Payment Factory

What is a Payment Factory?

A payment factory is a flow tool to improve control over and efficiency of payments. The basic concept is to centralise payments in a single process, which executes payments for all or most operating entities. Payment factories are Shared Service Centres (SSCs) for payments.

There are several variants of payment factories, ranging from literal payment processing to In-house Banks (IHB), (which amongst other features also acts as a payment factory).

Payment factories are data and process intensive so they require systems to function. The most common solutions use ERP or TMS functionality or some combination of the two. Some payment service providers also cover payment factory functionality.

 

Variants of Payment Factories

Payment factories have evolved from processing payments (like a shared payment gateway), to processing invoices (which allows more automation and improved control and greater savings), to payments on behalf of operating entities (IHB).

The basic payment factory is more like a shared payment gateway; operating entities send their payment files to the gateway for further transmission to banks. This does not provide much benefit since most of the processing is still decentralised. In addition, cloud solutions enable corporates to gain any visibility and control benefits that such gateways provide, so the basic payment factoryis variant is no longerless popular today.

Invoice level processing provides greater control and better value to the group. This type of payment factory receives accounts payable data from the operating entities, processes the resulting payments, and posts accounting entries back to the operating entities so that they can clear the invoices in their ledgers. This provides far greater value and makes a basis for full procure to pay centralisation.

If needed the payment factory can act as an integrator across disparate accounting systems. The same process works well with a single instance ERP.

Diagram: Payment Factory - Process

 

Invoice driven payment factories also send remittance advices to vendors thereby speeding up reconciliation and clearing of invoices at the vendor.

The first stage of invoice level payment factory is that the payment factory makes the actual payments to the vendors, normally once a week, using a power of attorney over the operating entity's bank accounts. The payment factory acts as a payment instructing agent over the operating entity's bank account.

The second stage is that the payment factory aggregates invoices from multiple operating entities and makes a single payment on their behalf to common vendors. This is payment on behalf of (POBO) the operating entities.

Many payment factories move on from invoice level processing to executing payments on behalf of operating entities; this is the same as the payment part of IHB.

 

Payment factory compared

Payment factory is a flow tool implemented by corporates (rather than a bank service).

Diagram: Cash Management - Flows Tools

 

Payment factory improves control over and efficiency of vendor payments. Netting improves control over and efficiency of intercompany payments. In practice there is some overlap, most netting systems can handle third party payments which means they can be used as payment factories, and most payment factory solutions can do intercompany payment netting.

IHB achieves all the benefits of both payment factory and netting, although using somewhat different methodology. IHB also improves other aspects of cash management.

 

Payment factory process

Indicatively, the process for invoice driven payment factory goes something like this.

 

Monday

  • Payment factory downloads all approved invoices due this week from operating entity ERPs

Tuesday

  • Payment factory sends payment instructions to banks for payment value Thursday (spot)
  • Payment factory sends remittance advices to vendors

Thursday

  • Payments are executed by banks value Thursday
  • Payment factory reconciles bank accounts and generates journal entries for operating entities to clear paid invoices

 

Payment factories typically use SWIFT for multibank connectivity.

 

Regulations

There are no regulatory barriers to agency payment factory. However, it does require e-banking at a minimum, and preferably host-to-host or better yet, SWIFT connectivity. Paper based payments do not lend themselves to centralisation and automation which is the heart of payment factory.

On behalf of payments may be restricted in some countries, for example by rules requiring that the paying party must be the same as the invoiced party. For such countries, the payment factory can revert to agency payments using the operating entity's bank accounts rather than on behalf of payments.

Cheques should be avoided. If cheques are absolutely required, payment factory can handle paper instruments through cheque printing or outsourcing.

In some developing markets, statutory payments must be done using specific paper based forms and cannot be automated. These may need to be executed locally and thus present a control risk and a point of inefficiency. Some banks can automate such statutory payments in some markets.

 

Tax

There are no substantial tax issues with payment factory.

If the payment factory makes a service charge to the operating entities, there might possibly be a transfer pricing or BEPS issue, but the amount is likely to be immaterial.

 

Implementation

Payment factory implementation affects core procure to pay processes and therefore needs to be planned carefully. Payment factory is often implemented as part of a broad move to shared services across the wider finance organisation.

Typically, corporates use a phased rollout, loosely grouping countries by expected ease of implementation or importance, to make the implementation more manageable.

Since process centralisation tends to be disruptive, it makes sense to take a holistic view to consider treasury centre, payment factory, netting, and IHB, and to determine which parts bring the greatest benefits relative to the disruption caused. As an example, rolling out payment factory may leave operating entities short staffed to handle foreign exchange settlements, so it would make sense to centralise foreign exchange to a treasury centre at the same time.

 

Discover a spectrum of possibilities

Simulate cash management structures on DBS Treasury Prism to better understand the benefits of utilising various balance and flow tools, and gain insights on how you can optimise cash management for your business. 

 

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Last updated on 23 Nov 2018
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