan, which runs operations for the Pacific Rim including Australia, New Zealand and Korea. The significant factor for GE is that all treasury operations run on a single platform based on a treasury system and therefore its global payments factory acts as a central engine processing all payments.

GE’s payment factory decides what to route and where, based on the information treasury receives from its partner banks. “The type of information that GE processes through its payment factory is broad because the company consists of six major business segments with very different cash management characteristics – industrial, infrastructure, healthcare, commercial financial services, GE money and NBC Universal,” explains Burstein. “As a result, the payment factory must be able to cope with multiple sources of information from all of these business areas, such as shared services (corporate accounts payable), intercompany billing, intercompany loan servicing, corporate travel and living, business account payable groups, trades payable business and the funding business.”

Going forward, one challenge for payments factories in terms of flows will be addressing the centralisation of collections and this will be aided by the introduction of the single euro payments area (SEPA) in January 2008. For instance, with the creation of the SEPA Direct Debit (SDD) instrument, the industry will have a solution that will facilitate the centralisation of the collections function.

How Can SWIFT and XML Standards Support New Generation Payment Factories?

According to Luc Meurant, head of the corporate access programme at SWIFT, the network can help support new generation payment factories in three specific ways. “First, the network is a single, secure and reliable communication infrastructure with 99.999% availability and scaleability,” he says. The network has global reach across 8,100 financial institutions in 208 countries. It covers a broad spectrum of information types from high-value payments/treasury deals to ACH files and gives corporates the opportunity to eliminate costly proprietary connections.

This was certainly the main objective for GE in the company’s decision to join the SWIFT network. “Originally, we had a complex architecture with many different platforms and one of our biggest drivers for progress was to simplify this,” says GE’s Burstein. “Once we implemented SWIFT connectivity, our businesses could feed files directly into our core system, which linked into SWIFT and then onto all our banking partners through one channel.” GE is now live with 57 banks on SWIFTNet Fin and 14 banks on FileAct.

“We run many different projects in different parts of the world but working with the SWIFT architecture and SWIFT partner banks enables us to format payments and process them with a high level of STP,” affirms Burstein.

Secondly, Meurant points out that the SWIFT network supports ISO 20022 XML-based standards as well as existing FIN and domestic formats so that corporates can determine the pace at which they want to move towards further standardisation.

It is important to acknowledge the importance of XML in the evolving nature of payments factories. The main developments this year have been the creation of the SEPA Credit Transfer (SCT) and XML payments status. BNP Paribas has taken a community and country level approach to XML in order to understand the differences in specification according to local usage and reduce existing gaps. BNP Paribas is part of the first SWIFT XML pilot and recently processed its first XML payment from a French corporate successfully.

In 2008, the priority for the industry as a whole will be to work on the XML specifications in order to reach agreement at a satisfactory level.

Finally, Meurant explains that SWIFT supports new generation payment factories by helping corporates in their preparation for SEPA (with the usage of ISO 20022 messages) and its ability to handle IBAN/BIC conversions.

The way in which the company’s payment factory integrates SEPA requirements is a key advantage highlighted by GE’s Burstein. “Traditionally, if we had to make a payment over SWIFT, we needed certain routing information for an international payment and different routing information for a domestic payment,” he explains. “Now, with the IBAN in Europe, we can use the same routing information and it doesn’t matter where the payment originated. This gives our businesses more independence to decide which account to do the disbursement from.”

Comparing Old and New Generation Payment Factories

The next section describes the implementation and dynamics of an old and new style payment factory to highlight how payments factories are evolving.

In the first case study (see figure 1 below), the payments factory was set up several years ago and uses US Edifact as its format standard and connectivity. On the corporate site, the middleware deals with all applications and concentrates flows into one final point in order to send payments to different banks. It is based on a private network model and Edifact is used because, at the time, it was the solution that provided the richest format and highest security. The objective of the corporate in this case study was to relocate all international payments into domestic accounts in each country. BNP Paribas handles the disbursements of all the group’s suppliers and payroll in France through a single account in Paris – regardless of the location of the subsidiary. Full reporting includes payment status confirmations, and payments can either be made by ACH, wire or via outsourced cheque printing.

Figure 1

In the second case study (see figure 2 below), the company began establishing its payments factory two years ago using a web-based model where subsidiaries could directly access the solution via the intranet, which is directly connected to the SWIFT network enabling the corporate to send all payments to different banks through one channel. The cash management bank receives payments into its SWIFTNet account and processes them in different countries. Using this model, there is increased flexibility and the bank can receive payments into its central electronic banking hub and process them regardless of format and other external factors. The company has centralised treasury by establishing an in-house bank but there is still a decentralised organisation in place with self-governing subsidiaries. Subsidiaries can handle their own payments through the intranet, for example, which is significant because one of the drawbacks of previous payment factory models was that it was hard to gain the co-operation of subsidiaries that felt they no longer had direct control over their payment systems.

Figure 2

Consequences for Banks

How do the driving factors described above affect the payment factory proposition from banks and how can they ensure they meet customer demand? Fundamentally, banks have to adapt to corporate expectations and offer solutions that facilitate the evolution of each customer’s organisation.

It is also important that banks further enhance standardisation. By participating in standardisation bodies and staying abreast of regulatory changes, for instance, banks can anticipate any change and improve their understanding of corporate needs.

Banks should also maintain close relationships with vendors in order to enhance integration and gain a better understanding of ERP and TMS tools that are available in the market. In this way, banks can keep corporate clients informed of new functionalities and test-run new technology ahead of customer use. It is also important that banks provide a dedicated implementation team to help and support customers with their payments factory projects.

Conclusion

The capabilities of payment factories are improving rapidly and corporates should take advantage of the new functionalities and efficiency they can provide. A payment factory is especially effective when there is a high level of centralisation across a company’s operations and payments systems, particularly in the case of multinationals – a further driver for efficiency within cash management structures.

As stated earlier, payment factories are not a new phenomenon but – with the increasing drive towards centralisation and initiatives, such as XML standards and SEPA – payment factories are becoming a much more valuable tool in improving liquidity management for corporates.

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