Improving Business Agility with On-Behalf-Of Structures For a corporate treasurer to conduct his daily operations-which include the execution of payroll, supplier payments, customer invoices and other payments like cash concentration transfers- effectively, he needs to have a 360 degree visibility of his cash positions and cash flows across a number of subsidiary bank accounts. Simplifying and Centralizing the Treasury Function WWW.NUCLEUSSOFTWARE.COM | [email protected]01 WHITEPAPER
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Improving Business Agility with On-Behalf-Of Structures
For a corporate treasurer to conduct his daily operations-which include the execution of payroll, supplier payments, customer invoices and other payments like cash concentration transfers-effectively, he needs to have a 360 degree visibility of his cash positions and cash flows across a number of subsidiary bank accounts.
Simplifying and Centralizing the Treasury Function
This is, however, easier said than done with the multiple accounts of these subsidiaries located in multiple geographies across different time zones. Not only do these accounts have to be maintained in multiple currencies, but they also have to be compliant with the local regulations and follow the regional accounting standards. Mergers and acquisitions further add to the chaos with additional number of banking relationships to maintain.
A typical account structure for a multinational corporate consists of having accounts at both the parent and subsidiary level. The accounts at the parent could include a cash concentration account which is used to concentrate funds from the local subsidiary accounts and a trading account which aggregates the surplus cash to be used for making investments and other trading activity. The subsidiaries in turn have trading accounts for executing financial operations; Accounts Receivables (AR) and Accounts Payable (AP) accounts for collections and payments respectively; payroll account for payroll execution, and a tax account for handling taxations.
ON-BEHALF-OF STRUCTURES CAN HELP IN REDUCING COMPLEXITY
Multiple subsidiaries, more often than not, lead to a multiplication of the number of bank accounts. As many corporates rely on the global, regional and domestic banks for strategic, operational and other tax /legal reasons, there was initially a need to open physical bank accounts across banks for uninterrupted transactions. However, with “On Behalf Of” structures like POBO (Payment On Behalf Of) and ROBO (Receivable
IMPROVING BUSINESS AGILITY WITH ON BEHALF OF STRUCTURES: SIMPLIFYING AND CENTRALIZING THE TREASURY FUNCTION 02
On Behalf Of), companies now can conceivably bring down their complex banking structures that encompass thousands of accounts across hundreds of banks, involving a wide range of currencies, into just a single physical account in a single bank. Corporates can initiate payments or collections using a single legal entity and enhance their cash management operations by avoiding both the physical and notional pooling of their cash.
Virtual accounts play an important role while setting up the POBO/ROBO structures for any complex global organization. The bank opens a physical account for the corporate and creates virtual accounts for both the entity and the subsidiary. Shadow accounting technique is used to track and process all transactions between the virtual accounts and the primary bank account. The information of all the payment and receivable transactions made to the bank ledger account from the local subsidiaries are reflected in the respective virtual accounts as well.
Nucleus Software’s integrated transaction banking solution, FinnAxia, supports the creation of the virtual account with dynamic parameterization. On-behalf-of structures using virtual accounts enable corporates to initiate payments through a single account to all its subsidiaries and receive collections in the single account on behalf of all its subsidiaries. It also resolves issues around missing remitter data by enabling automated payer identification which, in turn, allows for a faster application of cash. The timely reconciliation of the collections helps in providing
a real-time update of the remitter’s credit line, enabling him to proceed with the next booking of sales. The elimination of mundane tactical activities like manual tracking of invoice payment also empowers the corporate treasurer to focus more on their strategic responsibilities, which ultimately adds more value to the company. Credit limits can be set up for these virtual accounts by allotting them funds from the primary account without segregating the funds physically.
The bank can further set up complex on-behalf-of structures for their corporates in which the virtual accounts set up to make payments or receive funds can be further used as administrative accounts themselves to create another series of virtual accounts for payer identification.
In the POBO structure, a payment transaction generally follows the below steps:
The subsidiary initiates the payment initiation at the virtual account level, which results in the physical movement of the fund from the main bank account through actual accounting
The amount is paid directly from the main account to the payee but the same payment also reflects in the subsidiary virtual account through shadow accounting
When payments are routed through a payments-on-behalf-of model, both instruction for and settlement of payment is made from the primary bank account owned by the treasury. The group entity is noted in the payment reference field as the ordering party on
IMPROVING BUSINESS AGILITY WITH ON BEHALF OF STRUCTURES: SIMPLIFYING AND CENTRALIZING THE TREASURY FUNCTION 03
Similarly, in a ROBO structure, a receivables transaction has the following steps:
Payment
InstructionsCentral
Account
1. VA mapped to
actual account
2. ICL
Subsidiary-1POBO
Accounting
Supplier 1 Payment
Supplier 2 Payment
Supplier 3 Payment
Notional Debit VA 1,2,3
VA1
VA2
VA3
Subsidiary-2
Subsidiary-3
Payment
InstructionsPayment
Instructions
Extraction
Central
Account
1. VA mapped to actual account2. ICL3. Invoice Matching
Subsidiary-1ROBO
Accounting
Notional Credit VA1
Notional Credit VA2
Notional Credit VA3
VA1
VA2
VA3
Subsidiary-2
Subsidiary-3
Extraction
Extraction
Incoming
Request
Incoming
Request
Incoming
Request
The corporate provides the virtual account numbers to its trading associates for receiving payments
The trading associate makes a payment to the virtual account
When the payment arrives at the bank, it is ‘tagged’ to the virtual account aligned to the trading associate to help reconcile the transaction
The cash is deposited into the beneficiary’s primary bank account and can be used immediately without waiting for payment reconciliation. The transaction is reflected in the virtual account through shadow accounting
The virtual accounts support the
IBAN format. Since the virtual account assigned to each remitter is reflected in the IBAN fields, the corporate can easily recognize the remitter’s information and not depend on the detail provided in the payment reference. Virtual accounts speed up the transaction processing and provide the statements in real time while also providing customized, timely reporting.
BENEFITS TO BANKS AND CORPORATES
On-behalf of structures provide a range of benefits to both the banks as well as their corporate customers.
For the banks, the benefits are
Competing in markets without having a physical presence thus increasing their customer base
ON-BEHALF-OF STRUCTURES CAN HELP BANKS INCREASE THEIR CUSTOMER BASE BY COMPETING IN COUNTRIES WHERE THEY DON’T HAVE A PHYSICAL PRESENCE
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Protecting themselves against revenue losses from cash management solutions like notional pooling
Lowering their operational costs through the resultant high STP rates and low IT expenses
Driving customer centricity by providing self-service capabilities to their customers
For the corporates, the benefits are
Simplifying & centralizing their treasury functions
Having a cost-effective substitute to existing cash & liquidity management solutions such as notional pooling
Lowering their operational costs with the improved straight-through processing of reconciliation and payment information
Ensuring better credit control by enabling timely reconciliation of their collections
THE WAY AHEAD
On Behalf of Structures are growing rapidly in popularity among corporates who are looking to simplify their treasury operations and expand their business in regions where they don’t have a physical presence. In Europe, SEPA has made on-behalf-of structures easier to implement by ensuring that all payment transactions in the European Union would include both the debtor and creditor information. This makes it possible to identify the subsidiary on behalf of which the payment or collection is happening. However, there are still challenges that place limitations on a companies’ ability to implement these structures. Chief among them are the regional
regulations around currency controls, intercompany lending, withholding tax, debt-equity ratio and usage of non-resident accounts. ROBO specifically can be more challenging to implement since corporates have less control over the payment methods that customers use.
These obstacles are not insurmountable. The right advice and solutions from their partner bank can help corporates implement variations of the on-behalf-of structures based on their business model and the geographies in which they operate. Simplified banking relationships, better operational efficiency, reduced bank fees, and more control and visibility of their cash positions await them if corporates can get it right.
IMPROVING BUSINESS AGILITY WITH ON BEHALF OF STRUCTURES: SIMPLIFYING AND CENTRALIZING THE TREASURY FUNCTION 04
ABOUT NUCLEUSSOFTWARE
Nucleus Software is the global leader in advanced digital technology platforms that power Lending and Transaction Banking businesses worldwide. With over three decades of expertise, it supports the mission critical operations of more than 200 financial institutions in 50 countries across Retail and Corporate Lending, Transaction Banking and Cash Management, Automotive Finance and other business areas.
