Global cash and

liquidity management
CAFTA
Learning objectives

By the end of the session you will be able to

• Understand liquidity management and its key components such as cash forecasting and cash
management.
• Key aspects for cash forecasts and forecasting techniques.
• Deep dive into different types and mechanics of cash pools, including physical, notional and
hybrid structures.
• Understand the mechanics of payment factory through POBO/ROBO models.
• Familiarise yourself with trends and best practices in international treasury through in-house
banks and virtual accounts.
• Learn about the clearing and settlement systems run by banks and the emerging payment
methods.

Treasury Analytics
Page 2 23 August 2021
Draft- For discussion purposes only
 1. Introduction to cash and liquidity
management

Page 3 23 August 2021

 Quotes on cash

“Cash is ____!”
King
“Cash is a company’s oxygen supply.”
Ram Charan

“Cash flow is more important than profit.”

Peter Drucker

“Cash more important than your mother.”

Al Shugart
 Overview of cash and liquidity

Liquidity is access to cash. It is the cash available to an organisation, which is used to pay a company’s obligations and source
additional funds whenever required. It also refers to ability to convert an instrument into cash quickly and without loss of value

It’s a crucial component in treasury operations; operations which are concerned with maximising the benefits of surplus funds
and minimising the cost of shortfalls through careful investment and considered borrowing.

▪ Liquidity management is a broader term that

focuses on managing assets, understanding
the liquidity position of a company and the
number of liquid assets a firm must have

Liquidity management

Cash management

▪ Cash management is part or subset of

liquidity management. It focuses on day-to-
day management of cash, collection and
payments

Page 5 23 August 2021 Global cash and liquidity management

Benefits of cash and liquidity management

Organizations today are much more focused on cash and liquidity and on ensuring they report it, consolidate it
and plan for it. There is a renewed interest in the, which entails the following processes:

Reporting cash (Visibility to all accounts) Centralizing and consolidating cash

➢ Reporting consolidated cash balances ➢ Centralizing cash management

across geographies and at a group level activities at group treasury level
➢ Reporting opening bank balances ➢ Implementing cash pooling
currency wise (notional/physical) arrangements,
➢ Cash generation targets across where possible
geographies ➢ Repatriation surplus from overseas
businesses

Forecasting future cash position

Utilizing idle cash

➢ Geography wise surplus cash ➢ Forecasting cash flows and liquidity

investment strategy profile
➢ Deployment in investment ➢ Variance analysis of forecasts vs
instruments based on risk appetite actuals
➢ Managing arbitrage between Optimizing working capital ➢ Liquidity gap analysis
weighted average cost of borrowings management ➢ Funding Plans
and yield on investments

➢ Improved Cash Conversion Cycle

➢ Reduced funding requirement
➢ Improved ROA and ROI

Page 6 23 August 2021 Global cash and liquidity management

Key pillars of a global liquidity management framework

Key Pillars of a Global Liquidity

Management Framework

Below are the key pillars of developing a robust liquidity management framework to maximize liquidity, reduce costs,
ensure regulatory compliance and have synchronous control and visibility over treasury activities

Accurate Payment Liquidity management Technology and

cash forecasting processing structures Reporting

• Types of • Cross border • Cash pooling • Dashboards &

forecasts payments and netting KPIs / PPIs
• Objectives • Payments • Payments • Exception
• Key systems factory reports &
considerations • Bank • In house banks outliers
and enablers relationship • Cash • Tools for
wallet share concentration treasury

World Class Liquidity Management – The Structural Foundations

Organizational Principles Governance & Controls Technology

Governance & Policies & procedures / Core applications &
organisational structures Controls & audit interfaces

Page 7 23 August 2021 Global cash and liquidity management

 2. Cash Forecasting

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Define a cash flow forecast

What is a cash flow forecast?

► Cash Flow Forecasting is the process of obtaining an estimate or forecast

of a company's future financial position and is a core planning
component of financial management within a company.
► A cash flow forecast is a projection of an organisations future financial
position based on anticipated payments and receivables. The process of
deriving a cash forecast is called cash flow forecasting.

Page 9 23 August 2021 Global cash and liquidity management

Benefits of cash forecasting
Can you think of 5 benefits of cash forecasting ?
Minimizing cost of funds
Knowing when and where
funds are required enables
them to be obtained
efficiently either internally or
from external sources
Financial control
The cash forecasts can be
analysed and compared to
actual results to ensure that
subsidiary companies are
managing their cash flows in
line with plans and corporate
policy
Page 10 23 August 2021
Maximizing interest
savings
Knowing when and where
surpluses are expected
enables them to be used
efficiently either by making
investments or by repaying
borrowings
Investing and funding
strategies
Longer-term forecasts are
used to identify structural
cash shortages and surpluses
Global cash and liquidity management
Forex risk
management
Producing forecasts in
currency will identify the size
and timings of currency flows,
and hence indicate the risks
over the forecast period
which treasury may have to
manage.
Strategic investments
For mergers or acquisitions,
forecasting is essential to
calculate available cash and
the amount that must be
borrowed to complete the
deal
Working capital
management
Forecasting should identify
changes in requirements for
working capital, enabling
corrective action to be taken
if need be.
Strategic objectives
Corporate strategies and
objectives can be reviewed or
monitored by comparing
actual cashflows against
those planned
Cash forecasting methods

Key considerations during a forecast The inputs and influencers (steps 1 and 2) are derived
from various entities around the world, including
business units, procurement units, manufacturing,
Key inputs ► Cross finance, etc.
for functional and
forecasting entity inputs
Popular methods of cash forecasting:

Forecasting types
► Variables that
Key can cause
influencers changes in the
inputs

Direct Indirect
Forecasting ► Short-term,
using medium-term
relevant or long-term
Adjusted net income
methods Receipts and
- Starts with EBITDA and
disbursements
- Good for 30 days actuals adds and subtracts
- Schedules collections balance sheet item
and disbursements in the changes
Financial immediate future
► Liquidity
decision management
making
► Funding and
investment Proforma balance sheet
- Projected book cash
► Risk account on balance sheet
management - Assuming all others have
been correctly arrived
► Valuation

Page 11 23 August 2021 Global cash and liquidity management

Forecasting horizons

Forecasting horizons

Short term Medium term Long term

Actual cash estimates and Projects

Liquidity management M&A
cheque clearing for day to day
Working capital management Capital management
funding and investments
Credit facilities with banks valuation
-optimising idle cash

ANI
R&D method ANI PBS
Distribution method PBS ARM

Page 12 23 August 2021 Global cash and liquidity management

Key KPIs reported under cash forecasting

1 Percentage of business units/ regions that miss

forecasting date

This is done to ensure that operational forecast

4 Percentage forecast error

This helps understand the level of forecast accuracy

information is provided at the required time. so that funding/ investment decisions can be adjusted
accordingly

2 Time taken to collect and consolidate

company/regionwide cash

While creating a global view of projected cash flow we

5 Absolute cash balance error

This helps minimise required cash buffer to

should minimise the time spent in doing so maximise investment amount or minimise borrowing
amount.

3 Excess funding/Investment time

Its beneficial to ensure cash position/liquidity plan is

6 Daily opportunity cost of cash balance error

This helps you understand the cost of not investing

finalised as early as possible to enable earlier and excess cash or borrowing too much
more effective funding/investment decisions

Do you have any KPIs you want to discuss?

Page 13 23 August 2021 Global cash and liquidity management

Monitoring and forecasting

Forecasting and monitoring capabilities improves daily management of liquidity resources and
allows firms to deploy potential mitigation strategies during stress periods.

Forecasting Considerations Monitoring Considerations

► Leverage historical trend analysis to identify expected
timing of intraday shortfalls
► Forecast expected cash and securities positions
► Develop forward looking business forecasts
► Identify expected intraday usage across dimensions
► FIs are in the process of establishing automated
forecasting capabilities
► Monitor intraday positions across key dimensions
throughout day
► Track actual vs. forecasted settlement activity
► Incorporate intraday monitoring indicators into
management framework
► Establish escalation/protocol procedures
► FIs are in the process of establishing sufficient intraday
reporting MI and automated capabilities

Page 14 23 August 2021 Global cash and liquidity management

Using advanced analytics for forecasting
Machine learning and advanced analytics are a key component in a the forecasting process

Algorithmic forecasting uses statistical models to describe what’s likely to happen in the future. It’s a process that
relies on warehouses of historical company and market data, statistical algorithms chosen by experienced data
scientists, and modern computing capabilities that make collecting, storing, and analysing data fast and affordable

Uncover key
relationships and
Predictive forecasting interdependencies Forecast reporting and analysis
► Machine learning models serve as starting
► External factor analysis to improve
point for forecasts
accuracy
► Algorithms adapt over time to new trends
► Understand the root causes of
and emerging patterns, as well as any
variances
observed benefit of prior manual
adjustments due to external events or factors Feedback loop to enable ► Provide insights to the business
continuous model learning
Predictive forecast and adjustment over time Ongoing use of
enables forward advanced analytics
looking analysis and standard
Decision support dashboards provide a
Additional machine learning models and analyses framework for targeted
to provide insights to support efficient and analysis
effective decisions:
► What specific actions will help to reduce SG&A
cost?
► What customers / products do we foresee as
presenting the most revenue / margin
improvement potential?

Page 15 23 August 2021 Global cash and liquidity management

Cashflow forecasting analytics

Page 16 23 August 2021 Global cash and liquidity management

Cash forecasting analytics

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 Global banking, payments and
settlements

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 Evolving landscape of payments

The landscape of payments is evolving and is faster than ever. With near real time payments available, Treasurers need to
evaluate the best possible medium for connectivity

►Real Time Payments

►High Value Payments – Wires
► Swift Connectivity Transfers
► Swift Concentrators ►Low Value/ Batch Payments – ACH
► API with Banks Global Bank ►SEPA Payments
► FTP based Connectivity Connectivity ►Cross border Payments – SWIFT gpi
► Host to Host Connectivity
► Virtual Accounts Payment
Channels
Global
Payment Payment
Formats Management ► UK- CHAPS, TARGET2
► XML PAIN ► US – CHIPS
► SWIFT MT Payment & ► Brazil - SITRAF and SILOC
103 Settlement ► Electronic Payments Network
Regulatory Systems (“EPN”)
Push and open
banking
► Country Specific Banking
Networks: EBICS, BACS,
► ISO 20022 Editran, Zengin
► PSDC 2

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 Payment/ Collection Instruments

Paper-based instruments Electronic instruments

Cash Urgent electronic funds transfer

Cheques Electronic fund transfers
Bills of exchange Automated Clearing House (ACH) payments
Promissory notes Plastic cards (credit/debit cards/ prepaid cards)
Banker's drafts Standing order
Lockboxes Electronic bills of exchange
Payment Gateways
Mobile phones

Page 20 23 August 2021 Global cash and liquidity management

Instant payments are here but are scattered in a variety of pilots and projects

► Instant or immediate payments are real-time, 24 hours a day, 7 days a week; they are born from the need for a faster
alternative to the existing processing systems;
► Local or regional initiatives develop in parallel with cross-border ones. UK’s FPS and Swiss SIC have been recognized as
revolutionary and a gold standard for instant payments;
► The European Payments Council (EPC) published the Instant SEPA Credit Transfer Scheme Rulebook (Instant SCT) in
Instant November 2016 (voluntary scheme);
payments ► In November 2017 the EPC SCT Instant payment scheme became operational, the first for an entire region as large as
SEPA.
► First phase of SWIFT’s gpi (global payments innovation) live with more than 140 banks signed up. Phase two and three
will further enable digitization and also leverage on distributed ledger technologies.

Danish Polish
UK
NETS Swedish Express
Faster Payments Chinese
Bankgirot Elixir
Internet Banking Payment
System

Japanese
Zengin
System
Iceland
USA Greidsluveita
Zelle n
Korean Interbank Home
Mexican /Firm Banking Network
Swiss
SPEI
SIC
Brazilian Taiwanese
STRAF FISC
System Singaporean
Nigerian FAST
NIP
Chilean Countries with instant payment
TEF system
Countries investigating instant
South African Indian Immediate payment system
Real-time clearing Payment Service

Page 21 23 August 2021 Global cash and liquidity management

SWIFT and importance in Trade

• Society For Worldwide

Interbank Financial
Telecommunications

• The broader SWIFT community

also encompasses corporates
as well as market
infrastructures in payments,
securities, treasury and trade.

• SWIFT does not hold assets nor

manage accounts

• Information in messages
transmitted through SWIFT is
controlled exclusively by the
sending and receiving financial
institutions

11 characters : Last 3 are optional - Branch code

 Introduction to Swift GPI (Global payments initiative)

‘Global Payment Initiative’, also known by the acronym gpi, is the latest initiative launched by SWIFT to improve the customer-bank experience
in the world of international payments.

By joining all participants in a payment chain through a Unique End to End Tracking Reference (UETR), SWIFT GPI can improve the availability, transparency
and tracking of payments.
High

SWIFT GPI for corporates enabling

ERP/TMS integration

SWIFT GPI – available via bank portal

Value to corporate

Multi-bank capability: Tracking is

Swift GPI – Increased speed and
transparency
Tracking available via bank portal, no
need to call client service
➢ Real-time visibility of status changes
pushed to the ERP / TMS system
➢ Harmonised, real-time payments
tracking across banks
➢ Ability to establish payment

➢ Same day availability of funds ➢ Full transparency on deducts monitoring and alerts in ERP / TMS
systems
➢ Payments tracking ➢ Additional services (e.g. gpi Stop &
Recall) ➢ Enabling analytics
➢ Transparency on deducts
Low

Live since Oct/Nov 2017 Live since Oct/Nov 2017 Live since Oct/Nov 2018

Global cash and liquidity management

Page 23 23 August 2021
Characteristics of a payments network of the future

The Network of the Future needs a modern payment architecture to successfully meet and sustain future market trends while complying
with safety and regulatory requirements. We see three core characteristics informing this network model: multi-capability platform,
open ecosystem, and simplified operations.

Industrialized Delivery
• Proven agile software delivery leveraging cloud native tools to streamline activities, reduce
overall dev and test efforts, and decrease time to market
• Defined DevOps & CI/CD strategy to achieve both high speed, reliability and performance
• Well architected payments platform to take advantage of new technology advances through
best in class capabilities and proven solutions
Faster Payments Blockchain Data as a Service
Third Party
Allowing new and Payments Capturing additional
data attributes for Products
Multi- disruptive payment Being ready to take on Modular, Nimble & Integrated
types, such as cross the next wave of decisioning and
Capability servicing, e.g., • Design independent, interchangeable modules that are extensible, reusable,
border, real-time payments technology, maintainable and adaptable

Products
Platform Disputes Resolution

Social
payments, etc. such as JPM Coin, Card Digital • Provide seamless integration with channels, data sources addressing batch, near
World Wire, etc.
products products real-time and real-time integration

API-Enabled Ecosystem
Connected Beyond Digital Digital Identity • API enabled for better Integration
and Open Wallets Universal method Digital • Microservices built around business capabilities that can be deployed
Leveraging Internet of Things (IoT), for verifying a digital independently by fully automated deployment machinery
Open Open Banking, web browser payments, identity, cross
Ecosystem API, and tokenization channel, cross
Directories enterprise

Payments Platform driven Channel Experience

• Integrated Seamless Experience to Customers

Event & Data Driven Platform

Clearing Single Message Regulations • Drive use cases based on insights gained through
and Format and real-time ML models
Compliance Business AI/ML
Simplified Settlement Adopting industry Insights • Prescriptive Analytics with relevant, targeted &
standardization, Meeting global Intelligence Capabilities timely insights
Operations Supporting
omni- payee validation regulatory • Rapidly react to emergent business needs by
channel and screening requirements processing internal and external events in real time
transactions

Page 24 23 August 2021 Global cash and liquidity management

Fraud in payments
In the past five years payments fraud
activity has increased dramatically. A
significant 82 percent of financial
professionals report that their
organizations experienced attempted
and/or actual payments fraud in
2018, 20 percentage points higher
than reported in 2014.
While checks continue to be the
payment method most impacted
by fraud activity in 2018, the
percentage of financial
professionals reporting check
fraud activity decreased from
2017 to 2018
Page 25 23 August 2021
Fraud via ACH debits and ACH
credits increased; checks, wire
transfers and cards all saw declines.
Fraud originating from BEC continues
to be on the uptick. AFP began
tracking instances of BEC in 2016;
the percentage of companies
impacted by BEC since has risen
considerably from 64 percent in
2015 to 80 percent in 2018.
Global cash and liquidity management
Even though the percentage of
companies that are victims of BEC
is on the rise, and despite the fact
that organizations are highly
focused on mitigating these
attacks, the financial loss incurred
at companies as a result of these
scams—while not staggering—is
nevertheless on the increase. In
2018, 54 percent of organizations
were impacted by a financial loss as
a result of BEC (an increase of eight
percent over 2017) and the first
time more than half of the
respondents reported estimated
losses from these scams.
 Key KPIs reported for banking and payments

➢ Number of bank accounts and banking relationship across the globe to enable the company in
consolidating & rationalising the bank relationship to limited banks

Banks Bank Geographies Currencies Geography wise spread of bank accounts Connectivity methods used (%)
accounts 8.41% Africa

77 725 6 46
13.24% Host to
37.52% 4.83% host
Australia 49%
51%
Other
Geographical spread of top 9 banks South
36.00% America
Region wise H2H connectivity
Bank accounts Connectivity
239
S.No. Banks Africa Australia South America Atlantic APAC Europe Total
Bank accounts
1 BoA 125 26 151 H2H
Host to Host
2 ANZ 81 4 85 H2H 156
136
3 DB 18 63 81 H2H
96 69%
4 Citibank 5 5 10 26 46 Other
5 TD 37 37 H2H 17% 61
84% 60% 37
6 HSBC 1 1 3 5 19 29 Other
0% 0%
7 Bank of China 2 20 22 Other
Australia Europe Asia North South Africa
8 BNP 1 7 14 22 Other America America
9 SCB 4 17 21 Other
Total 12 83 8 202 189 494

➢ Details of the connectivity methods used across banks, regions and country
➢ Enables to Region wise split of bank charges
understand the
wallet share 3.00 50%
40%
and banking 2.00 30%
landscape 1.00 20%
10%
- 0%
Africa APAC Europe Atlantic Australia Not mapped
Amount (in millions) 0.66 1.20 2.43 0.31 0.70
%age 12.45% 22.71% 45.94% 5.78% 13.13%

Amount (in millions) %age

Page 26 23 August 2021 Global cash and liquidity management

 Liquidity management structures

Page 27 23 August 2021

Decentralized to Centralized payments – What does market say ?

“High “Lack in “Less “Complex

“Payment
Banking Visibility of control over banking
frauds”
Cost” cash” payments” relationship”
Kyriba Survey
Logica survey GT Survey FIS Survey Reval Survey

❖ Decentralized payments is a big challenge for corporates operating at a global level. There are high chances of
payment fraud due to non-standard controls, workflows and disparate systems

❖ Entities spanning across multiple geographies and regions incur high costs in banking fees, manpower and
infrastructure to gain visibility over operations

❖ With rising global operations, increasing M&A activity and banks & financial systems getting inter-twined,
treasuries often struggle with increasingly complex bank relationships, lack of governance and cumbersome
processes for managing and tracking key metrics – the question has been asked more than often – to centralize
or not to centralize?

Typical challenges noted in a decentralized & distributed banking & payments environment

Complex bank
Payment frauds Time consuming Poor visibility of cash
relationship structure

Reporting challenges and Lack of control over

Lack of governance High cost
lack of standardisation payments

Page 28 23 August 2021 Global cash and liquidity management

Benefits of Centralized banking & payments framework

6 Transparency & Governance 1 Increased visibility and control

➢ Greater transparency over outgoing
payments ➢ Control over timing of payments and
visibility into the amounts of those flows
➢ Setting up enhanced control and
delegation of authority increase to 6 1 ➢ is central to effective cash management
maintain the governance
➢ Good cash forecasting, significant business
value can be created, as cash managers can
Transparency Control over make these decisions more proactively
& Governance
cash
7 2 Prevent from fraud & error
5 2
➢ Establishing an automated workflow,
5 Opportunity Cost pre-defined approval limits, and

Due to better visibility of Increased Payment Fraud

authentication requirements for
each payment tightens controls,
Centralization
➢
cash, idle cash can be Visibility prevention reducing potential issues
invested in liquid ➢ Fraud reduction through process
investments management, visibility and
➢ In case of deficit cash and implementation of control policies
bank balance, surplus cash 4 3
can be used to avoid the
OD/CC withdrawal
Increased Cost
efficiency Reduction 3 Reduce cost
4 Increased efficiency
➢ Gain consistency in payment ➢ Lower transaction costs with better
processes enabling automation, management of banking
higher straight-through processing ➢ Consolidating systems reduces costs
(STP) rates, less manual activity and and manpower cost
resultant cost reduction
➢ Better utilisation of available funds as
➢ Ability to reduce number of banking funding processes and interest
relationships and rationalise account
conditions are optimised
structures

Page 29 23 August 2021 Global cash and liquidity management

Evolution of the liquidity management framework

Evolution usually driven by potential positive cost/benefit outcomes through increased

centralization.

Centralization
VI. POBO &
ROBO
V.
Intercompany IHB
Cross-entity (Treasury
Netting -
Liquidity Functionality)
Cashless
Management —
Global
IV. Centralize
Cash Forecast
& FX Risk Mgt
III. Centralize
II. Cross-entity External
Liquidity Investments
Management-
Regional

Finance
Company
I. I/C Fixed
Loans & “Segregated “
Deposits Liquidity Netting - Cash
Management Settlement
(no co-mingling)

Range of services

Page 30 23 August 2021 Global cash and liquidity management

 The evolution in cash management

The journey to building an in-house bank

Most global companies today have already centralized their cash balances around the world in order to increase
visibility and planning. Businesses are now poised to take the next steps towards the creation of an in-house bank –
a critical step in Treasury’s evolution from a cost centre to a value-creation centre.
Benefits
Benefits Full control of cash flows,

Greater operational efficiency, improved cash forecasting

Benefits
reduce risks
Benefits Significant cost savings, improved
Volume / Complexity

Enhanced visibility, more efficient negotiating position with banks

liquidity management
Cash pooling & netting
 Each subsidiary has their
own banking partners for
local services, including cash
pooling, the hedging of
financial risks, payments and
collections
 Cash pooling streamlined
through an overlay structure
 Centralized, internal netting
centre settles intercompany
receivables and payables
Payment factory
 A shared service center (SSC)
processes payments for global
subsidiaries
 A payment processing centre
(PPC) functions as a hub through
which subsidiaries’ payments are
routed and settled
 Centralized funding and
intercompany financing
In-house bank
Collection factory
 A small number of major banking
partners provide service across  Expansion of the in-house bank
the global company function to include collection on
behalf of subsidiaries
 The in-house bank provides
various banking services to
subsidiaries
 Subsidiaries have in-house bank
accounts through which all
external payments are settled on
their behalf
 Intercompany transactions also
settled through in-house bank
accounts

Technology requirement and functionality

Page 31 23 August 2021 Global cash and liquidity management

Overview of cash pooling

Cash pooling is the ability to concentrate or aggregate cash

by location, currency and account.

 Notional pool: allows the company to combine balances

of several entities without any actual movement of funds
within or across borders while still gaining centralised
access.
 Physical pool: physically moves funds to combine funds
from various accounts into one single account to be
utilised.
 Hybrid: combination of notional and physical pooling to
optimize the company’s liquidity

Cash pooling - Zero balance / Target balance

Under zero balancing approach, cash pool participants transfer their entire cash to a cash pool leader or bank, as
the case may be.
Under target balancing approach cash pool participants transfer their entire cash that exceeds a certain pre-agreed
balance (with the bank) to the cash pool leader or bank, as the case may be.

Page 32 23 August 2021 Global cash and liquidity management

Physical cash pool – An example

Physical pooling is the simplest method to appreciate: Cash is moved from one account to the
other through a physical transfer and then moved back in the morning if required. The actual
transfer happens to a master “concentration” account, and the net position is managed centrally.

Let us assume, the end of day

balances in accounts A, B, and C to be
USD 120,000, –150,000, and
190,000 respectively

If the deposit rates in each location

were, say, 2% and the overdraft rate
were 6%,the effective interest Can you validate how much interest did the accounts pay/receive if
receivable (payable) in each location is they were in a physical cash pool
around USD 13.33 payable

However, with the physical pool, the

organisation as a whole is receiving
interest USD 3.33

Page 33 23 August 2021 Global cash and liquidity management

Types of notional pooling

• Single currency, single country

• Single currency, cross border
• Multi-currency, single country
• Multi-currency, cross border

• What is possible?
• What is offered?
• What does it cost the bank?

Global cash and liquidity management

Page 34 23 August 2021
Pooling due diligence

• Is pooling permitted?

• Key issues
• Withholding tax on interest payments – Physical Cash pool
• InterCO loans issues
• FX issues
• Cross guarantees – Notional Cash pool
• Arms length rule
• Is debit interest an allowable deduction?
• Is thin capitalisation an issue?
• Location
• Exchange controls

Global cash and liquidity management

Page 35 23 August 2021
Payment factories - An overview
What is a payment factory?

A Payments Factory refers to an organisation establishing a central hub to gain a degree of central
control and management over the processing of previously decentralised payment flows.

Decentralized structure Initiators

and
A decentralized payments landscape leads to multiple Approvers
operational inefficiencies, some of them are:

1. High cost of operations

2. Lack of visibility into KPIs for treasurers
3. Inefficient financial supply chain
4. Opportunity cost of idle funds due to ineffective Multiple
cash pooling Banks
5. Lack of transparency & governance Bank 1 Bank 2 Bank 3 Bank 4 Bank 5

Centralized structure
Initiators
A centralized structure ensures cost optimization and
optimizes efficiencies by enhancing:
and
Approvers
1. Standardization & connectivity
2. Internal reporting Payments Factory
3. Fraud detection
4. Rationalizing banking relationships
5. Supplier visibility for cost negotiations
Multiple
Banks
Bank 1 Bank 2 Bank 3 Bank 4 Bank 5

Page 36 23 August 2021 Global cash and liquidity management

Overview of payment factory:
What is a payment factory?

“Payments Factory refers to an organisation establishing a central hub to gain a degree of central control and
management over the processing of previously decentralised payment flows.
The actual structure of a Payment Factory can manifest in a number of ways with internal factors, such as
configuration of processes, technology and staff, and external factors, such as bank counterparties, connectivity
and account structures, leading to varying models.”
Key features
of payment

Segmented
Centralized
factory

Secure, Pan-enterprise visibility by Standardized Fraud and

Standardized controls, with Reformatting
standardized visibility for units of their bank financial crime
processes segregation of capabilities
interfaces treasury local / regional connectivity management
duties
activity

Source: White paper by Jonathan Jordan titled ‘ Payment factories: different ways of achieving payments efficiencies

Multiple geographical Payment factory Banking relationship

locations solution

Africa
Validation
Australia Payment request, approved Payment
invoice processing
Authorization Connectivity via
Asia Pacific Europe
SWIFT, H2H

Atlantic Payment request for processing Scheduling

South America
Reporting

Global cash and liquidity management

Page 37 23 August 2021
Overview of payment factory:
Types of organisation models for payment factory set up

Communication hub Shared Service Centre

Communication hub is solely responsible for execution of Payment factory to drive full centralisation of both account
payments and maintaining communication with banking payables processes and staff into a single location –as within a
partners. The Hub is responsible for mapping file formats Shared Services Centre (SSC).
TYPE 1

TYPE 2
received from each entity to a format required by bank.
The Shared services team acts as a global accounts payable
Key advantage: Elimination of dedicated technology centre for multiple regions.
requirement by local payment teams for payment processing
Key advantage: Concentration of resources leads to cost
and bank connectivity
savings and enhanced efficiency.

Source: White paper by Jonathan Jordan titled ‘ Payment factories: different ways of achieving payments Source: White paper by Jonathan Jordan titled ‘ Payment factories: different ways of achieving payments
efficiencies efficiencies

Payment
Payment
factory - SSC
factory –
Communication
hub

Page 38 23 August 2021 Global cash and liquidity management

Overview of payment factory:
Types of organisation models for payment factory set up (contd.)

Payment on behalf of (POBO)

The Payment on Behalf facility allows payment centralization of several of the group's entities. It usually makes payments for all
participating group companies through single account (by currency). This eliminates the need for business units to hold foreign
TYPE 3

currency accounts. By using a POBO model, only one account per currency is required, from which payments would be made on behalf
of all group companies. These booking of payments is done on the originating entity's intercompany account. The beneficiary uses
entity name held on the remittance information to identify on whose behalf a payment is made, and reconcile the payment.
Key advantage: Reduction in number of external bank accounts reduces FTE and other operational costs, reduction in transaction fees

Source: White paper by Jonathan Jordan titled ‘ Payment factories: different ways of
achieving payments efficiencies

MODEL A MODEL B

Page 39 23 August 2021 Global cash and liquidity management

Key characteristics of a best-in-class Global Payments Factory

Highly automated and harmonized payment

processes by system and payment instrument Central processing,
release & monitoring by Standardized connection to banks
ONE PF Team enables technically a faster change
Key characteristic best-in-class
of banks
GPFs:
Automatic Payment
Cut costs by
✓ Act as an internal bank to Format Transformation
harmonizing
provide any kind of banking Companies & Systems End-to-end integration Banks 1-n
transport
service, including internal 1-n in the operating systems
channels &
settlements, internal loans, formats
internal foreign exchange Creditors
deals to subsidiaries Payments Bank files
Bank
✓ Have a straight-through Debtors 1
processing (STP) rate for Central
payments of over 95% Platform /
Treasury < payment hub Bank
✓ A rate of manual payments 2
entered in a payment system HR etc.
of less than 1% compared to Account statements Account statements
the overall payment volume Planning data Status reports
Electronic Payment
✓ Master data process in place to Bank
account Acknowledgments
ensure payment rejection n
rates of less than 2% statement Gain transparency to
processing identify further improvement
✓ Consequently implement global potential, monitor payment
defined cash management KPI’s & prevent fraud
bank strategy (typically 5-10 Processing of
banks; number might vary Payment Rejection bank information
based on business Rates <2% due to central Increased Transparency:
In real time;
requirements) vendor and bank master Daily Cash Visibility
Centralization of
data Global Payment Factory
✓ Payment centralizing provides follow-up activities
PPI’s
greater visibility and control
Standard workflows for
benefits
payment approvals

Page 40 23 August 2021 Global cash and liquidity management

 Proposed ROI framework

FTE reduction Bank fee* optimisation Bank connectivity

1 2 1 2 3 4 1 2
Purpose of
Process Geographical Cross border Bank fee Type of
Repair cost FX fee connectivity
enhancement consolidation remittances reduction methods used
method

- FTE cost Reduce the Savings can be The company Payment-on- Preference for Implementation
- FTE repair costs should target behalf-of along SWIFT service of BCP payment
reduction in realized in all with selection
reduction close to zero optimizing ~ bureau model to factory solution
SSC set-up by regions of formats avoid setup and
due to leveraging through- covered under 15-20% of enables turning for critical bank
maintenance of
internal low cost • Improved the POBO & the bank FX payments to connectivity accounts based
process opportunities data IHB model by charges fees local payments infrastructure on volume of
realignment in countries quality conversion of under this to avoid transactions.
currency Banks in South
like India • Use of cross border project American, African This would result
exchange losses
unified payments into and margins geographies can be in additional
- Reduction in formats domestic connected using spends for the
responsibiliti • Completen payments Host to host organization but
es for 3rd ess and connectivity improved
parties such accuracy Estimated average EBICs can be used connectivity with
as Infosys, checks unit price per cross- as the connectivity banks
IBM, border payment is method in Germany,
more than 10 times France, Switzerland
Accenture (due to popularity
higher than average and low cost)
unit price per
domestic payment

Typical ROI opportunities based on benchmarking insights

FTE savings Bank fee reduction Risk mitigation and fraud prevention

30% - 40% 20% - 25% 10% - 15%

*Large payment transformation projects typically create an opportunity to optimize:

Banking relationships, bank account structure and cost optimization across entire landscape of transaction banking fees spread across ACH services,
Depository Services, Disbursement Services, Lockbox Services, Reconciliation Services, Information Services, repair costs etc.

Page 41 23 August 2021 Global cash and liquidity management

 What is an in-house bank?

The In house bank is usually focused as a highly efficient structure for large companies with
• High volumes of transaction
• Multiple legal entities
• Multiple tax regimes

The IHB effectively acts as the “banker” for the parent and the subsidiaries in an affiliated group
A treasury management system or ERP would maintain in-house-banks accounts (“Virtual” bank accounts) to track
the transactions executed by the IHB on behalff of each entity

The IHB is a bank by this definition, but only for group entities
The IHB should be viewed as a captive bank

Takes deposits Pays interest

Make loans Charges interest

Page 42 23 August 2021 Global cash and liquidity management

 Why implement an in-house bank?

Cash Flow simplification Visibility and control

► Creates opportunities for major cost reductions ► Improves internal controls and standardisation around

► Eliminates system redundancies best in class processes

► Optimises banking relationships ► Creates new opportunities for efficient risk management

► Optimises number of bank accounts ► Unified and harmonised FX risk management

► Transfers intercompany transactions from banking

system to TMS

Improved cash utilization

► Provides intercompany netting opportunity

► Provides liquidity – minimising idle/local cash

balance

► Manages intercompany funding for optimal results

► Provides interest optimisation opportunity

Page 43 23 August 2021 Global cash and liquidity management

Key functions of IHB

The IHB intermediates cash, foreign exchange, and funding transactions between subsidiaries and
external banks. Once in place, the infrastructure also facilitates centrally managing and
responding to changes in markets, regulation, corporate transformation/M&A, etc.

Cash Concentration
Liquidity ► IHB becomes global pool header to centralize cash, Investments
Management short term funding of subsidiaries, and net investing
Cash Forecasting
POBO/ROBO

► Adoption of POBO/ROBO further reduces

fragmentation of liquidity, saves FX spreads, Netting
improves forecasting
FX Risk Management
► Subsidiaries execute FX trades (convertible currency
Management pairs) with IHB - which nets positions ;materially Hedging
reducing external trades
► Centralized portfolio of exposures at IHB can be
better managed and hedged

Short term
► Sub capital structure optimized by repatriating more
Subsidiary retained earnings to HoldCo, with IHB providing long (Working Capital)
Funding term debt funding, within country thin cap limits for
tax deductibility Long term
(Capital Structure)

Page 44 23 August 2021 Global cash and liquidity management

Case study – Payment factory
Company overview

Key Geographies Key teams, roles & responsibilities

No of Region Bank ac. Revenue Region Bank ac. Revenue Ref Teams Location Roles & responsibilities
Entities Atlantic 261 7618 m Africa ➢ Make treasury payments
61 Treasury Singapore

246
across all countries
APAC Europe 30,691 m South
272 America 35 1493 m BS&S team

Australia 96 720 m Others - ONSHORE

Atlantic USA

APAC-Europe India ➢ Approves payment in ERP and

banking websites
Cash
Australia Perth ➢ Executes payments on e-
mgmt
banking portals
Africa Multiple ➢ Monitor payment status
South America Multiple
Payroll team Multiple ➢ Manage payroll payments

OFFSHORE
➢ Initiate payment proposal
Offshore- Infosys team Pune
➢ Monitor payment status
➢ Reconcile bank/ GL
*For internal teams, this map shows the regions controlled by that team. For outsourced teams, it indicates the location of t he team. IBM team Chennai
information

➢ Payment operations are performed in different geographical locations using disparate Accenture IT finance Brisbane and ➢ Manages payment formats &
team India system interfaces
systems. This leads to lack of central visibility, reporting challenges and lack of
standardisation Payroll team Multiple ➢ Manages payroll payments
➢ Interaction between teams is managed using manual workflows through calls, emails Table 1: Key teams, roles and responsibilities
etc. which may result in operational delays, higher operating costs and operational **In some locations local business units are responsible for the payment process. For some geographies,
risks the local business units may be handling a part of the payments process (for geography specific
information, ref to next slide)
 Project scope

#1 #2 #3 #4 #5
Scope components

Bank relationship and

Process cost rationalisation Bank connectivity Operating Risk and compliance
optimisation methods model

Area Area Area Area Area

1. As-is/To-be process Bank relationship and account

Connectivity types Payment organisation Risk and control
structure
Vendor, OTV, intercompany,
Focus areas

tax, Payment forecasting IT organisation Fraud and sanction screening

Payment format maintenance
Payroll Cash management Business continuity planning
2. Cost benefit analysis Bank charges rationalisation

All payment types

 Our approach

1. Create payment 2. Approval of 3. Sending payment 4. Monitor payment 5. Payment

request payment within SAP file to bank status forecasting
Teams

Offshore- Infosys Rio- Cash mgmt Offshore- Infosys Offshore- Infosys Rio- Treasury
Offshore- Infosys Rio- Cash mgmt

Automated- F110, Manual- F53 Automated- H2H, Manual- E-banking portals

▪ Creation of payment proposal in the system ▪ Generation of payment file in SAP and routing to the bank ▪ Daily computation entity
Process

▪ Review, validation and approval of payment proposal through H2H interface wise Payment forecast
▪ Execution of payment run in SAP/manual clearing of payments ▪ Creation and approval of payment on banking portal ▪ Sending request to
▪ Monitoring of payments on SAP/bank portal treasury for funding
Technology

Archival of payments within SharePoint

Step wise plan for transformation

a Current activities and RACM evaluation
Key parameters

1 2

a Activity time and utilisation

evaluated

Alternative optimisation
initiatives Activity enhancement
a Risks EYRx and inefficiencies IEx

a Process maturity (defined, standardised, leading) 3 4

a Volumetric analysis Technology vendor

assessment Cost benefit analysis
Understanding current landscape
Project approach and coverage

1. Understanding as-is landscape

2. Risks and inefficiencies for each process type

Project approach and coverage

3. Time motion study

4. Solution analysis
Project approach and coverage

5. Cost-benefit analysis
Understanding payment factory as a solution
 Future state in case of payment factory set up

Current state for payments at Rio Tinto Illustrative future state for payments at Rio Tinto

Local business
units Payment factory Banks Multiple
banks in
local
Non geographies
Shared Service POBO
Infosys Pune team Payments
• PO centre
are directly
creation settled
• GRN through
• PR creation
creati respective
on bank
accounts

Payment factory solution

Banks
Payments are
settled by
POBO leading banks
Regional payroll in each
teams • Payment run SWIFT geography, in
• Payment approval which
• Sending payments payment is to
to banks be made
• Payroll through a
applicatio • Payment
local
n monitoring transaction
• Reconciliation
• Accounting
* Treasury team
• Netting
• Liquidity
management
*Refer IHB Structure for detailed IHB structure of Rio Tinto

• Payments process involves multiple teams across geographies for handling the various legs of
the payments.
• Cash management team (Pune) is responsible for executing payment runs, followed by
approval of payments by regional P2P teams. The bank reconciliation is performed by IBM
team in Chennai.
• For payroll, the payments are made by IBM team in multiple geographies. (* this is based on
limited information received till now)
• All types of payments are initiated in SAP or in the payment factory solution.
• The role of cash management team (Pune) would get realigned based on activities
performed in payment factory.
• The role of local business teams would be realigned basis the extent of centralising of
activities in shared services centre
• For payroll runs in SAP, responsibilities need to be centralized and routed through
payment factory solution as much as possible after considering the regulatory restrictions
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