Corporate TreasuryCentralisationSSCs/Payment FactoriesThe Strategic Value of a Payment Factory

The Strategic Value of a Payment Factory

The current economic malaise continues to have a real impact on businesses. Confronted with uncertainty and weakened demand, treasurers and finance executives desire improved working capital, reduced costs, optimised efficiencies and tightened controls across their financial value chain. With the importance of cash at the top of the corporate agenda, businesses are looking more closely at their payments processes to drive value across the entire organisation. To this end, leading companies are transforming their business with a consolidated payment factory – a shared service centre (SSC) centralising and optimising payments and collections.

Catalyst Driving Consolidation

In an era of cross-border networked economies, corporates are finding that legacy systems and disparate business processes cannot keep pace with the increased complexities of managing and monitoring cash movements and available balances. Recent turbulent events demand that treasurers analyse financial risk exposures in real-time. Yet, according to a new study by the Financial Services Club, half of corporations (50%) don’t have insight into their liquidity exposure (Figure 1), and of those who do have visibility, only 24% have access to real-time information.

Companies looking to manage their cash positions with a consolidated view are leveraging technology and standardisation of processes in pursuit of enhanced business performance. Shifting to a payments consolidation model or a payment hub – also commonly known as a payment factory – is permitting a more nimble response to evolving business changes.

Figure 1:
Do You Know Your Future Financial Exposures?

The Financial Services Group Survey sponsored by Logica, Autumn 2011

Building the Business Case

The first step in establishing a payment factory is to transition to a centralised financial service centre – a SSC accounts payable (A/P), accounts receivable (A/R) and treasury. In this effort, corporations are leveraging their enterprise resource planning (ERP) and other specialised corporate treasury systems in combination with a payments hub to bridge and handle the different payment types and formats. The workflow management system of a payments hub streamlines payment approvals, while the rules engine routes payments (manual and batch) to the least cost option. There is also a trend with next generation payments factories towards in-house banking to settle inter-company transactions.

The compelling case for a payment factory includes:

Increased efficiencies including higher straight-through processing (STP) levels

With wide-reaching business units, subsidiaries, and trading partners, corporations must often grapple with complex and inconsistent standards, procedures, and a mix of banking relationships. Constrained by less than optimal processes, many firms continue to rely on manual practices to consolidate, track and measure their cash management performance. However, for leading companies, corporate ERP or financial accounting systems are integrated with their banks’ payment networks to eliminate or reduce manual intervention and automate cash inflows and outflows for increased STP.

Lower transaction and operational costs

The manual processes also exacerbate another issue: companies are dealing with hundreds of bank accounts at multiple banks across the globe. Maintaining multiple banking partners – each with proprietary connections and/or systems to send, receive, and access banking information – can be cost prohibitive and time consuming. A centralised operational structure reduces banking relationships, cross-border payment fees, and payments across locations and subsidiaries. This, in turn, lowers foreign exchange charges and wiring costs. The corporation is also in a better position to negotiate lower banking fees based on higher volumes of transactions.

Improved visibility into cash flow

Historically, siloed bank payment systems based on individual product lines such as checks, Automated Clearing House (ACH), or wires have supported corporate payments. Too often corporate treasurers have had to toggle from one application to another for payments processing. As a result, businesses experience process fragmentation, diminished efficiency, and obstructed enterprise-wide transparency and control. Combined with the global expansion of the financial supply chain – businesses trading with new partners, opening new facilities and supporting the regulatory and compliance requirements of in-country trade transactions and cash management – there is a demand for enterprise-wide visibility and control over global cash balances. A cohesive solution and access to banking services through a single platform or portal via a payment factory can enable businesses to make more informed decisions. Organisations can monitor collections, work more strategically such as extending better payment terms to the best customers to maintain a more competitive position, while also doing business more effectively.

Optimised payment flows including reduced exceptions processing

In today’s environment of multiple banking platforms, ERP and treasury systems, companies face a lack of common standards, common interfaces, and integrated process flows between banks and trading partners. With a payment factory, the payment processes (batch, direct debits, and manual) are standardised regardless of originating or beneficiary country, leading to substantial benefits. As an example, with greater visibility over cash from the concentration of financial services, companies are able to closely align payment strategy to enhance liquidity forecasting and planning.

Reduced fraud, risk, and errors

The majority of finance executives still rely on drawing data from multiple sources, which often entails time-consuming, manual processes that increase the potential for error. Combined with paper-based payments processes, companies are vulnerable to heightened risk issues. Beyond the internal sources of risk, the fallout of the financial crisis has made counterparty risk an area of focus as well. Companies concerned with potential disruption are closely monitoring the performance of their banks, as well as suppliers and even customers that may become insolvent. The enterprise view provided by a payments factory can enable businesses to expand key performance metrics for monitoring and mitigating these internal and external exposures.

Improved compliance and control

The increasing concern with liability, corporate identity theft, data breaches and malfeasance is leading corporations to seek better internal controls and enhanced tracking mechanisms. Consolidation of financial processes with a unified payment factory affords greater transparency of funds; payment flows are more streamlined, strengthening internal controls, and easing the burden of many aspects of regulatory compliance.

Building Blocks of a Payment Factory: Leveraging Electronic Payments and Automation

With the increasingly complex financial supply chain, there is a need for more efficient ways to manage payments and to connect to the network of banks and trading partners. A key initial step to an optimised payment factory starts with moving to electronic payments and business process automation.

Corporations can achieve incremental cost savings by switching from paper checks to electronic payments (e-payments). Top-performing companies use a high percentage of electronic – ACH, commercial cards, and wire transfers – versus paper payments to better control the timing of their cash flows. Sellers benefit from reducing their days sales outstanding (DSO) and collections costs. Conversely, by speeding payables, companies are able to take advantage of early payment discounts or dynamic discounting to negotiate lower prices with their suppliers.

E- payments can be further enhanced by solutions like electronic invoice presentment and payment (EIPP), or employing data standard formats such as financial electronic data interchange (EDI) and extensible markup language (XML – a set of rules for encoding documents and representing data structures) that enable electronic processing. With automation of business processes via digital invoices, EDI and XML bring lower processing costs, improve cash flow management, and build better customer relationships.

The Way Forward

In the face of an unstable global economy, intense competition, profitability pressures, and an evolving regulatory environment, the pressing issue for companies is cash management. Companies that will emerge ahead will be those that apply a holistic approach to processes and technology. A comprehensive strategy implementing a payment factory – a unified approach integrating back-end systems of payables and receivables with treasury in a shared business centre, will contribute towards a significant strengthening of internal financing resources and capital efficiency to better position companies to navigate and capitalise on change.

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