Payment Factory

A payment factory is a central unit within a corporate group that handles payments for all or most of the group's subsidiaries. Instead of each subsidiary sending its own supplier, payroll and tax payments through its own banks, the subsidiaries pass their approved payment requests to the hub, which checks them, formats them and releases them to the banks through a single channel.

The model is used by multinational companies with many legal entities and bank relationships. It is a project of corporate treasury and finance shared services, usually set up alongside an in-house bank, and its aim is to replace many local processes with one controlled, standardised process. A payment factory may only route payments, or it may also make them from its own accounts in the subsidiaries' names.

Payment requests originate in each subsidiary's enterprise resource planning system once invoices have been approved. They flow to the payment factory's platform, typically a payment hub or a module of the treasury management system. The hub validates the data, screens payees against sanctions lists, checks for duplicates, applies group approval rules and decides the route: which bank, which account and which payment method gives the lowest cost for the required speed.

The hub then converts the instructions into the bank's format, most often the ISO 20022 pain.001 message, and delivers them over one connection, either a host-to-host link to each main bank or corporate access to Swift. Status reports and account statements return through the same channel and are passed back to the subsidiaries' ledgers for reconciliation.

In the simplest form, the factory is an agent. Each payment still leaves the bank account of the subsidiary that owes it; the hub merely centralises processing and connectivity. This requires little legal change and is often the first stage.

In the fuller form, the factory makes each payment on behalf of the subsidiary from an account owned by the central entity. The supplier is paid from one group account, with the remittance information naming the subsidiary whose debt is being settled, and the subsidiary's obligation to the centre is recorded as an intercompany position in the in-house bank. The mirror arrangement for receipts is collection on behalf of, in which customers pay into central accounts, often using a virtual account number for each subsidiary or customer so that receipts can be allocated automatically.

• Fewer bank accounts and connections. Subsidiaries no longer need accounts in every currency or their own electronic banking tools, which cuts bank fees and administration.
• Lower payment costs. A cross-border payment can be turned into a domestic one by paying from a group account in the supplier's country, and volumes can be concentrated with fewer banks at better prices.
• Visibility and liquidity. Treasury sees all outgoing payments before they are made, which improves cash forecasting and supports cash concentration. Intercompany payments can be settled by multilateral netting instead of by transfers.
• Control. One set of approval rules, one master file of supplier bank details and one point of sanctions screening replace many local practices. Central checks on changes to payee details are a defence against business email compromise.
• Standardisation. Common formats and processes make it easier to add an acquired company or change banks.

The on-behalf-of model does not work everywhere. Some countries restrict payments by a third party, require payments to residents to come from a locally held account, or impose exchange controls that prevent intercompany offsetting. Payments of taxes, social security and salaries frequently must come from the employing entity's own account. Groups therefore keep some local accounts and run the routing-only model in those jurisdictions.

Paying for another legal entity creates intercompany loans, which need agreements, interest at arm's-length rates under transfer pricing rules, and attention to withholding tax. Suppliers must be told to expect payment from a different entity and must be able to match it to their invoices. In some jurisdictions the central entity needs to consider whether making payments for affiliates falls within regulated payment services, although intra-group activity is commonly exempt.

The projects themselves are demanding. Master data for suppliers has to be cleaned and harmonised, the number of systems feeding the hub can be large, and local finance teams lose control over the timing of payments. Concentrating all payments in one platform also concentrates operational risk, so business continuity arrangements and strict access controls are essential.

A payment factory is often one component of a wider centralisation. The in-house bank keeps the intercompany accounts and provides internal funding and foreign exchange. A shared service centre handles invoice processing, increasingly through accounts payable automation, and hands approved items to the factory. Cash pooling moves the resulting balances to the centre each day. The spread of instant payments and of bank programming interfaces is leading some groups to add real-time payment capability to hubs originally designed around daily batch files.