Payment Factory Trends in Europe
The payment factory concept has been around for some time, with US multinationals trailblazing the way last century in an attempt to increase control and rationalise payment and collection costs. The large US corporates were faced with an enormous, yet fractured, domestic market and saw the huge potential in optimising this area of their business.
When these companies expanded across the Atlantic, they were confronted with more of the same in Europe, with an absence of standardised processes and numerous file formats. Today, there have been some important developments in the market to drive forward harmonisation and many corporates, including European ones, are having a fresh look at payment and collection factories. The reason for this renewed interest is three-fold.
First, today’s technology is much more mature. An example of this is SWIFTNet, which is promoted as a single pipeline to many banks and is now more available to corporates with the new SWIFT service bureaus connectivity model. In the gtnews Payments Survey 2010, just under half (48%) of the organisations surveyed indicated they use SWIFT services to process payments. However, among the organisations that do not use SWIFT, more than half (55%), would consider using SWFT in the future.
The service bureau model has the potential to dramatically lower SWIFT implementation and running costs, as well as reduce the level of internal expertise that a company needs to have.
Second, increased regulation and the corresponding need for internal control are driving companies to look at payment factories. Beginning with collapse of Enron, the past 10 years has seen regulators ramp up pressure on companies to document the way they operate. Increasingly there are regulations coming out of the US, such Sarbanes-Oxley (SOX), which require detailed and complex audits. Corporates are realising that the more disparate their processes and technology, the more difficult, cumbersome and lengthy audits will be.
The third reason for the rising interest in payment factories is the single euro payments area (SEPA), which is a banking initiative – alongside the legal framework, the Payment Services Directive (PSD) – to support payment harmonisation across Europe.
Interestingly, SEPA affects a wider area than simply the eurozone. This is because once a company begins harmonising its payments processes, it may as well go a little further and use the same technology to harmonise the non-SEPA processes. Many corporates are using SEPA as an impetus to put in place a worldwide payments factory.
These are three reasons why companies are now having a fresh look at payments and collections factories. The background of all this activity is the global economic slowdown, although now the outlook is one of “cautiously optimistic”, as BNP Paribas’ chief executive officer (CEO) Baudouin Prot puts it.
The effects of the current economic situation could go either way: some may argue that it is a bad environment to reorganise part of the company that is not core business, i.e. treasury, but others argue that it is an opportunity to drive payment costs down.
As companies scrutinise cost areas, many are developing a business case for a payment factory from a cost-cutting perspective. They are coming to the conclusion that, despite the economic turmoil, the investment is worth the return, with a breakeven point of approximately two years.
From both an economic and a control perspective, the old trend towards increased centralisation is rising, regardless of whether the company is traditionally more centralised or decentralised. All corporate treasuries are moving closer to a centralised structure, allowing for increased control.
In payment and collection factories, there are at least three dimensions to optimising these areas:
Often companies begin the centralisation process by optimising the way they connect to their banks. US corporates – such as GE – have led the way by putting in place a single pipe to connect their subsidiaries to their banks. Often technical optimisation can be combined with operational efficiency and account rationalisation, but if not, it is solely a payment hub, as it only centralises the technology used for bank connectivity.
Companies dealing with multiple banks often find it expensive to run multiple bank connections. In the industry, the figure normally quoted for a total cost of ownership (TCO) of a proprietary bank channel is €6,000 – €10,000 per annum, which covers IT, resources, backup, hardware, etc. Quite often a company can have a dozen of disparate electronic banking solutions, which can add up to a significant cost. A SWIFTNet connection quickly becomes a more cost efficient solution.
Cost is one reason why companies are moving towards payment hubs, while another is the control associated with a single connectivity channel. By centralising what goes to and from the bank, a company can improve links to its treasury management system (TMS) as well, not only for payments and collections but also balance reporting, treasury forecasting, etc.
The development of financial shared service centres (SSCs) is part of improving operational efficiency. Previously, centralising connectivity was the main aim; today, it is also about centralising the accounts payable (A/P) and accounts receivable (A/R) teams.
By centralising these areas, companies can also revamp the processes by using techniques such as invoice scanning. There is a whole industry built on helping companies optimise the purchase-to-pay (P2P) processes.
Through the process, a number of criteria materialised that dictate the best location for a SSC, including legal issues, political and country risk, availability of skilled resources, labour costs, and tax, as well as travel time from the main subsidiaries. Historically, central and eastern European (CEE) countries have been considered the prime locations for SSCs – choosing nearshore as opposed to offshore. Asia, on the other hand, was not as popular, in particular because of the time zone differences.
Today, however, CEE countries are becoming increasingly expensive, in terms of unitary FTE and office space. In the future, locations such as the Czech Republic, Slovakia and Poland may no longer be the favourite locations for SSCs, as more traditional treasury locations, such as Dublin, The Netherlands, etc, may make a comeback.
The final dimension in optimising payments and collections is account rationalisation. The promise of SEPA is to have one disbursement account that can be used across the SEPA zone and across the company’s group. This has promoted the concept of an in-house bank, whereby the payment comes out of the bank account of the SSC or payment factory and then the internal current account process debits the subsidiary that initiated the payment.
The in-house bank trend, and making payments on behalf of, is part of the concept of one central disbursement account for multiple countries and entities. This is probably the most complex aspect to a payment factory, and many companies don’t go this far because it requires substantial IT resources.
This model does have some legal and sometimes tax constraints. Some payments cannot be done on behalf of, while some payments can’t be done electronically in various jurisdictions, for example Greece. There are many constraints in terms of making certain tax payments across Europe on behalf of and these need careful consideration when define the scope of the payments initiating from a company’s in-house bank.
At BNP Paribas’ Cash Management University (CMU) in 2009, Céline Hug-Sapin, deputy treasurer, Richemont International, spoke as the project manager for the payment factory process. She explained to the audience that 80% of the cost savings comes from process automation and process rationalisation,15% from replacing multiple local electronic banking system (EBS) to one single pipeline, and the remaining 5% from reduction of bank charges.
Regardless of whether a company operates a central hub, a SSC, or an in-house bank with a central disbursement account, many companies want to have greater control over the number of bank accounts.
On the one hand, companies may want to rationalise the number of accounts, but sometimes they may also want flexibility in bank relationships. SWIFTNet facilitates that ability. With a single pipe of standard connectivity, it is much easier to switch from one bank to another.
Globally, the outcome is more towards optimisation, in other words fewer bank relationships, but it depends on the market, the size of the company, its purchasing power, if it is cash rich or poor, etc. It is difficult to say whether this is the result of payment factories or the more difficult market conditions in terms of credit, or whether it is about the power that companies want to have when they negotiate better pricing with their banks.
One out of three pan-European request for proposals (RFPs) that BNP Paribas receives relates to payment factories and payment and collection optimisation. The trend is quite noteworthy – if banks and clients want to make it a success, corporates need to tap the expertise of the banks that have been involved in payment factories and SSCs for quite some time.
The next article in this two-part series will explore what corporates should be looking for in their banks when it comes to supporting payment and collection factories.To read more from BNP Paribas, please visit their gtnews microsite.