by Guillaume Flies, Head of Collections, BNP Paribas
By delegating the power to collect incoming customer payments to a single entity through a single bank account for each currency, ‘collections on behalf of’ (COBO) potentially offers considerable value to corporates aiming to centralise their collections. COBO, and collections centralisation generally, is still too often perceived as a complex process, and its benefits may not initially appear sufficiently compelling for some treasurers and finance managers to develop a strong business case. As the CMU workshop on COBO explored, however, while there are inevitably challenges to overcome, whether legal, operational or organisational, the opportunities, and solutions to support COBO are growing rapidly.
The workshop was moderated by Graham Buck, formerly managing editor of treasury website gtnews, with a panel comprising Guillaume Flies, head of collections, virtual accounts, BNP Paribas Cash Management, Aliette Leleux, finance and risk managing director, Accenture and Marek Chruściel, head of treasury at Play, a Polish-based telecoms group.
Centralisation and COBO
A collection factory acts as a centralised processing centre for accounts receivable (A/R), usually including activities such as account reporting, reconciliation, account posting, credit management and collections administration. The advantages of centralising financial functions are well-documented, including: cost savings through economies of scale and better use of automated technology; standardised processes and controls, and consistent reporting and metrics. Collections on behalf of (COBO) models (i.e., the ability for a single entity to collect cash ‘on behalf of’ group companies, often through a single account per currency) develop these benefits further, with streamlined processes and bank communications, fewer bank relationships, simplified liquidity structures and lower bank charges.
Click image to enlarge (opens in new window)
COBO structures have grown in popularity in recent years,helped by the implementation of the Single Euro Payments Area (SEPA) and the Payment Services Directive (PSD). Companies no longer need to maintain separate euro accounts in each country, and payment instruments have been harmonised across the Eurozone. This makes it far easier to rationalise collections through a single entity and account, automate collections processes, and rationalise bank account structures.
Click image to enlarge (opens in new window)
The value of COBO is not restricted to Europe, however. Ongoing pressure on treasurers and finance managers to reduce costs and increase efficiency and scalability is prompting companies in all regions to centralise collections, including COBO, to maximise operational efficiency and optimise working capital. Given that collections are a major balance-sheet item for all corporations, improvements in collections processing can bring substantial benefits.
Overcoming challenges
Despite the potential advantages, however, there are some common challenges that companies implementing a COBO model need to overcome. Firstly, there may be tax and implications of COBO, which differ across markets. Secondly, there are operational considerations, such as the need to identify, reconcile and post items efficiently on both the beneficiary’s current account and the customer account. Thirdly, there may be organisational issues, particularly if the company does not have a culture of centralisation. For example, given the proximity of collections to sales and customer service teams, and potential sensitivity over the way that customer relationships are managed, ‘people’ issues are often the most complex to overcome to convince other business functions of the value.[[[PAGE]]]
Overcoming COBO challenges
Guillaume Flies, BNP Paribas outlined some of the ground-breaking ways in which the bank is helping clients to overcome these obstacles,
“BNP Paribas’ virtual account solution is highly effective in addressing the operational challenges associated with COBO. Companies are able to provide a unique account number to each customer which is linked in turn to a genuine account number with BNP Paribas into which payments are made. These unique ‘virtual’ account numbers can be used to identify, reconcile and post each collection automatically, freeing up customer credit limits, enhancing working capital and enabling more accurate monitoring of key performance metrics. BNP Paribas’ virtual account solution is already live in Asia and in eight countries in Europe with a further seven to follow shortly.”
While a company can generally control how it makes payments, it is more difficult to specify which payment method customers and other payers should use. While SEPA has harmonised formats for both credit transfers and direct debits in the Eurozone, diverse payment cultures and legacy local instruments continue to exist, such as Pagares in Spain and RiBA in Italy. Inevitably, the more diverse the range of payment methods used by customers, the more fragmented the company’s collection processes can become. Guillaume Flies continued,
“BNP Paribas’ Collect-4-You solution overcomes this issue by facilitating and streamlining collections of local instruments. The solution provides companies with local accounts to collect local instruments and these accounts are held and managed by BNP Paribas through Collect-4-You on their behalf. This avoids the need to manage multiple local accounts and collection methods, therefore supporting centralised collections and COBO.”
The broader picture
While most organisations can benefit from COBO, Aliette Leleux, Accenture noted,
“The value proposition is strongest, and implementation easiest, for companies that have set up in-house banks and/ or those that have already centralised collections and rationalised banking partners. Technology also plays a role: for example, it is easier to implement a cohesive collections framework when there are fewer ERPs in place. While there are still obstacles to centralised collections for both cultural and regulatory reasons, these are becoming less onerous. In France, for example, a growing number of companies are setting up SSCs, initially by country or group of countries, before rolling out on a pan-European basis. Even so, business culture can be one of the greatest impediments to centralising collections, and strong collaboration between business, treasury and accounting is essential.”
What quickly becomes apparent when exploring solutions that have emerged to support collection factories that operate on a COBO basis is the value of these solutions for a wider spectrum of organisations. Aliette Leleux continued,
“Virtual account solutions offer benefits to many corporations, facilitating automated reconciliation and account posting, particularly when large volumes are involved. These benefits exist irrespective of whether a corporation is ready or interested in implementing a COBO structure.”
Virtual accounts in practice
Marek Chruściel of Polish telecoms operator Play illustrated the practical value of collections factories. As a corporation operating in the retail space, the collection volume is very high: in March 2015 alone, Play processed 3.6m collections. Such has been the success of the collections factory that only seven of these needed to be processed manually. Ninety-one per cent of collections are via regular bank transfer or payment, 5% through pay-by-link provided with electronic invoice or via the company’s Play24 service, 3% by direct debit and the remaining 1% from various types of cash payment or a more recent option of Q-codes scanned with smartphones.
Play is an active user of virtual accounts. Virtual bank account numbers, which are relatively long by European standards, consist of an eight-digit bank identification number, a four-digit identification number to identify Play as a customer of a bank and a 10-digit customer ID number assigned by the company. These are generated by Play’s billing system and mirrored in banking system. When payments are received on Play’s virtual bank account, these are recognised automatically by the bank system as customer payments and consolidated on Play’s main collection account.
Play runs three billing cycles each month and payments are received 365 days a year, amounting to over 350,000 on peak days. Files are delivered daily by the bank via secure file transfer protocol (SFTP) or a web service, which are then processed automatically overnight, with payments assigned to the appropriate customer. The need for manual intervention is very rare, bearing testimony to the value of virtual accounts as part of an efficient centralised collections framework.
Marek Chruściel compared the costs and benefits of collection factories,
“We are now able to automate the end-to-end collection process from the daily download of bank files into our billing system, across multiple payment methods, through to automated reconciliation and posting to customer accounts. We have full visibility over the status of customer collections, which allows us to produce complete, timely reporting, and provide better service to our customers. As our processes are now automated, with very little manual intervention, we have made considerable cost savings, whilst having the flexibility and scalability that we need as our business continues to grow.”
He noted that there are some challenges that inevitably need to be overcome in a project of this scale and complexity,
“There are various departments that need to be engaged in the implementation process, which requires a high level of communication and collaboration, and disciplined change management procedures. There are also additional controls that need to be put in place. For example, there are risks to the continuity of the process, such as a daily file left undelivered or a major data error, so back-up processes need to be in place to mitigate these risks. While implementing a collections factory with virtual accounts brings cost benefits, potential users need to bear in mind the additional cost for each incoming payment.”
While centralisation of payments and payments-on-behalf-of (POBO) has grown significantly over recent years, centralisation of collections has traditionally proved more difficult. This now appears to be changing, with growing recognition amongst senior treasury and finance professionals of the operational and working capital advantages of collection factories, including COBO. Alongside growing demand, there is also a wider spectrum of solutions now available to support centralised collection models. With complex organisational and regulatory issues, and a wealth of solutions available, strong advisory services become even more important, an area where BNP Paribas’ collection expertise and commitment to meeting customer needs is increasingly proving invaluable.
