Payment factories and ‘on behalf of’ models offer corporate treasurers the opportunity to capitalise on strategic opportunities, in addition to the easier gains of lower costs, increased cash visibility and improved control over the timing and terms of payments
While the concept of payment factories is nothing new, the march towards single euro payments area (SEPA) compliance
has placed a renewed focus on payment centralisation, due to the harmonisation of formats and connectivity that SEPA
offers. This standardisation makes it easier to establish payment factories and, once implemented, to improve the efficiency of payment workflows.
Setting up payment factories is a team effort, as multiple departments typically own different parts of the payment process; for example treasury owns bank relationships
; procurement or credit may own the customer or supplier relationships etc. The migration effort to comply with SEPA also requires collaboration among these same teams, so if they didn’t work together to centralise payments before, they are likely to do so now.
Whether a payment factory was already in place or is a new initiative for these cross-departmental teams, corporate treasurers have an opportunity to benefit from reduced costs, increased cash visibility and improved control over payment timing and terms.
Benefits of a Payment Factory
Most organisations implement payment factories to reduce costs. By eliminating redundancies and consolidating disparate processes, they save money. Optimising payment timing and the choice of payment methods minimises costs and money can also be saved by centralising bank services, when the opportunity arises. These direct benefits are obvious and among the first to be taken advantage of by the business.
Most finance professionals will also appreciate the benefits arising from improved visibility and control. Payment centralisation offers better management of the payment process. Ensuring the right people are approving payments helps to improve timing and control. If the business lacks control over payment release, then the possibility for surprises increases – and these generally lead to bad tempers and poor consequences.
With payment centralisation, visibility into all payments increases. Treasury will know the exact timing and the amounts of outgoing payments and, especially with direct debit, incoming amounts too. In addition, visibility into payments allows for better cash planning, improving liquidity risk management
Perhaps more importantly, chief financial officers (CFOs) and treasurers gain analysis and insight through improved visibility and control of payments. Payment factories also create the opportunity for more strategic decision making.
For example, armed with better transparency and control, the organisation has the opportunity to standardise payment terms. Ideally, visibility of invoices will also have been centralised when creating the payment factory, meaning that payment identification and processing times decrease. Combined with the opportunity to standardise terms, this puts the finance team in a great position to find ways to improve working capital.
Supply chain finance
(SCF) is one such way, where the treasurer can extend days payable outstanding (DPO) without putting financial stress on the supply chain. On the flipside, cash-rich organisations may choose to offer early payments using their own excess cash and liquidity, taking the opportunity to earn higher cash returns.
Whether the objective is to improve working capital by extending DPO or proactively implementing a programme to offer attractive early payment discounts directly, there is significant business value to be created by having the centralised visibility and standardisation of process that results from implementing payment factories.
Requirements for Implementing a Payment Factory
A checklist of requirements for implementing a payment factory should, as a minimum, include the following:
• Centralisation of payment connectivity (to the banks) and payment formats. In the European Union (EU), this means simply meeting SEPA requirements.
• Centralising processes such as approvals and payment limits is also necessary, to ensure the complete payment workflow is controlled and meets internal policy compliance.
• Data consolidation: payment requests must be consolidated into a single database so that all users – many of whom may be remote – can input requests for approval and, ultimately, the transmission of approved payments to the bank(s).
Technology is a key enabler. Treasury systems and enterprise resource planning (ERP) have to be interconnected, as both systems play a role in the centralisation of invoices and payment requests. Often the treasury management system will be the consolidation point, managing the payment approvals and operational workflow and responsible for connectivity to the banks, either directly or via SWIFT. As the volume of payments is generally very high – a monthly total of 100,000 payments is typical – operational efficiency is absolutely critical. Systems must be integrated and workflow automation is a must.
No matter the extent of the payment factory and degree of centralisation, every treasurer and chief financial officer (CFO) stands to gain from reduced costs, increased visibility and improved control over payment workflows. SEPA’s focus on both credit transfers (SCTs) and direct debits (SDDs) also acts as a catalyst to combine incoming payment collections into this centralised model, improving the benefits to the organisation. As a shared objective across multiple teams, implementation of a payment factory can serve as a fine example of collaboration and co-operation that could extend to other internal, value-add projects.