How Realistic Are Payments/Collections-on-Behalf-of Models at the Moment?

Interest in payments-on-behalf-of (POBO) typically occurs in companies where it is realised that the existing cash management structure is complex and difficult to control centrally.  If, as is often the case with global corporations, there are significant volumes of payables and receivables being handled by local banks, via local bank accounts, then the case for POBO becomes compelling.  Such situations will result in potentially high levels of inefficiency and therefore cost.  In today’s tough economic environment treasuries will not tolerate this for long.

We have seen interest in POBO structures increasing over the past few years  initiated especially when corporates are either considering changes to their cash management (bank) providers or their treasury technology.  Of course there is no surprise here as technology is widely available now to run a POBO structure and the business case is easier to justify as adoption increases. I will look at the more nebulous concept of collections-on-behalf-of (COBO) later on.

As the name implies a POBO solution involves centralising payments activities to a centre.  In a POBO model the liability to the supplier remains on the balance sheet of the local entity but the liability is discharged out of the liquidity owned centrally on behalf of the local entity.

There are typically two ways in which companies are currently implementing a POBO solution:

1. Nomination of a single entity in each operating country to execute domestic liabilities incurred by domestic entities.
2. Nomination of a single legal entity to execute all liabilities to domestic sources, irrespective of where the liability occurred.

The second way often has greater attraction for a corporate because significant cost reductions can be realised in the reduction in the number of cross border transactions needed resulting in lower bank payment and foreign exchange (FX) charges.  We have seen a growing level of corporate interest in this and I want to examine in this blog the benefits a POBO structure can bring, and also future developments in this area.

Payments Factories

The term In-house banking (IHB) is widely used in reference to a central treasury providing bank-style current account services to their entities.  It can also be extended to include disbursement and collections services thus creating a payment factory.  This is seen as the ultimate way of making cash a corporate resource.

The POBO structure brings both tangible and intangible benefits such as:

• More cash is managed centrally therefore reducing cash locally and providing greater control and ultimately higher return on idle cash.
• Less bank float.
• Management of FX positions at a central rather than local level leading to greater efficiencies.
• Lower bank charges overall as there are fewer banks/accounts.
• Optimal payment routing resulting in a reduction of expensive cross-border payments and an elimination of payments in non-account currency.
• Group warehousing of payments leading to cost reduction.

There are of course many challenges in implementing a POBO structure and these particularly centre around the areas of tax and regulation.  In some jurisdictions they are prohibited so you will need to get advice.  POBO structures create extensive intercompany assets and liabilities resulting in increased tax and accounting complexity where again advice will be necessary.

Collections-on-Behalf-of

On the receivables side there is a lot talk around collections-on-behalf-of (COBO) and collections factories. These are still in their early infancy in terms of treasury usage, but could promise huge corporate benefits in the future, such as:

• Bank account reduction.
• Centralisation of credit management.
• Standardised and centralised receivables reconciliation.
• Centralised cash collection.

It can be argued that to achieve the above you will need very sophisticated technology such as a global enterprise resource planning (ERP) system, which has the capability of harmonising invoice numbering.

Whatever the technology issues the concept of COBO is something we are going to see more of in the future as corporate treasuries, once they have consolidated and harmonised payments, will want to do the same for collections. It is only natural and COBO is something I expect to see develop in future years. It is still at its very very early stages, however, and the difference between the concept and the real-world, with live examples, is still wide.

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