The payment ecosystem has been gradually growing over the past years. To no surprise, when we conducted research a little while back, we found that over 80% of business leaders are prioritizing increasing cash and payment management efficiency. Partly also to enable optimal liquidity management.
And the current market trends are following this survey result. Topics like automation of payments, developing an integrated technology framework, complying with regulations, as well as the emerging need for tackling payment fraud have all been drivers for enterprises to adopt payment hubs these days.
A major technology enabling this worldwide is payment hubs. The technology has been undergoing transformation to meet the needs of enterprise users for better connectivity with banks and systems, improved security, and even more visibility into company-wide cash flows.
While the transition to a payment hub can be a complex project, the investment is well worth it for most companies. In this article, we will look at how a payment hub works, why you need one, how it can be connected to different systems, and its main functionalities and benefits.
A payment hub is a platform for organizations to execute their payments. It centralizes outgoing payments and improves visibility and control. It often is also leveraged to reduce the chance of payment fraud and errors.
On top of that, payment hubs are great systems for compliance. They ensure that organizations can easily comply with ISO20022 as well as their own payment policies.
While multinationals most often prefer payment hubs, they can also be very useful software for companies doing business locally, especially if multiple bank and system connections are involved.
Where traditionally it was treasury and finance departments requiring payment hubs, today CIOs are increasingly interested in the implementation of a corporate payment hub. And for a good reason; they enhance security through rules and better user management, a task that often belongs to the IT team.
A payment hub's architecture is designed so that the platform sits between the organization's banks and the ERP system(s) (one or multiple), treasury management systems, and any other internal system where payment files are stored. That way, it creates a single source of truth for payments, that also allows central processing to banks and postings back to ERPs.
People often also refer to payment hubs as ‘payment factory’. This term is used to describe a combination of a platform that automates payments, including the workforce behind it that is actually tasked with handling payment processes.
Payment hubs exist because they can be fully integrated into the organization’s technology and bank ecosystem. Since it involves so many systems and stakeholders, such software purchases are rarely the sole decision of the finance and treasury departments.
Such technologies can benefit accountants, procurement, business intelligence, finance, and IT teams, for example. IT teams are often burdened with the work related to creating and managing bank connections between ERPs and other internal technology stacks, while payment hub vendors fully manage this for them.
The organization's banks are normally all connected to the central hub, and depending on the bank or company's requirements there are different connectivity types; host-to-host connectivity, local connectivity options (e.g., EBICS), or connectivity through the SWIFT network.
Working with a payment hub provider that already has an extensive number of bank connections can speed up the implementation of the payment hub, as no additional connections need to be built.
On the other end, the payment hub needs to connect to various systems, such as ERP systems (often SAP or similar), sometimes even multiple ones, especially when the company has mergers and acquisitions. Other systems could include treasury management systems or finance and accounting systems.
Connecting systems requires know-how, especially when organizations use outdated legacy systems with proprietary data formats. Thankfully, over the past decades, APIs and data standards have become more common, making it easier to connect to data sources and enabling two-way communication between systems.
The image below shows the typical payment hub setup, in which the payment solution sits between banks, ERPs, TMS, and other financial systems, as discussed earlier.
The biggest challenges of implementing a hub are bank connectivity, integrations, and change management.
Finding a payment hub vendor that also offers bank connectivity as a service can be beneficial. Then, the vendor already has a number of host-to-host connections readily available, as well as the possibility to connect to banks via the SWIFT network.
Bank connectivity is something that decision-makers have also found extremely valuable and according to our Forrester study.
When it comes to the source system side, a well-documented API as an endpoint and modern standardized data formats will make the integration much less challenging than when there are legacy systems and proprietary formats.
You will also notice that vendors have experienced hundreds of payment hub implementations, which has given them the expertise to manage change more effectively and efficiently.
In the end, a vendor who supports you thoroughly throughout the implementation process will be beneficial for the project's success.
The main objective of using a payment hub is to automate and simplify local, cross-border, and global payments by importing all your payment files from the source systems. Payment hubs typically offer the following functionalities:
Centralized payment processing: With a centralized payment hub, companies can optimize the overall control and efficiency of the payment processes. The hub collects payment files from various systems before bank transmission. The payment hub is set up so that all banks and source systems are connected, and the data mapping has been carried out for necessary payment file format conversion so that all the systems can automatically communicate with each other.
Manual payments: While the main objective is the automation of payment flows, sometimes it’s still necessary to create and send manual payments such as tax payments, customer credits, travel expense claims, and more.
Approvals: Approvals can be a fully automated process with up to six multi-approvals for safety measures.
Sending payments and receiving feedback: The payment hub is configured though that it’s possible to send payment batches to banks in the correct bank-specific format and receive automated bank remit feedback.
Monitoring and reconciling payments: Within the payment hub, users can browse, search, and view individual payment files and payment batches to monitor and reconcile payments throughout their entire end-to-end lifecycle.
Audit logs for regulatory compliance purposes: For security and compliance, payment hubs tend to provide users with payment history logs and audit trails for all processed payments.
Fraud detection: Financial fraud is a rising problem. Some payment hub providers have developed tools for anomaly detection to identify fraudulent, irregular, and erroneous payments with rule-based anomaly detection functionality. False positives typically require a separate review.
Sanction screening: Another topic you may have been hearing a lot recently. When you adopt the sanction screening feature, you can screen your payment files against sanction lists and blacklists before sending payments to your designated bank. This screening facility allows you to automatically detect, identify, and stop payments that should not proceed further.
At this point, you may already understand the main benefits of implementing a payment hub, whether it’s for local payments or global payments, but we have collected some of its main benefits.
One hub for all payments—automated and manual payments: While the main purpose of a payment hub is automation, being able to create manual payments and manual payment templates can be just as important. The payment hub can also go beyond Account Payables (AP) processes—depending on the integration level, it’s also possible to automate salary payments, for example.
Centrally controlled: Centralized control can be important, especially when the company operates in many countries and has many subsidiaries. Control is necessary to ensure that there are sufficient funds in all bank accounts and there’s more visibility into the company’s liquidity position.
Also, having processes and adequate workflows is important for ensuring the security of the company’s funds.
In our ‘Successful Businesses Excel at Cash Management’ report commissioned by Forrester in 2021, 78% of global decision-makers shared that they believe tools to control how batches are routed through the system are valuable for their treasury and cash management activities.
Multiple users & compliance: When there are many users, having audit trails and history available and a process for multiple people verifying outgoing payments can ensure the company’s compliance.
Easy to add new bank connections: Having the availability to add new bank connections is a vital benefit of using a payment hub, as you can automate the communication between your company and the bank.
Growth readiness: The payment hub enables you to add new source systems as your company is growing for example via mergers and acquisitions.
It’s also quite typical that a company starts with one country using the payment hub, and only later do they try to add more entities and users.
Security of the payment hub: A cloud-based payment hub comes with the security of the cloud. Having single-sign-on (SSO) and multi-factor authentication (MFA) are essential features, and anomaly detection and sanction screening are becoming a must for many at the moment.
As challenges around payments continue to exist for companies, payment solutions for cash flow efficiency will keep rising in popularity in the years to come. Beyond improving treasury and finance processes, compliance is a major driver in the shift towards adapting enterprise payment systems to increase payment efficiency and security.