The Netting Revival

Netting has been used by group treasuries for decades. Although it was predicted that the euro currency and, later, the single euro payments area (SEPA) would diminish or remove the need to net payments, interest in netting has shown signs of growth.

According to Robert Wennerström, sales director at OpusCapita who has worked with payments and netting since the 1980s, the development of web-based systems, and lately the financial crisis, have increased interest in netting. “Compared to the systems back in the 1980s, modern web-based systems are easy to implement and allow great flexibility. With netting, it’s possible to acquire remarkable savings for a smaller group, too,” he states.

The needs for netting may vary between companies, but some signs are easy to spot, according to OpusCapita’s business consultant and netting specialist, Tomas Kerst. “If a group has several countries of operation, this usually means that there are several currencies and cross-border payments involved. SEPA will naturally reduce costs for euro payments within the EU, but if several non-euro currencies are involved, that could be a trigger for netting,” Kerst says. “With netting, all internal FX [foreign exchange] risks are automatically centralised, as each participant pays or receives only in the local currency. The netting centre carries the risk centrally.”

However, netting can be an option for a single currency business, too, as it reduces the number of payments and administration. In addition, the benefits are not limited to the payments – rather, netting also clarifies the internal invoicing and transactions process and responsibilities related to the process.

“Netting introduces a common process for invoice management with agreed company payment dates and an approval process. This means less manual and administrative work. Automatic reconciliation of paid invoices is also part of the process,” Kerst points out.

Renewing the Netting System

Not every company needs to start a netting process from scratch – on the contrary, a great number of corporations already have a netting system installed, but are interested in updating the system to match the needs of the present and the future.

“There is usually nothing wrong with the systems of the previous netting generation – they do their job. The problem arises when you want to build interfaces. Most of them are not designed to communicate with other systems, which creates extra work for treasury personnel. Updates and changes are usually costly – simply because the technology is outdated and persons responsible for the design very seldom work in the company any longer,” explains Wennerström.

Today, integration of netting systems with, for example, enterprise resource planning (ERP) and treasury management systems (TMS) is a prerequisite for making the process smooth. Also, with modern systems, subsidiaries can reach the netting database directly via a web interface. The system’s user-friendly nature and quality of its reports is naturally much better than that of old mainframe systems.

Despite the changes, the netting core process has remained the same. “If the group has a netting process in place, it’s usually quite painless to replace the systems with a modern netting solution with integrations, instead of building totally new processes and systems,” Kerst advises.

Extending the Netting Process

In addition to better integration possibilities and usability, netting systems can today be extended to cover further processes. One example is third-party netting. “If several of the group entities buy from one supplier, it’s convenient to combine the entities’ payments into one payment made by the group. This reduces the number of external payments and is usually well accepted by the supplier, as it reduces their risk, too,” Kerst says.

Another possibility is factoring, selling invoices to a third party in exchange for money. This is becoming popular within large groups. Extending netting to factoring improves risk management, because the group treasury can buy the invoices and the currency risk in the early phase of the process. This is especially suitable for shared service centres (SSCs) or companies with a centralised buying function. The netting system can also be used for managing internal loans and deposits, usually combined with an in-house bank.

“Today, netting offers more possibilities than ever. When purchasing a new system or updating the old, it is definitely worth checking all the processes it can be applied to,” Wennerström suggests.

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