Corporate TreasuryCentralisationSSCs/Payment FactoriesPayment Factories: Driving Control, Centralisation and Cost Savings

Payment Factories: Driving Control, Centralisation and Cost Savings

Spying new opportunities to globalise operations and reduce costs, treasury executives are on the hunt for the ideal operating model to manage payments. In years past, they’ve pursued a number of strategies, including shared service centres (SSCs) and in-house banks (IHBs), to consolidate and centralise payables. Now there’s a new model to consider – the payments factory – a concept that’s getting a lot of attention among multinational corporations (MNC’s) targeting redundancy and strengthening control. As with every new idea, it’s critical to analyse what this structure really offers, how the concept can be implemented and which companies are best suited to become payments factory managers.

Clearly, there’s increasing demand for streamlining the payables process. And each of the two more commonly used models, the SSC and thek IHB, has made progress in reducing costs. Because the payments factory concept represents a complex, hybrid approach combining aspects of both models, the first step in considering a payments factory is to recognise the value that the SSC and IHB deliver independently.

Shared Services: Efficiency and Service Benefits

The SSC model has proven itself within many global corporations. Here, a centralised payments operation makes all payments (including treasury and accounts payable (A/P)) through a single operating entity, standardising processes, leveraging process efficiencies and reducing costs. Other benefits include centralised expertise, which delivers better service, quality and timeliness, tight alignment with the corporate strategy, and the opportunity to expand treasury activities at lower marginal costs. Specifically, the SSC can reduce the number of systems interfaces, increase financial transparency, lower transaction fees, lower fixed operating costs, aggregate liquidity positions, and better leverage foreign exchange (FX). The SSC can be run as a large subsidiary, an independent service company (the most prevalent model) or as a finance company that serves as an agent. Governance of the SSC is aligned with the organisation’s strategy through service level agreements (SLAs) and activity-based charges. Companies that have been successful with the SSC model typically have top executive sponsorship and a customer-centric/metric-centric culture.

IHB: Greater Control

The IHB structure, on the other hand, promises and delivers control at the highest level with funding and liquidity and distributes funds through sophisticated methods. The IHB effectively serves as a ‘captive bank’ for the parent and subsidiaries, able to take deposits, pay interest, make loans, and charge interest. Therefore, the IHB must be fully auditable and transparent, adhering to regulations and capital requirements in every country in which it operates. With this model, a treasury management system (TMS) or enterprise resource planning (ERP) system maintains virtual bank accounts to track transactions executed by the IHB.

The main benefits of this approach include simplifying cash flow, gaining visibility and improving liquidity. There are no duplication of efforts and big benefits to having fewer banks and fewer bank accounts. Because of standardisation, the company gains visibility and control, tapping new opportunities for cross-currency hedging and other risk management tactics. The IHB also delivers improved cash utilisation, which allows for intercompany netting and pooling, improved liquidity and intercompany funding benefits. Companies that have leveraged the IHB model often have multiple legal entities and operate with multiple tax regimes. Handling the regulatory and statutory issues can be an issue for companies considering the IHB model.

The Payments Factory: Combining Brawn and Brain

Simply put, the payments factory combines an SSC (the brawn) with an IHB (the brain.) It’s a complex treasury structure that consolidates payments with efficient funding, concentrates company cash at the highest level and disburses funds through sophisticated methods designed to minimise cross-currency and bank fees. In summary, you get the operating efficiency of the SSC with the control, consolidated volume and cash management benefits of the IHB. The payments factory is actually more efficient than shared services, in that it:

  • Minimises the number of actual transactions.
  • Minimises cross-currency exposure and transactions.
  • Minimises the number of fees and risks.
  • Aggregates and nets liquidity for improved performance.
  • Increases visibility and control across the enterprise.
  • Maximises the use of available cash and reduces overall funding costs.

In the hierarchy of functions, the payments factory drives cost savings by:

  • Serving multiple legal entitles.
  • Promoting netting (intercompany, cross-currency, third party).
  • Managing incentives and disincentives to hold cash.
  • Reducing group funding costs.

Incorporating all the SSC and IHB functions, the payments factory can handle payables and receivables on a worldwide basis, including the payable-on-behalf model. With this model, for example, payment can be made in US dollars out of a US account on behalf of a UK entity.

Is a Payments Factory Right for You?

Before deploying the payments factory model, there are many factors to consider. A payments factory is likely to be advantageous to your company if you have the following institutional factors related to currencies, cash balances and organisational structure. In the area of currency, you should consider a payments factory when you have large amounts of payments or receipts in different currencies, when you are long in some currencies (and short in others), and when your operations include restricted, volatile or less frequently traded currencies. This is because the aggregation and the co-ordination features of the payments factory will allow you to maximise liquidity, offset costs and minimise risk in these currencies. In the area of cash balances, you should consider a payments factory when you have excess cash levels or deficient cash in different regions. Here the payments factory delivers benefits by allowing the group companies to offset balance levels to minimise bank borrowings, increase liquidity yields and provide lower cost funding to individual group companies.

Lastly, it’s smart to look at your organisational structure and use the payments factory to maximise liquidity and minimise costs. For example, a payments factory makes the most sense for companies with diversified business entities (i.e. different cash needs), or when the different entities use the same suppliers and vendors or do third party netting on high-value contracts. The ability to disburse funds on a net or consolidated basis can lower processing costs and increase group liquidity. As with any strategic approach, there are significant costs involved in operating a payments factory. These costs, particularly those related to technology and systems, need to be evaluated in light of the above advantages.

The Bottom Line

Overall, the payments factory can be an excellent model for companies that want to improve control, centralisation and cost savings. It will streamline the operation, reduce bank transactions and reduce the number of accounts. The process, however, demands a good deal of organisational discipline. Corporations need will power to address the internal and external issues that come with structural change. That said, technology advances, combined with the pressures to do more with fewer resources on a global basis, are prompting more companies to build a treasury structure that will carry them into the future.

Tips on Designing and Implementing a Payments Factory

  • Make sure that all major stakeholders collaborate on the design process, with each group playing a key role.
  • When consolidating functions, work closely with tax and legal advisers. The co-mingling of funds on top of compliance considerations translates to complicated tax issues. You need a transparent process that’s auditable.
  • Understand group companies’ needs explicitly – make no assumptions – and design a process to meet those needs. Highly specialised processing should be assessed to determine whether it truly meets a need or is just a legacy practice.
  • Flow the process on paper and take honest feedback from stakeholders. Revise the design multiple times to agree on the optimal process.
  • Look for ‘proofs of concept’, processes that can migrate first to deliver quick savings and help drive the implementation process.
  • This is one of the most complex structures you will ever create: phase in change at levels that ensure success.

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