Payment Factory
What is a Payment Factory?
A payment factory is a flow tool to improve control over and efficiency of payments. The basic concept is to centralise payments in a single process, which executes payments for all or most operating entities. Payment factories are Shared Service Centres (SSCs) for payments.
There are several variants of payment factories, ranging from literal payment processing to In-house Banks (IHB), (which amongst other features also acts as a payment factory).
Payment factories are data and process intensive so they require systems to function. The most common solutions use ERP or TMS functionality or some combination of the two. Some payment service providers also cover payment factory functionality.
Variants of Payment Factories
Payment factories have evolved from processing payments (like a shared payment gateway), to processing invoices (which allows more automation and improved control and greater savings), to payments on behalf of operating entities (IHB).
The basic payment factory is more like a shared payment gateway; operating entities send their payment files to the gateway for further transmission to banks. This does not provide much benefit since most of the processing is still decentralised. In addition, cloud solutions enable corporates to gain any visibility and control benefits that such gateways provide, so the basic payment factoryis variant is no longerless popular today.
Invoice level processing provides greater control and better value to the group. This type of payment factory receives accounts payable data from the operating entities, processes the resulting payments, and posts accounting entries back to the operating entities so that they can clear the invoices in their ledgers. This provides far greater value and makes a basis for full procure to pay centralisation.
If needed the payment factory can act as an integrator across disparate accounting systems. The same process works well with a single instance ERP.
Invoice driven payment factories also send remittance advices to vendors thereby speeding up reconciliation and clearing of invoices at the vendor.
The first stage of invoice level payment factory is that the payment factory makes the actual payments to the vendors, normally once a week, using a power of attorney over the operating entity's bank accounts. The payment factory acts as a payment instructing agent over the operating entity's bank account.
The second stage is that the payment factory aggregates invoices from multiple operating entities and makes a single payment on their behalf to common vendors. This is payment on behalf of (POBO) the operating entities.
Many payment factories move on from invoice level processing to executing payments on behalf of operating entities; this is the same as the payment part of IHB.
Payment factory compared
Payment factory is a flow tool implemented by corporates (rather than a bank service).
Payment factory improves control over and efficiency of vendor payments. Netting improves control over and efficiency of intercompany payments. In practice there is some overlap, most netting systems can handle third party payments which means they can be used as payment factories, and most payment factory solutions can do intercompany payment netting.
IHB achieves all the benefits of both payment factory and netting, although using somewhat different methodology. IHB also improves other aspects of cash management.
