Simplifying Global Account Structures for Payments and Collections

Corporates are increasingly recognizing the numerous benefits of channeling payments and/or collections through a single legal entity, making payments on-behalf-of (POBO) or collections on-behalf-of (COBO) multiple group entities. By leveraging a single legal entity, supported by an in-house bank (IHB), treasurers can rationalize their accounts and simplify cash management structures.

ON-BEHALF-OF STRUCTURES

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In traditional set-ups, payment factories automatically initiate outgoing payments from the accounts owned by the participating group entities. The parties instructing the payments are the group entities, with the payment factory acting as a technical and operational processing hub. When a payment factory changes to the payments on-behalf-of model, both instruction for and settlement of payment is made from accounts owned by the payment factory. The group entity would simply be mentioned in the payment reference field as the ordering party on whose behalf the payment factory initiates the transaction. The external bank accounts of the group entities are replaced by internal accounts operated by the payment factory in the group's ERP system. The payment factory will act on terms pre-agreed upon with each group entity. The payment factory will then initiate a payment to the third party in order to fulfill such claim. Collections on-behalf-of is similar, with the collections factory collecting on behalf of the group entities via the collections factory's external bank account.

THE BUSINESS CASE

The business case for a POBO/COBO project depends strongly on a company's individual organizational set-up. Benefits include reduced bank fees, simplified banking relationships, operational efficiency gains, added control and visibility improvements. Corporates can not only decrease the number of payments per account and the number of accounts per bank, but also optimize the number of banks they want to maintain per currency. If on-behalf-of structures are implemented for multiple currencies, corporates can also shift FX transactions from banking to the intra group space. Thereby, dramatically reducing their FX spend.

POBO and COBO can provide corporates with significant operational efficiency gains. Key benefits result from further process consolidation and standardization. Account maintenance becomes a much easier task as time-intensive account opening and change processes with banks can be handled by internal systems. Economy of scale benefits can be realized in the reconciliation process as well as with the bank fee monitoring process. The dramatic reduction of bank accounts and bank relationships offers further control and visibility improvements with respect to internal and external bank accounts.

EVALUATING THE COSTS

Changing the operating model to an on-behalf-of structure requires both one-off start-up costs, as well as incremental processing costs. The latter are primarily a concern in the Single Euro Payments Area (SEPA)-zone, as cross-border payments generate incremental filtering and central bank reporting costs. There is a strong requirement to conduct legal, tax and market due diligence before implementing on-behalf-of structures. This due diligence needs to cover not only the market where the proposed payment/collection factory is implemented, but also the location of the participating group entities.

On-behalf-of implementation projects tend to be highly-complex as they affect a corporate's full operating model, its banking relationships as well as interfaces, and, to a significant degree, its customers and suppliers. When assessing the costs of organizational change of this scale, they need to be calculated with regard to the required adjustments to workflows, policies, service level agreements, governance structures and customer as well as supplier communication. The latter is required to make counterparties aware of the changes and the impact to their payment processing and reconciliation. The primary cost drivers in relation to the corporate's technical model are changes in IT interfaces, workflows, system configurations, internal and external reporting and reconciliation processes. Also, it is important to consider the impact on customers and suppliers. Depending on the client-specific situation, the counterpart may have to take on additional transaction costs due to cross-border payments, higher reconciliation efforts, and/or incremental central bank reporting requirements.

POBO/COBO REQUIREMENTS

Given the complexities of setting up payment and/or collection factories, certain pre-conditions should be in place prior to initiating a POBO/COBO project. First, the central treasury and the participating group entities should operate on the same IT, accounting and enterprise resource planning system. Secondly, the payment and reconciliation processes should be standardized and centralized. Thirdly, intra-group service provider agreements between the payment/collection factory and the participating group entities need to be established. This includes the ability of the payment/collection factory to book the current cash positions and cash movements onto the internal accounts of the group entity. Fourth, it is critical to have a clear understanding of the legal, tax, and market practices impacting on-behalf-of structures in all affected jurisdictions.

LEVERAGING SEPA

On-behalf-of structures have the potential to become even more significant under SEPA. Pre-SEPA there was a lack of standardization, limiting the effectiveness of POBO and COBO since groups with one or both of these structures in place had to maintain a multitude of different local bank accounts to handle local payments and/or collections on behalf of their subsidiaries. Additionally, payments and collections in different countries required the use of varying electronic formats, some of which could not denote which entity within a group was making the payment. With SEPA, groups are able to rationalize their bank accounts and potentially operate with just one account for the entire Eurozone — thereby creating greater visibility over cash and liquidity. They can also use the structured fields in ISO 20022 Extensible Markup Language (XML), the designated format for SEPA transactions to clearly signify that a payment is being made by a particular subsidiary.

ACCOUNTS RECEIVABLE MANAGER

Deutsche Bank's Accounts Receivable Manager (ARM) for SEPA solution is a corporate cash management service that helps global organizations to streamline and simplify the complexities of receivables management. ARM is a fully-automated payer identification solution that enables auto-reconciliation of incoming SEPA credit transfers, while significantly reducing the need to maintain multiple bank accounts for separate lines of businesses. As such, ARM can greatly simplify a client's rollout of POBO and COBO structures.

International Bank Account Numbers (IBANs) that are required for SEPA compliance provide a structure for automated payer identification without the need to match existing client data and improving auto-reconciliation rates up to 100%. IBANs are ready-made to serve as unique identifiers for routing of payments. On incoming payments (collections) customers use the "virtual account" number or IBAN that can then be used as a reconciliation field, enhancing automatic reconciliation rates and accelerating account posting. For outgoing payments, the IBAN is used to indicate to suppliers the entity on whose behalf payment is being made in a standardized way. This significantly reduces supplier queries on funds that they have received and supports their own reconciliation efforts. Deutsche Bank is the only provider in the market to offer this type of fail-safe approach to reconciliation.

GETTING TO THE NEXT LEVEL

The need for POBO/COBO structures is increasingly apparent as corporates seek to better leverage their investment into technology and ERP systems and unlock further efficiencies throughout their treasury and accounting operations. Deutsche Bank has further deepened its product and advisory portfolio to address the specific needs of corporates seeking to improve their operating models by implementing payment or collection on-behalf-of structures.

Susan Skerritt, Regional Head Global Transaction Banking Americas, at Deutsche Bank, said, "Deutsche Bank is committed to serving our clients in the Americas and across the globe by anticipating and exceeding their complex needs. We pride ourselves on creating innovative solutions and providing premium service. Our client-centric solution approach uniquely positions us to deliver excellence while serving as a trusted partner. With our payments and collections on-behalf-of solutions, corporate treasurers are able to further optimize and streamline their operations. Deutsche Bank's broad array of transaction banking services, including Trade Finance, Cash Management, Corporate Trust, Depositary Receipts, Fund Services and Securities Lending, allows us to offer comprehensive and creative solutions for our clients."