Is SEPA the Perfect Opportunity for Implementing a Payment Factory?

Gtnews alone is the source of over 230 articles on
payment factories – and more than 500 on SEPA. Its 2012
Cash Management and Trade Finance Survey reported that out of 135
organisations questioned, 47% expect to start the implementation of a payment
factory – either within a shared service centre (SSC) or as a stand-alone –
within the next 24 months. These figures show the huge ambitions of corporates
to implement payment factories within their operations. But why do they
harbour such plans, given that they are likely to involve significant
organisational changes and costs?

The reason is closely related to
macroeconomic developments over the past 10 years, which have significantly
changed the role of treasury in a corporate context. The Association for
Financial Professional’s (AFP) 2011 survey entitled ‘Strategic role of
Treasury’ shows that the two top trends within corporate treasury are the
growing importance of cash management and liquidity and senior management’s
wish for greater visibility on their organisation’s liquidity. Payment
factories have proven to be an excellent tool for an organisation to get more
visibility and control on cash and liquidity.

A further development
that has forced treasury departments, especially those based in Europe, to
review their payment process is the advent of the single euro payments area
(SEPA). From 1 February 2014 onwards, all standard euro payment transactions
in the SEPA zone must be executed as SEPA payments or direct debits. In order
to comply with the SEPA regulations corporates are obliged to send SEPA
transactions to their bank(s) in the ISO20022 extensible markup language (XML)
format. Furthermore, SEPA transactions have certain data requirements, such as
the mandatory bank identifier code (BIC), international bank account number
(IBAN) or the direct debit mandate information. As corporate treasuries are
forced to implement changes in order to comply with the SEPA regulations, so
interest in payment factories has steadily increased.

Payment Factories

Payment factories are often
discussed together with shared service centres (SSCs) and in-house banks
(IHBs), although the two structures have different functions. A payment
factory is a centralisation of the part of the accounts payable (AP) function
that executes payments. An IHB is where internal subsidiaries hold bank
accounts with an internal bank, which is owned and operated by the treasury
department. These internal bank accounts can then be used for internal
payments or the settlement of internal foreign exchange (FX) hedges. When an
IHB and a payment factory are both implemented it is possible for the business
units to use their internal account with the IHB both for internal purposes
and for external payments.

Both an IHB and a payment factory imply
the centralisation of processes within an organisation and can therefore be
considered a shared service. However, a SSC implies not only the
centralisation of treasury-related processes but also the centralisation of
other processes such as accounting, human resources (HR) or IT services.

A payment factory’s role is defined as ‘centralising the execution of
external payments within an organisation’. So, at the very least, a payment
factory must be able to collect the various kinds of payments from internal
subsidiaries and should be able to forward these payments for execution to the
various external banks. Broadly speaking, there are two separate set-ups
possible for supporting a payment factory. The traditional approach is where
the payment formatting, routing and validation are handled by IT systems
maintained within the organisation. This can be done by modules of an
enterprise resource planning (ERP) system, a treasury management system (TMS)
or a dedicated IT system. Recently, cloud-based solutions have been introduced
that seek to challenge the traditional approaches.

The advantage of
cloud-based solutions is that they offer greater flexibility. Generally
advertised as ‘plug and play’, they can have a relatively short implementation
time. Among the services usually provided by these cloud-based solutions are
reformatting payments to the correct format and data validation This is, of
course, also possible with in-house solutions but it should be noted that
implementation time and costs are likely to be higher. However, cloud-based
solutions create a dependency between the corporate and a third party
supplier. While the implementation costs might be lower the recurring costs,
combined with the increased dependency on a third party, need to be considered
closely.

With the SEPA deadline less than a year away, interest in
these cloud-based services has increased noticeably. Cloud-based services can
support the reformatting of payments to ISO20022 XML and can additionally
enrich payments with the master data required for SEPA. In other words, these
cloud-based services can significantly reduce the impact of SEPA for
corporates.

Advantages of a Payment Factory

Centralising the payment process by introducing a payment factory can offer
huge advantages for a corporate. The extent to which these advantages are
achieved depends on the set-up that is chosen. The most straightforward is
where the payment factory simply acts as a ‘forwarding service’ for the
internal subsidiaries. The payments are executed from the local subsidiary
systems and are then collected at a central point: the payment factory. If
required, the delivered payments are reformatted, for example to the ISO20022
XML format mandatory for SEPA, and then sent to the external banks. Payments
are then made out of the accounts owned by the local subsidiaries.

Such a forwarding service, along with the more advanced payments-on-behalf-of
(POBO) model, which will be discussed next, include the following
advantages:

• Increased visibility in cash
  and liquidity. By ensuring that all payments are flowing through a central
  system the corporate treasury department has a clear overview of outgoing
  payments at all times, thus ensuring more effective cash management
  processes.
• Improved control in both the
  payment authorisation process and in the ability to maintain bank master data
  at a central location, thus ensuring that no payments are made to blacklisted
  accounts.
• IT savings. As the maintenance of
  payment formats and interfaces to the various banks are maintained centrally,
  overall IT costs within the group can be reduced.
• Savings
  in full-time equivalent (FTE). As the payment process is
  centralised, responsibilities are transferred from multiple local subsidiaries
  to a central location. As such, there is no more duplication of roles and
  responsibilities, resulting in fewer FTEs required for payment processing
  across the group.

Although the above-mentioned advantages can
already provide a sufficient business case for implementing a payment factory,
substantial additional advantages can be obtained when choosing a more
sophisticated set-up, such as the POBO model.

In the POBO model,
payments are routed to external bank accounts, which are owned and controlled
by corporate treasury. As such, the number of bank accounts required for
executing payments can be reduced. Additionally, payments can be routed in
such a way that they are executed from a domestic account whenever such an
account is available. Such a model then offers the following additional
advantages:

• Reducing transaction and FX translation fees as more
  payments are executed as domestic payments instead of foreign payments.
• Reducing the amount of bank accounts required. As payments from different
  subsidiaries can be executed from a single account per country, or even per
  region when considering SEPA, the number of bank accounts used for executing
  payments can be greatly reduced.

Implementing a Payment
Factory

When a company is developing the business case for
implementing a payment factory it has to look at the big picture and ask a few
fundamental questions, such as:

• Do we also implement an IHB?
• Should we rationalise our banking relationships?
• Will we use
  SWIFT to connect to our banks?
• Will the payment factory be managed
  by the corporate treasury department or outsourced to a SSC?
• Should
  we rationalise our ERP landscape?

Given the current economic
climate – and despite the reduced budgets available for projects within most
corporations – the ever-growing number of payment factory implementations is
remarkable. This is mostly due to the fact that a payment factory project can
achieve strategic and operational advantages simultaneously. On the one hand
such a project can greatly increase the visibility of cash within the
corporate, which is a top requirement for many group treasurers and CFOs. On
the other hand it reduces costs by introducing efficiencies in the payment
process. It is fairly common for payment factory projects to have a payback
period of one to two years.

However, implementing a payment factory
should not be taken lightly. First of all it requires a significant up-front
investment in IT licenses and systems. The costs of internal and external
resources should then be considered. But the importance of good project
management should not be underestimated. By centralising the payment process
one can anticipate much resistance from the local business units. It is
therefore absolutely vital to manage the process so that the payment factory,
once established, can be used to its full capacity.

Conclusion

With the 1 February 2014 deadline for
SEPA approaching fast organisations are, hopefully, busy preparing their
migration projects or have already completed them. Some of the often-noted
advantages of SEPA for corporates are comparable to some of the advantages of
a payment factory as both provide greater standardization and centralisation.
But, can you still use SEPA to leverage the implementation of a payment
factory? Given the fact that SEPA has to be implemented in less than seven
months this is unlikely to be the case. Given the low
acceptance rate for SEPA payments within Europe, it is clear that many
corporates are currently implementing SEPA or have yet to start. Even when
companies have by now realised that SEPA comes with the opportunity to
implement a payment factory, the tight deadlines will make such a project
unfeasible before 1 February.

Does this then mean that the
opportunity is completely lost? No, even when SEPA and a payment factory
cannot be implemented at the same time, at the very least SEPA provides the
treasury department with an opportunity to review the current payment process
and to create a roadmap, which can outline the different changes required and
their timelines. As such, SEPA should be seen as a perfect opportunity to put
this on the agenda and can serve as a foundation for a future payment
processing model.

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