One of the most significant trends in treasury and
finance functions in recent years is the centralisation of payments. This can
take a variety of forms and corporations are adopting different models
according to their culture, organisational structure and the regulatory
requirements in the countries in which payments are made.
Increasingly, both new and established centralised payment functions are seeking to maximise the cost reductions, financial and operational efficiency and enhanced security and control associated with centralised payments by implementing in-house bank structures operating on a ‘payments-on-behalf-of’ basis. Rather than making payments from bank accounts held in the name of the originating entity, the central payments function makes payments on behalf of group entities from one account, usually by currency.
Alternative centralisation modelsCentralised payment operations are often referred to as ‘payment factories’ or ‘shared service centres’ (SSCs). These terms are often used generically to refer to a variety of centralisation models. These include:
Centralised or hub technologySome companies choose to implement a payment ‘hub’; i.e. a central technology infrastructure accessed by accounts payable functions located in different parts of the group. This system is connected to the relevant banks through banks’ proprietary electronic banking systems or a multi-bank connectivity solution such as SWIFT. The hub ‘maps’ the file format received from each entity to the format required by the bank. A payment hub avoids the need for each local payments team to implement dedicated technology for payments processing and bank connectivity, while enabling consistent processes and reporting, improving controls and reducing technology costs, but without changing the structure of the organisation.
A payment hub solution enables consistent processes and reporting, improves controls and reduces technology costs.
Centralised resourcesA payment factory or SSC builds on the benefits of a hub by centralising accounts payable teams in one global centre or, more commonly, regional centres. Typically, companies that implement a payments factory also rationalise their bank relationships and connectivity, appointing one or a limited number of payment banks, e.g. by region. This brings further cost savings and efficiencies by concentrating resources and creating economies of scale.
Payments-on-behalf-ofThe third, and potentially optimal means of centralising payments processing, is via an in-house bank. The SSC or payment factory makes payments ‘on behalf of’ participating group companies through a single account (usually per currency), with payments booked on the originating entity’s inter-company account. The entity on whose behalf a payment is made is identified on the remittance information, thereby enabling the beneficiary to identify and reconcile the payment.
Using a POBO model through an in-house bank builds on the advantages of an SSC by enabling companies to reduce the number of external accounts they operate; a major plus for multinationals that have historically held a large number of bank accounts to make payments.
The administration cost and effort of bank account management are greatly reduced, costs are reduced through economies of scale and treasurers achieve better control over cash, avoiding the need for complex pooling structures or interbank transfers.
All euro payments are already treated as domestic payments in the Eurozone, but a POBO model can enable significant reductions in transaction fees on non-euro payments as these can be transacted domestically rather than cross-border.
Catalysts for POBOPayments centralisation has been growing for a number of years, but now it is far simpler to centralise payments in the Eurozone area as payment instruments and formats have been harmonised. Without the need to hold euro accounts in each country, a major obstacle to implementing POBO in the Eurozone has been removed. But centralised payment functions are not restricted to the euro or to Europe. Increasingly, companies are expanding POBO models globally, allowing them to channel payments through one account per currency in countries where regulations permit.
This was harder to achieve in the past due to the regulatory restrictions in many countries and the diversity of formats for exchanging information with payment banks. This often led to remittance information being truncated or removed from payment messages. Without this information, the beneficiary cannot identify the originating entity of a payment, resulting in multiple supplier queries and potential supply freezes where payments cannot be allocated promptly.
This issue is decreasing due to the growing use of XML ISO 20022 formats (on which SEPA (Single Euro Payments Area) credit transfers and direct debits are based), but there is growing acceptance at a global level. This format includes a structured field to indicate the entity on whose behalf a payment is being made. This data is passed consistently through the payment process, automating and accelerating reconciliation and account allocation. The use of remittance advices also makes it easier for beneficiaries to identify and reconcile incoming payments.
Without the need to hold euro accounts in each country, a major obstacle to implementing POBO in the eurozone has been removed.
Guide to implementationImplementing a payments-on-behalf-of system is becoming more straightforward now that migration to SEPA is complete and the introduction of PSD2 (the EU’s Revised Directive on Payment Services), which supports POBO structures, is in progress. The following outlines the steps treasurers and finance managers should take when implementing POBO, whether centralising payments from scratch or developing a payments factory:
- Put in place intercompany agreements between each participating group
company and the payments entity to authorise it to make payments on its behalf.
- Explore external regulatory issues to ensure that POBO is permitted for
each currency and country included in the scope of the project. Banks that are
experienced in POBO can help with this.
- Consider any internal obstacles, such as organisational structures that
ring-fence entities or restrictive statutes, and ensure that both senior
management and group companies understand the benefits.
- Anticipate any potential legal issues (such as the risk that a debt
settled by another group entity is considered paid) which may require changes
to the general purchasing conditions.
- Evaluate systems used for payments processing to ensure they support
POBO; specifically the ‘on-behalf-of’ field, in the ISO 20022 format.
Multinational corporations operating across regions, or in regions where there
is regulatory diversity, may implement a ‘blended’ approach; i.e. one which
uses POBO in countries where feasible and other centralisation models in more