The payments revolution is putting new pressures on businesses. Cash payments are now happening in real-time. That is a big departure from the old settlement cycle, which could take days to complete.
Senior management demand instant visibility of the cash position. This means new tools must be introduced which provide a clear picture of the global situation. Liquidity must be boosted through more efficient cash management. And cross-border payments must be done in a controlled and considered manner.
Those are four tough challenges. Solving each requires a break from traditional practices.
Daunting? Maybe. So we assembled three global experts to give a master class. The man who knows payments inside-out is Thomas Halpin, HSBC global head of clearing and foreign currency payments. Covering currencies is Gregory Edwards, HSBC head of global transactional foreign exchange (FX). And James Colassano, global head of disbursements, is HSBC’s expert on cash management. This triumvirate are authorities in their field.
HERE ARE THEIR INSIGHTS
First up, you need to know what payments your organisation is making. Not just the big ones. “I regularly ask clients day in, day out, do you understand the nature of your under-the-radar payments?” says Mr Edwards. “I typically don’t get a robust answer.”
The problem is this. During the era of low volatility many companies let minor payments get paid informally. Overseas hotel bills, for example, are settled without a second thought about FX. Other small, but in aggregate important, items may include cross-border royalty payments, pension payments or procurement. Time and again these are made with little consideration of currency implications. Now that currency volatility has returned, this laissez-faire approach needs some management attention to introduce elements of best practice.
These under-the-radar payments must be identified and then a decision needs to be made on how to handle them.
Mr Edwards asks: “Do you have a threshold over which payments go to treasury for execution or under which you would be happy for them to be done in a straight-to-processing fashion? Do you know how long internally it takes to make a payment?”
The level of collaboration between payments, cash management and foreign exchange must be at an all-time high
Finally, a review should be conducted into the foreign markets between which currencies are high volatility. Destinations such as China will have their own rules and regulations regarding payments. The advent of the Single Euro Payments Area (SEPA) has changed the landscape in Europe. You need to ask whether your company’s practices are making the most of SEPA and other initiatives. A systematic review of each market will clarify the situation. Clients need to manage the “how” can I get a payment made alongside the method the client can use to achieve the best overall price at which the payment can be execute at.
This three-step process will bring transparency and efficiency to some of the more overlooked areas of FX payments. But for a radical overhaul of mainstream payments, a deeper rethink needs to happen.
THREE INTO ONE
Treating the critical elements of a payment as individual components is no longer suitable in today’s business environment. To support this convergence, Mr Halpin says: “The level of collaboration between payments, cash management and foreign exchange must be at an all-time high. Customers are no longer saying, ‘It’s just a transaction with an FX element in it’ or talking about payment without thinking about liquidity. They want to end the silo-thinking and bring the three together.”
The benefits are obvious. By linking cash management with payments and FX the company can reduce the chance of an unexpected shock to cash reserves. And the new model means the treasury can be streamlined. “Sometimes you can better leverage your primary account to make payments in different currencies thereby streamlining and simplifying your operation,” says Mr Halpin.
Forecasting becomes more accurate, as the timing and FX elements are brought under a single control. Suppliers will love the increased transparency, knowing when and how they are going to be paid.
That’s the sales pitch for fusing the three into one. But how is it done? “It is not primarily about technology,” says Mr Halpin, which will come as a relief to many businesses. “The real investment is in time. The company and bank need to work together to become more educated on what types of payments they make, how they need to make payments, what their sensitivities are and where their priorities lie.” Only then can the right tools be implemented. “We already have the tools, we just need to align them with what our clients need. That means them educating us about the types of controls they would like to have.”
A case study illustrates the point. A treasurer of a large company analysed his team’s performance. He found 90 per cent of their time was spent on transactions of less than €100,000. He was shocked. The data showed not only were the smaller transactions using a disproportionate amount of man-hours, payments were getting lost or not paid on time. HSBC introduced a straight-to-processing solution which sorted the issue out immediately. The hours spent on managing smaller payments collapsed. “It was nothing to do with flash new technology,” says Mr Edwards. “If anything it was going back to basics.”
BLURRING OF PAYMENT TYPES
A vital component of revamping payment processing is to take a fresh look at the ways that payments have been made historically. Traditionally, wire payments, automated clearing house (ACH) payments and cheques, for example, had their own unique characteristics, the chief one being settlement time, which varied from minutes to days. No more. With the growing number of programmes underway globally to accelerate clearing and settlement times, same day and even immediate settlement is becoming much more prevalent. The acceleration of settlement times means it is harder to distinguish one from the other.
There are important implications to this trend. One example concerns fulfilment. As payments become more immediate, customers will increasingly expect that experience to be end-to-end. Real-time commerce is the model. Just look at the new generation of services which can deliver a new pair of shoes to your desk the same day you ordered them. Overseas clients may not quite get that level of speed, but they won’t want to wait a few extra days for processing to complete after their payment has been made and settled.
Another concerns day-to-day liquidity requirements. Mr Colassano explains: “Companies now have payments coming in at various times and they will want to leverage the 24-hour clock for paying suppliers too. This changes not just their operational approach in terms of payment management, but their intraday liquidity needs to make sure they have funds available when they need them throughout the day. They will need more information about payments, such as the time of day they settle, so they can effectively manage their intraday positions. That will have implications to the back offices of the treasury function.”
Again, banks can help in many different ways. For example, helping companies navigate these global changes and route bulk payments in the most effective and cost-efficient way possible. “We can distribute lower-value payments into different global clearings without the client having to decide or understand whether or when to use a wire, ACH or a cheque. When we start to understand customer flows from an end-to-end perspective, we can also guide them on the best way to pay their beneficiaries, and to minimise the amount of work they need to do, as well as their costs and value to their beneficiaries.”
HOW TO GET STARTED
It is clear that treasury departments have a lot of work to do. It won’t be simple. Treasury projects can pull in stakeholders from across the organisation, leading to dozens of voices competing for attention.
Fortunately, treasurers have a lot of guidance they can call on to manage the transformation process. Mr Halpin urges anyone looking for guidance to lean heavily on their bank. “We can talk to all departments and bring an external perspective, seeing things you might miss. More than that, we bring experience. We work with clients across industries and bring those insights with us. We know markets such as China intimately. Issues like how to leverage the Directive on Payment Services in mobile is something we understand well,” he says.
“Our message is if you make the most of your banking relationship, and take the time to educate your bank on how you work and what you need, you’ll find you can get where you want to go very, very quickly.”
To streamline payments and reduce cost, innovative companies are centralising their payments processes. James Colassano, global head of disbursements for HSBC, considers whether all firms should adopt the strategy
Q. What is the motivation for centralising payment processing?
A. There are lots of models for centralised payments and supporting each are lots of different business cases. In general, centralised payments structures support well-managed foreign exchange (FX) risk, currency forecasting and cross-currency cash management which are strong motivations. Centralised structures also create efficiency and cost-savings. Companies can reduce the number of bank accounts they hold globally, reducing the money spent on account, transaction and FX fees. It also minimises the number of proprietary banking platforms which need to be maintained. Compliance is easier. Instead of monitoring multiple local banking relationships, you can focus more deeply on a smaller number. There are administrative economies of scale in moving payments processing into fewer centres. And, when combined with the right technologies, this can increase visibility and control, which is vital for effective treasury performance.
Q. Does it improve liquidity management?
A. Yes. Though payments are only part of a company’s working capital management strategy. You can achieve increased visibility by consolidating your cash positions. Your banking partners can provide tools to give you even greater insight and control. Do it right and you’ll find you can predict cash positions more accurately, which allows you to put idle funds to work to improve liquidity and manage risk more effectively. Some of the more complex models cover more than just the underlying payment activities, and start to touch on centralised bank accounts and “on behalf” transactions, which have a more significant impact on liquidity and FX management, through consolidated funding positions and centralised currency exposures.
Q. Why is it becoming more popular now?
A. Advances in technology are a key driver. Companies can also now make use of common message standards, dependable communications connectivity and simplified processes to make it easier to implement. Industry initiatives are contributing too. The Single Euro Payments Area (SEPA) means you no longer need bank accounts in multiple European countries. Bank agnostic channels, such as SWIFT, and the development of XML messaging standards are making it possible to integrate payments into enterprise resource planning or treasury management systems. This makes it easier than ever before.
Q. Is there a downside?
A. Some of these structures can be complex, and involve tax and legal considerations that need to be well understood and clearly align with a company’s business strategies. They can also introduce a lot of disruptive change to organisations and that should not be underestimated. From a pragmatic point of view, it’s easier to consolidate payments across countries than it is collections for numerous reasons, including the paper intensive nature of collections, which is something to consider as you develop an execution plan.
Q. So is it right for everyone?
A. There are several models deployed in the market and every business is different, so I would not say there is any one right structure for everyone. You need to understand what your needs and objectives are from a corporate standpoint. It’s only an appropriate solution if it aligns with your strategy and business objectives. However, if it makes sense to you as a business and aligns with your strategy, then it is very likely there is a structure that can help achieve your objectives.
Q. Even small firms?
A. In Europe we are starting to see smaller firms centralising payments. It’s a strategy which needs a supportive environment, and SEPA came in and created that environment. Whereas previously centralisation was the domain of large corporate multinationals, it is now something which smaller companies are taking advantage of.
Q. What unexpected considerations are there?
A. There may be tax implications, so they need to be examined carefully. You will need to look at intra-company transfers. These are complex structures to set up. If you want a downside, then it is that this isn’t simple. It will also require some organisational re-engineering from a treasury standpoint.