Payment Factories: Are They a Valuable Treasury Investment?

In a company with decentralised processing, payments and reconciliation are administered by the subsidiaries themselves. This creates duplication in both roles and systems, however, and means that there is no overview of the company’s payments at the central level. Consequently, the control of payments and liquidity can be hampered. But the subsidiaries do have greater freedom to act, which can provide speed and flexibility in the management of payments.

It is the classic case of the perennial debate about the pros and cons of shared service centres (SSCs) and payment factories, and how to correlate the two to achieve maximum payments efficiency in your treasury.

Figure 1: The Use of Banks and Technology Systems to Process Subsidiary Payments.

Source: Scandinavian Financial Solutions AB.

In a corporation that implemented an SSC to manage the payments for the entire corporate group, economies-of-scale can be achieved in the payments processing. The improvements will be in the administration of the payments. But major potential savings will be missing as a large number of systems will continue to need maintenance. SSCs also often fail to generate improvements either in liquidity management or payment routines as information is spread across multiple systems. A payments factory may be able to help in this regard.

Figure 2: The Role of a Shared Service Centre (SSC) in Corporate Payments.

Source: Scandinavian Financial Solutions AB.

In a corporation where a payment factory has been implemented, all account and payment information is available in the same system, offering significant benefits. This gives the treasury access to all account and payment information in the same system, aiding flexibility and efficiency. This also helps the group to improve liquidity management and its ability to manage payments according to general routines. Large savings in the administration of authorisations, in comparison to an SSC, are also possible. Note, however, that the approval of payments can still be set on a subsidiary level. The payment factory gives flexibility about how to manage the payments at the same time as the administration can be centralised.

Figure 3: The Role of a Payment Factory in Corporate Payments.

Source: Scandinavian Financial Solutions AB.

SEPA and Payment Routines

As we all know the single euro payments area (SEPA) deadlines are approaching fast, with the migration for eurozone countries in the payments harmonisation project due to be completed by 1 February 2014, and by 31 October 2016 for non-eurozone countries. SEPA will mean necessary adaptions in the payment systems used by the public sector, corporations and indeed all organisations processing payments across Europe. The requirements are quite concrete such as the mandatory XML ISO 200022 messaging format, which should be used and contain international bank account numbers (IBAN) account information and Bank Identifier Codes (BICs).

I will look at three examples of payment set ups in this article to illustrate that adapting to SEPA will be easier if a payment factory has been implemented. If no payment factory has been implemented your treasury needs to ask what the cost is to adapt all systems to the new SEPA credit transfer (SCT) and SEPA direct debit (SDD) payments formats, rather than standardising on these in a centralised payment factory. Of course, the compliance time schedule must be taken into consideration as full implementation of a payment factory might not be possible before the SEPA deadlines start next February. As you perform ‘pre-studies’ of the SEPA migration it might be beneficial to evaluate the implementation of a payment factory in terms of the cost, savings and compliance timing available to treasuries.

Making the Business Case: Emphasise Savings and Revenue

In the business case that should be presented to the boardroom, in order to win the ‘greenlight’ to implement a payment factory, at least the below-listed items should to be considered a priority, alongside an emphasis on the available savings and revenue impact. It can also be of value to use a consultant to support the creation of a business case to present to the board, especially if the consultancy engaged has done this type of thing before for previous clients. Consultants can also add additional resource to strained internal staff members or procedures that have to meet daily obligations, and can provide an unbiased viewpoint of existing current routines.

Quantitative Advantages:

• Lower banking costs: Banking cost can be reduced by optimisation in management of batches sent to the bank. Banks often charge for each batch procedure, covering bulk transaction data. By coordinating payments to the bank, the number of batches can be reduced and savings made. A payment factory can also help a corporation to do payments-on-behalf-of (POBO) payments, thus making cross-border transactions effectively cheaper than domestic payments. It is also possible to reduce the number of bank accounts and bank connections using this model.
• Improved working capital: In organisations without a payment factory, the payment routines are often not managed optimally, thus payments are sent too early. What is your days payments outstanding (DPO) and how does it correspond to your payment terms? An improvement in the DPO of one day, for instance, at a cost of sold goods of EUR1bn will free EUR2.7m in capital. Ask yourself how many days can your DPO be improved?
• Improvement in liquidity management: A payment factory will give you an overview of all balances and payments, and this will enable you to manage intraday balances more efficiently. Large amount of capital can be set free with this support.
• Savings in administration: The implementation of a payment factory can improve treasury and corporate administration costs in several areas. Three of these areas are; the management of payments; the reconciliation of payments; and the administration of authorisations.
• Lower IT costs: It is expensive to maintain bank interfaces; a payment factory will allow you to have fewer interfaces and to save money.

Qualitative Improvements:

• Improved control and lower risk of fraud: As the administration of authorisations and limits is centralised in one payment factory system the control is improved, thereby risk is reduced. It is also possible to gather blacklisted accounts in one place to ease the administrative burden of complying with sanctions screening or anti-money laundering (AML) obligations.
• Historic data: The possibility exists to gather all of a corporate’s payment history in one central archive for a desired time frame of say 10 years, which could be useful for data storage and regulatory retrieval purposes.
• Easier to follow regulations: All of the aforementioned payments factory benefits will also support the organisation in following its regulatory obligations.

Costs 

When it comes to examining the organisational structures and cost benefits of a payments factory treasurers should ask themselves:

• Who should administer the payment factory?
• How are payments to be managed on a day-to-day basis?
• What will be the administration cost be, in comparison to today?

System cost is also an important consideration. Treasurers should ask themselves about:

• Implementation costs: To implement a payment factory is a long-term project so effective project scoping is essential. Each project is related to a different type of implementation cost, both internal and external, and should be assessed thoroughly.
• Licensing costs: New systems will give additional licensing costs, depending upon if you use a cloud-based Software-as-a-Service (SaaS) model and what bank services you use. It might be possible to close down some old systems, however, which should offer considerable savings.

I hope I have given you some input about how to start making the case for implementing of a payment factory. SEPA can be the trigger to get started with the challenge of implementing a payment factory in your organisation and may be a good starting point in the task of winning boardroom approval.

This article was first published in ‘CFO World’, Swedish edition.

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