Payment process streamlining has been on treasury teams’ agendas as the global payment industry is becoming increasingly standardized and treasurers want more control over the incoming and outgoing payments. This development has resulted in payment factory implementations becoming popular.
The main reason why companies adopt payment hubs is to gain more control over the outgoing and incoming payments and get visibility into the bank account balances of subsidiaries. For those who want to gain more control over the payments of its subsidiaries, POBO & COBO could be a good solution.
Eventually, payments-on-behalf (POBO) and collections-on-behalf (COBO) are often the number one goal of setting up a payment hub, but still, you should consider whether you need a payment hub or an in-house bank. Before going into more depth on that topic, we will look at how POBO and COBO work in practice and what the actual benefits are of taking more control over the payments of your subsidiaries.
How do POBO & COBO work?
For a long time, POBO & COBO have been recognized as solutions that bring efficiency to cash management as all accounts payables (AP) and accounts receivables (AR) can be channeled through a single legal entity (e.g., the group treasury). POBO and COBO are typically implemented as part of an in-house bank using internal accounts instead of bank accounts from a variety of banks.
In-depth details about POBO & COBO
With POBO, payment on behalf of a subsidiary is executed from an account centrally owned by the central/group treasury. In the reference field of the payment, the entity is marked as the ordering party.
It’s important to remember that POBO is not possible for all payment types. For example, tax payments are always made locally. Also, in some countries, it is prohibited by the law to execute payments on behalf of someone else or it could be highly complicated due to legal restrictions.
Before planning the implementation of POBO and COBO, always ask for the advice of local experts to see whether you should plan the implementation at all.
When using POBO, always consider the need for cash in the local entity’s bank account for payments that cannot be executed in an on-behalf fashion.
Also, it’s important to ensure that all internal receivables must be correctly accounted for in the balance sheet.
COBO works in a similar fashion to POBO. The central treasury department collects payments on behalf of the group entities via a central bank account and the treasury pays the subsidiary.
Whenever you are using COBO, it’s important to be able to retrieve information related to AR such as bank statements, lockbox, cheque payments, and remittances advice. The bank statement should be routed through the payment factory.
POBO & COBO Implementation
POBO & COBO are integral parts of a payment hub or in-house bank solution. Therefore, the implementation will take a larger project. So, when you want to use these solutions, you should consider whether it’s right for your organization and if you solely need a payment factory or if you would be better off with an in-house bank.
Is POBO & COBO right for your organization?
For POBO & COBO to make sense for you, you should have subsidiaries in multiple countries that are using multiple banks and have payments in multiple currencies. It’s difficult to advise the number of entities you should have to start with POBO & COBO but to create a business case for a solution, analyze the following:
- How many subsidiaries/entities do we have?
- How many banks are we working with internationally and how many bank accounts do we have?
- Could we potentially reduce the number of banks and accounts?
- What are you currently paying for banking fees and what would be the potential saving?
- What would be the ROI of the solution?
- Would you be able to manage FX risk better?
- Could you see benefits in terms of liquidity management and cash visibility?
- Would you be able to reduce the chance of fraud?
When considering POBO and COBO, ask yourself the following questions:
- Should we implement a payment factory for POBO & COBO?
- Would we benefit the most from an in-house bank for POBO & COBO?
- What are the benefits of each?
- What are the challenges?
- How does it fit into our treasury policy? Do we need to implement changes in the future?
- How would the implementation happen? Which vendor do we work with? Do we have internal resources in the team for the project management? Do we have IT resources?
- Consider local legislations, laws, and taxation
POBO & COBO: Payment hub vs In-house bank
Traditionally, payments have been executed through payment factories once the owner entity initiated the outgoing payment. The group would instruct the payment and the payment factory would process the payment. When a payment factory is used for POBO & COBO, the group still relies on external bank accounts, and the fees paid to the bank can be significant.
When an In-house bank is used for POBO and COBO, all incoming and outgoing payments go through the group treasury so that the entity that pays or collects is mentioned in the reference field of each payment file. The payments are then settled between the group and the entities not by using external bank accounts but by using internal accounts hosted via the group’s ERP system.
How to make the implementation of POBO & COBO a success?
To make the implementation project a success, you’ll need the following:
- Dedicated process owners or project managers to take the project forward
- Excellent project plan with timelines – sufficient time & clear milestones, measurable tasks, and clear responsibilities
- Consolidate the number of banking partners and bank accounts
- Involve tax and legal experts
- Technical implementation: dedicated IT resource to support the payment factory vendor with setting up the project
The benefits of POBO and COBO
When we are talking about the benefits of POBO & COBO, we assume that it is part of an in-house bank that is also utilizing a payment factory at the same time.
The benefits of both POBO and COBO include:
1. Centralization & operational efficiency
Using POBO & COBO are good starting points for centralizing cash management and gaining operational efficiency. The group treasury will have more control over all the outgoing and incoming payments, but at the same time, it’s also possible to reduce the number of bank accounts used and decrease banking fees. The solution also helps to avoid idle cash in several bank accounts.
2. Cash visibility & better liquidity management
Enhanced visibility and control over group-wide cash flows maximizes transparency and gives group treasury the widest opportunities to manage cash in real-time. In addition, cash forecasting, based on centralized information, is more reliable and enables you to better manage your group’s debts and investments.
3. Reduce the number of banking partners
With POBO and COBO, you can concentrate payments and collections into one external channel, for example, using a single account per currency. This allows you to limit the number of external bank accounts in the group and simplify banking relationships at the group level – not to mention the reduction in bank and transaction fees.
By implementing both POBO and COBO, a group treasury can reach the highest level of independence from banks by reducing the number of bank accounts to a minimum. You will also be better placed to negotiate pricing with your few selected cash management banks using economies of scale.
4. Decrease banking fees
By reducing the number of banking partners and replacing bank accounts owned by the banks with internal accounts, bank fees can be reduced significantly.
While it does not mean that all bank accounts can be eliminated, the cost savings can be significant thanks to implementing POBO & COBO.
5. Decrease FX risk
Internally hedging foreign exchange and interest rates will help to decrease FX risk. Also, by using intercompany payments, one can eliminate currency conversion rates that banks are imposing when executing a payment in another currency.
6. Optimized payment processes
When group treasury is in charge of making payments on behalf of the subsidiaries, you can optimize the process and always select the most cost-efficient payment method as well as the most suitable banking connection. You are also free to round up payments according to your own criteria. In an in-house bank setup, the selection of the external account to be used can be automated based on the currency of the payment, for example.
7. Reduced risk of fraud
Centralizing payments means fewer people are involved in the payment process which helps to reduce the risk of internal abuse. This is also true for group-wide harmonization of the payment process. With a centralized payment factory and POBO approach, you will know when and where the cash is flowing out of the group. Clear visibility makes it easier to detect and tackle payment fraud.
8. Optimized working capital management
Collections-on-behalf-of goes one step further, not only giving treasurers better visibility over the group’s liquidity position but also providing faster access to cash.
Centralizing the collection of receivables at the group level can have a huge impact on optimizing the working capital management of the entire organization. When you in the treasury hold the reins of both outgoing and incoming cash flows, it becomes easier to cover the cash shortfalls in one place with the excess liquidity elsewhere in the group.
Consider the benefits of POBO & COBO for your organization
Whether you are planning to implement a payment hub or an in-house bank, consider whether POBO & COBO could improve your operations and what would be the benefits you’d realize as a group.