Cash management centralization: best practices & trends

Centralization has been a hot topic in treasury and cash management for more than 15 years already. And while some organizations are already reaping the benefits of centralization, there are still many treasury and finance departments struggling to get started.

In this blog post, we will not go into detail into the benefits of treasury centralization. You can read about those for example in this blogpost from Bloomberg. Most people working in treasury or cash management are fully aware of the benefits, but the difficulty lies within changing already established processes within their companies. Most companies we meet in our daily work have some level of centralization. We actually polled our audience in our webinar with our partner Zanders. Out of our attendees, 17% assessed that their processes are decentralized, while 58% would describe their processes as regional or global liquidity centralization. This was already reflected in the 2019 Treasury Barometer by Enigma and Rabobank which reports that 82% of respondents are aiming to centralize at least partially, if not fully, their payment processes.  

Based on this we see that treasury centralization is a high priority, but most companies are still in the early stages of their centralization journey.

But why are we slow in making this shift? Let’s look at what decentralization means in practice: funding, tools, processes, organization and bank relationships are optimized for the needs of a business unit or subsidiary. Change away from this bears some difficulties albeit it is beneficial for the group. But for previously acting autonomous subsidiaries this is more than a simple process change. Centralizing cash management processes can easily feel like giving up control. The key to successfully implementing ways to centralize cash management is by not rendering subsidiaries completely mute and powerless but by finding a way that works for the specific company.

Current market best practices and trends and objectives driving these best practices

A market best practice can best be described as so-called In-house Bank. A group level In-house Bank is fully established when all the relevant parts of the centralization steps are successfully deployed and the group moves into continuous improvement: 

• From decentralized cash management to centralized internal funding
• Liquidity centralization
• Payments centralized in a Payment Hub
• Payments on-behalf-of (POBO)
• Collection Hub, Collections on-behalf-of (COBO)
• Treasury operations included in Shared Service Center(s).
  
  

In other words, the way the group handles cash and treasury processes is completely transformed to support the business needs in the best way possible. All the above listed improvements are great. But let’s also look at the why, at the concrete benefits that are gained from steadily moving towards an In-House-Bank:

• Near real time insights to global cash positions.
• A repository of all cash flow data to improve the quality of cash flow analysis and forecasts.
• Centralized bank account management to increase control and minimize local limits, optimization of cash application and fully automated settlements of internal current accounts. 

The approach allows the company to choose the optimal way to include virtual accounts structures: We see that the combination of bank-specific cash pools and bank independent virtual accounts on In-house Bank solution is most often the best combination. 

On your centralization journey, the In-house Bank is like the iron throne. First you might want to start by centralizing functions, such as visibility on cash position or payments, then you might move towards automated cash forecasting and once you have the tools set up to support you, this is where it comes to really changing the way we work. A transaction hub is then all about setting up policies and practices with the common design principle of centralization.

Corporate payments - how to optimize for centralization

Payments are a cornerstone of liquidity and risk management and therefore treasury is paramount for corporate payment processes and payment processing solutions. Payments will also have a strategic impact in the near future when business and payments are becoming more real-time. The need for centralization, standardization, harmonization, and automation are the overarching themes when it comes to corporate payments and preparing for the future.

Bank connectivity and payments are often the processes that are centralized first. Quite often companies think through their banking landscape while renewing the bank agreements to be ready for centralization. Having the bank connectivity in place enables balance reporting and visibility on cash position with no extra effort. We call the combination of bank connectivity, payments and balance reporting a Payment hub. Payment hubs allow companies to make their payments compliant and secure. The foundation of payments is the bank agnostic connectivity, which lets you choose the optimal way to connect with a bank depending on the countries and services covered. Bank agnostic means standard ways to connect: SFTP, EBICS, Web services, SWIFT and APIs. We actually covered the topic of bank connectivity quite in depth on our whitepaper, which I’d recommend for a complete guide to bank connectivity.

All these features make it a good choice for companies to start their centralization journey with their payment processes. There are many solutions available for bigger and smaller companies and the benefits are easily visible. This has also become visible in a poll in the same webinar as we mentioned above, where we asked the audience if they had already implemented best practices for corporate payments and 60% of the respondents stated that they already implemented a number of best practices. So, while most companies are at the beginning of their centralization journey, they are actively working on optimizing commercial payments and thereby walking the first steps on their journey with optimizing their payment processes.

No matter where you are on your centralization journey, probably the best advice would be to just do it. Right, if it would be so easy we’d not talk about this topic. We need to be aware of internal conflicts and interests and at the same time find processes such as corporate payments that lend themselves to start to optimize because they easily show benefits and allow everyone in the company to see that while a centralized process can mean a loss of autonomy, at the same time the benefits far outweigh this.