Published: May 01, 2009
We have talked about the need for greater automation and efficiency in treasury for many years and indeed, a great deal of progress has been made. However, as with many major steps forward, it may take a crisis to act as a catalyst for real change. Very often at treasury conferences, liquidity is described as the lifeblood of an organization. While this analogy is a good one in many respects, effective liquidity management is not just about the substance which is pumped around the body of the company, but also the arteries through which it flows. For this reason, a focus on payments and how they are channelled in and out should be amongst the priorities for a treasurer in the new financial climate in which we find ourselves.
...a focus on payments and how they are channelled into and out of the organization should be amongst the priorities for a treasurer in the new financial climate.
In this article, we survey some of the trends and developments in payments, particularly in the United States, where the move toward payment automation has taken place a little later than in Europe and parts of Asia Pacific. What is significant, however, is not only the increasing synergy across regions in the challenges which companies are facing, but also the ways in which they are addressing them.
As I mentioned, there has already been substantial progress by many firms in the way that they process payments. The concept of straight-through processing (STP) i.e. the flow of information from end to end with as much automation and little manual intervention as possible, continues to evolve, with both banks and their corporate clients setting ever higher bars of what is achievable and desirable. There are a variety of reasons why treasurers – and their banks – will seek to enhance payments processing further, including operational considerations, such as cost reduction and efficiency improvements, and strategic concerns, such as better information on which to make financial decisions and liquidity optimization:
Tom Halpin, Senior Vice President, Global Head of Financial Product Management, HSBC summarises,
“A significant trend we see amongst corporate clients is the need for additional information in order to more effectively manage their working capital and improved operational efficiency. This trend is evidenced by the continued need to integrate detailed information on cash flows into ERP systems in order to reconcile this information in a more automated way.”
“A second objective is to maximize liquidity. Many corporates rely on multiple providers for liquidity, and they need to maximize their access to credit in the current environment, for which information management is critical.”
Consequently, many of the payments-related initiatives that we are seeing do not simply relate to the flow of payments in and out of a company, but the transfer of information which accompanies them. This is a significant driver behind global payments developments such as SWIFT Corporate Access and standardization initiatives (e.g. XML ISO 120022) in addition to regional and domestic schemes. [[[PAGE]]]
The need for greater information and access to liquidity is a global dilemma, and so too are some of the solutions. However, a major payments-related issue for companies based in, or operating in the United States, has been the shift from manual to electronic payments which has been taking place over the past few years. There are a number of advantages of electronic versus manual payments, which we have discussed in detail in TMI in the past. In theory, it may seem to be more attractive during the crisis to delay the payment value date with a valuable few days in the post. However, in reality, this only serves to add to uncertainty and the need to maintain higher working capital levels. Tom Halpin, HSBC explains,
“The migration away from checks to electronic payment channels in the US is also being driven by corporate clients rather than being solely led by banks and regulators. This drive to electronic payments over paper checks has become increasingly important in recent times as there is a heightened sensitivity to risk management and a need for greater certainty of payment date.”
While the majority of companies see the benefit of making payments electronically, and the proportion of electronic payments increases year on year, conversion is not always a simple process.
Hubert J.P. Jolly, Managing Director, Head of Payments and Cards, North America, Citi gives one example,
“While many companies are seeking 100% electronic payments, this is not always possible in practice as 25% of the U.S. population is non-banked.”
There are not only obstacles to conversion for payments to individuals, but also in electronic business-to-business (B2B) payments. As Hubert Jolly, Citi continues,
“80% of business-to-business (B2B) supplier payments are still made by check. While larger companies are often comfortable executing electronic payments, often smaller suppliers need the remittance information held on checks for reconciliation purposes. Otherwise, in some cases, these suppliers’ access to remittance information is no more than that of a retail customer, without reference information which can be tied back to the invoice.”
I mentioned earlier that payments (and collections) cannot be viewed in isolation as both are elements of the financial supply chain. Fig 1 provides an illustration of both purchase-to-pay or order-to-cash process depending on the perspective. Increasingly, companies are seeking to achieve STP from an earlier stage in the payments process, i.e not simply looking at the final payment, but at the process from the point of origin, such as the purchase order or invoice. Payments factories or shared service centers are therefore taking an extended view of the payments process and introducing tools such as eInvoicing and supplier portals, discussed below. [[[PAGE]]]
As a further stage to centralizing and automating the payments process, some firms are then seeking to outsource the accounts payable function, although as Hubert Jolly, Citi outlines, corporate objectives need to remain at the fore when considering this:
“We are seeing a real push to automate the whole payment process, from eInvoicing through to payment automation, as a way of optimizing working capital management. Some firms are also then seeking to outsource their accounts payable function to a business process outsourcer (BPO). However, this can counter attempts at converting to electronic payments, which ultimately is a better alternative to manual checks even if a BPO can deliver cost savings in paper processing.”
In addition to the benefits of payments automation in processing efficiency, better control over payments means that companies are able to take advantage of early payment discounts offered by suppliers where these are beneficial, manage FX risk created by foreign currency payment obligations and co-ordinating payments with cash inflows to avoid liquidity issues (see Harold Young, Deutsche Bank in ‘The Banker’s View’ which accompanies this article.) Greater control over the financial supply chain also means that treasurers can isolate supply chain risks more clearly and take steps to increase its robustness.
As Hubert Jolly, Citi continues,
“Another priority amongst large firms is providing supplier financing. Increasingly, these firms recognize that ensuring the continuity and solvency of their suppliers is critical to the value chain. To achieve this, there need to be tight links with suppliers and electronic invoicing and payment may be part of this. As well as the potential for discounting and preferential terms for customers, suppliers benefit from earlier payment.”
As we discussed earlier, one of the problems of converting to electronic payments is that suppliers also need to see the advantages. An approach which some firms have adopted is setting up electronic supplier portals. These are web tools in which invoices can be sent and payment instructions logged. In TMI 172 (February 2009) we presented a case study of Cumberland Farms, which is summarized in figure 2. Chris Bozek, Product Development Executive, Bank of America, who partnered Cumberland Farms on the project explains,
“It pays for companies to do their homework to pick the right technology, ensuring that the solution meets the company’s needs and objectives. Successful vendor adoption is crucial to achieving the goals and benefits of converting to electronic payments, as the experience of Cumberland Farms (fig 2) illustrates.”
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For example, Bank of America’s Paymode now has over 6,000 suppliers registered who can then receive payment from any customers using the service. Chris Bozek, Bank of America continues,
“In addition to developing a compelling business case, we work closely with our customers to communicate the benefits of electronic payments to key stakeholders in the organization, including Procurement, Treasury, IT, and Audit. For example, a consideration for IT will be how easily the solution can be interfaced with the ERP system; Internal Audit will be looking at internal controls and payments transparency will be enforced; Treasury will be seeking to achieve working capital goals and cash flow visibility; Procurement’s goal is to achieve the best pricing possible, while improving vendor relations, and so on. Working with each group early in the process to understand their concerns and objectives ensures the right business case is successfully advanced internally, and the best solution is deployed.”
This is an important point, not only when looking at supplier portals, but any payments initiative which will generally involve technology in some respect. However, not everyone is convinced of the widespread success of supplier portals in the short term. As Hubert Jolly Citi, discusses,
“To push for electronic payments, some companies will try and build supplier portals – in some cases, joining the portal is a condition of payment although this is not common. Although such portals give suppliers a range of benefits, such as access to invoice information and downloads, these projects are often unsuccessful as suppliers are not comfortable with providing bank data online without a financial institution involved in the process.”
Increasingly companies are seeking to achieve STP from an earlier stage in the payments process...
However, there is more agreement in the value of purchasing cards. As Hubert Jolly, Citi continues,
“More successful is the evolving use of the Purchasing Card as a critical payment option for our customers. In the past, some suppliers may not have wanted to pay interchange fees to Visa or Mastercard. Today, with liquidity more scarce, suppliers would rather get hold of cash earlier rather than waiting for a check to arrive. Use of p-cards has the potential to automate large volumes of supplier payments.”
Chris Bozek, Bank of America agrees that purchasing cards can help companies to increase the efficiency of the payments process significantly,
“Growing both ACH and Card use for AP payments is critical to success, especially in driving down costs and increasing payment visibility. Use of purchasing and “ghost” cards provides additional benefits by eliminating purchase order and invoice processing costs, extending working capital, and generating revenue through potential rebates. The right vendor strategy will maximize the benefits to the payer, while delivering value to their suppliers.”
Additional revenues through rebates can be substantial, with firms which make significant use of purchasing cards reporting multi-million dollar rebate amounts.
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We mentioned earlier the importance of the liquidity “arteries” through which payments flow. Internal technology is vitally important, but the way in which information is transferred between a company and its banking partners is equally so. Many banks have invested significantly in their electronic banking solutions to enhance the timeliness and quality of information, and to integrate these systems more closely with their clients’ payment systems.
Successful vendor adoption is crucial to achieving the goals and benefits of converting to electronic payments...
In addition to individual bank endeavors, there are wider initiatives which aim to integrate information flows between banks and their corporate clients more closely. In particular, SWIFT Corporate Access is becoming increasingly important for companies worldwide. You can find more about SWIFT in TMI’s Guide to SWIFT Connectivity at www.treasury-management.com. Although large US multinationals were amongst the first to adopt SWIFT to connect to their banking partners, more recently companies in Europe and Asia have accelerated adoption of SWIFT more quickly than many US firms. Harold Young, Managing Director, Global Head of Payments Products, Global Transaction Banking, Deutsche Bank summarises what he sees in the market,
“While SWIFT is still the domain of early adopters in the corporate segment, it is rapidly becoming mainstream as the opportunities for “plug and play” connectivity increase. The message of SWIFT corporate access is resonating across the corporate sector, particularly amongst firms which are i) growing their footprint outside of the US; ii) at a switch point in their technology platform, or iii) committed to a multi-bank approach.”
In addition to SWIFT connectivity, standardization of financial messages based on XML standards, such as ISO 20022 is becoming widely accepted with significant benefits in STP, integration and information flows between financial partners. Again, more on this can be found in the TMI Guide to SWIFT Connectivity.
Internal technology is vitally important, but the way in which information is transferred between a company and its banking partners is equally so.
As Harold Young explains in ‘The Banker’s View’ accompanying this article, the payments business is going through a major change. The automation and increasing efficiency of payments will drive down margins further and not every bank will be in a position to provide payments services in the future. The need for investment in new tools such as artificial intelligence routing solutions and adapting to new regulatory and customer demands is substantial. Harold Young, Deutsche Bank outlines,
“Banks will drive the outcome of where the payments business goes in the future, which will require a disciplined and realistic view of the economics of their business, for example, basing fees on reliable costing methodologies. Due to the narrow margins in the payments business, regulated pricing in Europe and competitive pricing pressures globally, only the largest processors will have the scale volumes to justify proprietary payments processing. For many banks, it may be in their interest to consider outsourcing payments processing.”
Often, we refer to the “commoditization” of payments. In fact, with the refinement in payments processing, the increasing quality of information which is available and the integration of the payments process as part of the financial supply chain, perhaps the opposite is true. Tom Halpin, HSBC explains,
“In an environment in which there is little cost differential between providers, companies are selecting their payment bank based on the quality and delivery of services. In this respect, the payments market is actually becoming less commoditized, as the level of services and information which banks can provide varies greatly.”
There have been substantial developments in payments processing over the past few years, but with many of these opportunities still adopted by only a minority of firms, there is still great progress that can be made. Fuelled by the economic downturn, companies which take these opportunities can benefit from lower costs and enhanced liquidity, deriving competitive advantage and stronger financial management.
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