Corporations today are under ever more pressure to devise ways to manage their cash more effectively. Currently, many are managing their payments processing and bank accounts in one of three ways – regionally, at the business unit level or at the subsidiary level. While these methods may offer a certain degree of flexibility, they often result in poor visibility and high ownership costs.
This article will explore the topic of how implementing a payment factory can support organisations in gaining control over cash management, as it helps to automate and centralise payments processing across regions.
Utilising a single channel for payments processing also improves visibility of cash flows for better liquidity management and significantly reduces operational and transaction costs.
The Initial Business Case
Payment factories have been around for some time. Typically, they have been implemented at large multinational organisations that want to streamline their accounts payable organisation (or part thereof) by defining common payment processes across various locations and subsidiaries in a shared-services centre.
Most of the CFOs who pioneered payment factories are enjoying a sound return on investment (ROI ) because the centralised payables and payment processing centre provides tangible operational efficiencies for their organisation, including:
- Driving down banking fees, as it becomes possible to deal with a smaller number of banking relationships across various locations and subsidiaries, resulting in a better negotiating position;
- Handling larger payment volumes with less staff due to increased automation and straight-through processing (STP);
- Replacing proprietary e-bank connections that typically cost about US$20,000 a year per bank connection, resulting in substantial savings;
- Routing payments to the least-cost option based on configurable rules;
- Offering flexibility for dealing with many different payment instruments and payment types, adding value to enterprise resource planning (ERP) systems that are often not capable of dealing with certain instruments and for which building customisations is a costly exercise;
- Centralising the payments business process, resulting in changing the process only once in case of changes required by business and regulatory pressures. Again, this means a substantial cost saving compared to changing many different systems;
- Facilitating compliance with internal control procedures as imposed by regulation such as Sarbanes-Oxley and the 8th European Union directive.
This first wave of payment factory implementations has focused on the operational benefits for the CFO, treasurer and accounts payable director. These advantages are obvious and are in most cases compelling enough to build a strong business case for payment factories. However, the advantages do not stop there.
Next Generation: Collection Factories?
Payment factories have now reached a level of sophistication that supports improvements in working capital management. Working capital is defined as current assets less current liabilities and is a financial metric that represents the amount of day-by-day operating liquidity available to an organisation.
The goal of working capital management is to ensure that a firm is able to continue its operations and has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
Traditionally, there has always been a strong focus on the accounts receivable (current assets) side to improve working capital. Getting money into the organisation quicker and converting the current assets into cash has been managed based on ratios such as days sales outstanding (DSO).
At first sight, this A/R process has nothing to do with a payment factory.
Direct debits, for example, are collection instruments that provide many advantages for a creditor, such as a high degree of certainty about the timing and the amount of the collection. They are done at the initiative of the creditor, as opposed to having to wait until the debtor is willing to pay.
However, direct debits require systems that are market specific, as their schemes in the various markets are different: direct debit formats, collections cycles, timing rules, and mandate management rules are all different by country.
Sound familiar? These are the same issues that payment factories have been dealing with on the accounts payable side. In other words, modern payment factories can also process direct debits.
Moreover, in Europe, there is a major initiative ongoing to streamline direct debits with the Single Euro Payments Area (SEPA) project. This should bring down the cost for pan-European creditors to implement a payment factory – or should we call it a collection factory?
Moving into direct debits and plugging them into a payment factory is leveraging the investment and adding significant value by bringing down DSO and more importantly, by decreasing the risk of non-payment and uncertainly about the timing of the incoming cash.
More Evolution
Back to the accounts payable side. The equivalent of DSO is days payable outstanding (DPO), which represents the number of days that accounts payable items are outstanding. A numerically high DPO could indicate sound working capital management practices – but it may also point to issues in meeting the short-term obligations.
In these times of intense collaboration with strategic suppliers and initiatives like supplier relationship management, it is very important to give suppliers insight into when and how they will be paid. Not supplying this information is a competitive disadvantage.
Traditional accounts payable systems are good at invoice management and payment runs, but are typically not able to give timely information about the payment status itself. A payment factory can readily provide this information.
Exposing this information to the accounts payable folks or even the supplier is something that enhances supplier relations and leverages the investment in payment factories.
Another benefit can be realised by ‘extracting’ information from the payment factory and using it for cash management purposes. As payment factories already contain information from various systems (ERP systems, payroll systems, treasury management systems) across the organisation or enterprise, it is there to be used!
Additionally, modern payment factories also include workflows for getting intraday and previous day account statement across a range of bank accounts. This information is crucial for cash management decisions.
Extracting information for short-term cash management decisions or implementing cash management modules that are integrated with the payment factory are therefore a logical next step. It leverages the information of the payment (and collections – remember direct debits) factory. It leads to better cash utilisation and improved working capital management.
Conclusion
The current generation of payment factories is offering much more than just a series of payment formats and workflows, but additionally is providing strategic information for better working capital management.
Payment factories offer timely information about payment status that can be shared with suppliers, a key element in supplier relations management. Payment factories also help from a receivables perspective by supporting direct debits and decreasing DSO.
Basic payment data, as well as collection instructions and intraday and previous day account statements are also available with such a system. This information can be easily extracted and used for cash positioning purposes.
Today, many companies are not just operating payment factories within a silo. They are being used to share information across the financial ecosystem and through the financial supply chain for improved liquidity management and better collaborative financial management.
About the Author
As Product Director Payments, Luc Belpaire is responsible for product management of SunGard’s AvantGard Payment solutions. He previously spent 11 years at Oracle working in various roles and geographies. Luc has a Master’s degree in Economics from the University of Ghent and an MBA from the Vlerick Management School, both in Belgium.
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Most of the CFOs who pioneered payment factories are enjoying a sound return on investment
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