From the March Special Report issue of Treasury & Risk magazine

SEPA Facilitates Making Payments for Subs

Companies in Western Europe will now have an easier time using payments-on-behalf-of structures.

As more companies take steps to centralize their payment processes,those using payments-on-behalf-of (POBO) structures will get a helping hand from the Single Euro Payments Area (SEPA).

Companies employing a POBO structure make payments for subsidiaries out of a central account, which allows them to cut back on bank accounts and related costs.

“In-house banks have been around for decades, while POBO solutions have been around for only about the last 10 years or so,” said Drew Arnold, trade finance/cash management corporates global solutions Americas, Global Transaction Banking, at Deutsche Bank. “SEPA is one of the main reasons why POBO has taken off.”

Prior to SEPA, companies needed a bank account in every European country in which they made payments because each country had a different clearing system, Arnold said. That limited the benefits of using POBO. Now that SEPA has established a single clearing system for 33 European countries, a single bank account anywhere in the Eurozone is sufficient.

Moreover, SEPA formats include an on-behalf-of field, unlike legacy payment formats. So the supplier that’s being paid not only sees that the payment came from the parent company’s bank account, it can see which of a company’s business units or subsidiaries the payment is on behalf of, Arnold said. “The receiver can easily reconcile that payment because it is clear who is paying.”

As a result, “companies have started using POBO,” he said. “It is not yet common practice, but we expect it to become much more prevalent for corporations to use POBO in Western Europe within the next two to three years.”


Efficiencies and Challenges

When all the payments for business units go through a centralized corporate bank account, the company can eliminate the other accounts its business units formerly used to make payments. Companies save the fees they paid for those bank accounts, plus related expenses such as audit costs, said Arnold, pictured at left. “Reducing the number of bank accounts can result in quite a significant cost reduction for companies.”

Centralizing payments can also allow a company to reduce IT expenses and labor costs, such as the staff time involved in reconciling payments. The internal savings that are possible could be even more of an incentive for companies, he said.

Eliminating the business units’ accounts also does away with pockets of cash sitting in those accounts. “You can have it all in one master account, which means more cash is now accessible for use by the company,” Arnold said.

One challenge for companies using POBO can be the process of divvying up the files the bank sends back about the payments to provide each business unit with the information it needs. Arnold said Deutsche Bank is working to provide companies with consolidated data about funds flow as well as business-level payment information.

POBO works best for “large multinationals with complex structures,” he said. “If you have a monoline business—just one legal entity—there’s little benefit to doing all this work to create an in-house bank.

“The more complex and geographically spread out a company is, the greater benefit they’re going to get out of establishing an in-house bank and using POBO on top of that,” Arnold said. “On the other hand, the more complex and widespread they are, the more difficult it is to implement an in-house bank and POBO.”

The advent of SEPA means that “less-complex companies can benefit from moving to an in-house bank, which was not the case in the past,” he added.


Continuum of Centralization

Paying on behalf of subsidiaries represents the most sophisticated level of payment centralization, and Arnold said that at this point “very few” companies have such structures in place.

Dennis Sweeney, a managing director and treasury solutions executive at Bank of America Merrill Lynch, cited a “continuum of centralization” that includes payment factories and in-house banks.

Companies consolidate their accounts payable and accounts receivable into a shared service center, said Sweeney, pictured at right, and from that point they can start to build an in-house bank by adding functions, such as serving as a borrowing and lending unit for subsidiaries, centralizing the foreign exchange trading to make foreign currency payments, netting, and putting in place a payments-on-behalf-of/collections-on-behalf-of structure.

“Many companies are somewhere along that continuum,” he said. “They may not be all the way to an in-house bank [or] doing all business unit transactions, but they’re moving in that direction.

“You get scale; you can negotiate better prices if your payments are centralized,” Sweeney said. “I can also control who I’m adding to my master vendor database.”

The decision to centralize payments or use an in-house bank has more to do with a company’s geographic range than its size, he said. “We have a number of clients that we would consider middle market that have shared service centers and in-house banks. I don’t think you have to be the Fortune 100. You just have to have multiple subsidiaries in multiple countries.”


Turnkey Shared Service Centers

Andrew Gelb, head of Citi’s treasury and trade solutions North America, suggested that the interest in payment factories in part reflects multinational companies’ evolution from employing a distributor model in new markets overseas to selling directly into those markets.

“We now see more and more companies that are engaged in some kind of direct sales model,” Gelb said. “That’s definitely a trend, where the company acts [for] itself in the given country.” But as companies do so, “they also by necessity have had to make more domestic payments,” he said. “A downstream impact of that is they’ve looked to further centralize and make those payments more efficient by setting up payment factories.”

Gelb noted, though, that payment factories must involve “a commitment to long-term benefits and appropriate resources to tackle significant amounts of work,” including dealing with legal and tax aspects, gathering all the payment information, and ensuring the funding and liquidity of the payment factory.

Technology such as the Internet has helped companies centralize payments. Many B2B transactions still involve some paper, Arnold said, such as paper-based invoices. “Today you can image paper documents, and 30 seconds later they can be on the receiver’s screen in a distant country. That’s a boon because it allows paper-based invoices to be imaged and processed anywhere in the world,” he said.

“Enough companies have done the work of using shared service centers for payments that now it is fairly easy for other companies to follow in their path, Arnold said. “It has become kind of turnkey.”

He advised that companies setting up a payment factory should take it step by step.

“If, for instance, you are centralizing the payments responsibility for 40 different business units, defining the standard way of processing payments as you move to the shared service center adds a new level of complexity that can introduce more breaking points,” Arnold said.

Instead, companies should consider a “lift and shift” strategy, he said. “Once you have all payment processing under the same roof for a couple of months, you can start to standardize. Until then, you are unable to be sure which of the 40 legacy processes, if any, work best.”


Read the March Special Report on Liquidity & Cash Management.

The March to E-Payments
Paying Without Plastic
Cash Flow Management in a Basel III Worldo
Best Practices for Payments & Working Capital Optimization
The Year Ahead for Treasury: Promising Signs for 2014
Simplifying Global Account Structures for Payments and Collections

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