Many large corporates are focusing on how to centralize and streamline the management of payments. One solution gaining popularity is the employment of a Shared Service Center that helps corporations consolidate payment functions - known as POBO (Payables on Behalf of).
In this article, we will discuss the overall approach to POBO, why the concept is becoming more appealing to treasurers, and how to determine if utilizing POBO is the right fit for your treasury needs.
What is POBO and what is needed to adopt this approach?
A POBO structure allows corporations to route payments from a central location on behalf of their subsidiaries/entities, often utilizing a single demand deposit account to initiate all payables. In establishing a POBO structure, organizations should coordinate with their legal and accounting teams to determine the appropriate structure – which often involves establishing an in-house bank to manage the liquidity for funding the payables account.
In general, US-based corporations have been slower to adopt POBO structures, due to current inefficiencies in payment processing and limitations in organizational capabilities. Oftentimes, corporations have disparate ERP systems or different versions of the same ERP platform, making it difficult to centralize processes across their organization.
Organizations based in other areas of the world have been faster to adopt these structures, particularly in the Americas and Europe, where POBO has enabled them to optimize their funds under applicable tax laws and regulations. Additionally, European entities are often more successful in implementing standardized processes and ERP platforms within their organizations, which then better positions them to leverage a POBO structure and benefit from its efficiencies and automation.
Conversely, Asia-based organizations face the challenges of diverse tax laws and regulations that limit currency movements and generally hinder consolidation of cash. As a result, funding of the POBO solution across the region may not be as seamless as in other parts of the world.
Choosing the right region in which to use POBO is important, but it is also important to align your organization with a bank that has experience in supporting POBO and that is familiar with your objectives. The right bank can help navigate payment pain points and provide insight into how other organizations have overcome hurdles. An added plus is if the bank’s architecture and technology already support POBO for other companies – particularly if the bank can accept a standardized payment file (e.g., an ISO file), which many ERP systems utilize today.
How to determine if POBO is the right fit for your business needs
POBO might be the right fit for your organization if you currently operate subsidiaries in multiple countries across several regions and are looking for a way to consolidate payment operations, gain greater operational efficiency, reduce costs, and achieve greater transparency. However, it isn’t right for every business. Implementation of POBO involves a great deal of complexity, consuming significant resources and time. Indicators that a POBO solution might not be the right approach for your organization might include: If your company is smaller in scale, uses diverse accounting and treasury platforms, or struggles to comprehend its liquidity position.
Advantages of POBO
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Consolidation:
POBO payments provide a centralized and streamlined solution to help consolidate and simplify not only payments, but overall treasury operations as well.
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Elevated efficiency:
Consolidated management of payments helps reduce errors and the bundling of payments to commonly shared vendors across subsidiaries ultimately increases overall efficiency within the company.
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Decreased fraud:
With increased transparency, treasurers can have a greater understanding and control over cash flows to help identify fraud the moment it happens.
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Cost reduction:
Integrating POBO simplifies payment consolidation and centralization, ultimately reducing banking fees through the reduction of bank accounts needed to manage your cash. Additionally, consolidation of payments in a Shared Service Center, the foundation of POBO, can help reduce costs associated with maintaining multiple payable teams across the entities or countries.
Disadvantages of POBO
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Complicated:
Choosing and including the various corporate entities can be challenging from both an accounting and legal aspect. The entities generally need to continue to operate separately yet participate in the structure - adding another layer of complexity.
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Expensive:
It’s an expensive proposition as you research and address tax, legal, and regulatory issues in preparation for establishing the appropriate structure (as well as including an in-house bank to support the program). Therefore, a thorough cost benefit analysis is critical early in the analysis and decision process.
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Not fully available:
POBO is not available for all payment types, e.g., tax payments must generally be made locally using an in-country account to comply with local regulatory rules.
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Lack of unique IBANs:
POBO often fails to continuously provide unique International Bank Account Numbers (IBAN), often leading to a lack of payment ownership. This can ultimately lead to similar reconciliation issues seen in traditional transaction payments.
How to add POBO to your business
If it looks like POBO will be a good fit for your business, here are recommended steps to follow before undergoing an implementation.
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Meet with your IT team:
Meet with your IT experts to determine not only whether your infrastructure can meet the tech demands, but that the IT team has the knowledge and capacity to commit to this project, which often is completed in multiple phases over a long period of time. Contemplate integrating your system with a treasury management system (TMS) or an enterprise resource planning system (ERP) as part of the IT discussion.
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Consult with experts:
Consult with legal, compliance, and tax experts to ensure that your processes meet all local and international requirements.
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Focus on consolidation:
Review and study all payment processes, methods, and management objectives from the beginning of the analysis to decrease the risk of failing to meet payment deadlines that may give rise to potential incidences of fraud.
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Emphasize communication:
Communicate all changes to stakeholders to gain buy-in and commitment to ensure the structure is implemented successfully and any concerns are addressed prior to and throughout integration. Before implementing POBO, conduct trial tests within a region to identify and mitigate any problems before a full rollout of the structure. -
Provide training:
Provide the team with training and education on the new approach and to ensure all employees have a firm understanding of the advantages and the roles they will play.
POBO can be a powerful tool for streamlining processes and promoting both operational efficiency and transparency. The structure can also lead to cost reductions and greater visibility of funds, thus enhancing your liquidity management. By ensuring that your business is at the right stage of its lifecycle and incorporating the steps above, you can set up a solid foundation for your future treasury operations.
