POBO and ROBO Channel Flows for Group Wide Value
As a growing range of companies adopt in-house banking, here is how two of the key techniques, payments-on-behalf-of (POBO) and receivables-on-behalf-of (ROBO), may prove valuable and viable for businesses in Asia.
As a growing range of companies adopt in-house banking (where a treasury centre provides banking services to its group of companies), two of the key techniques, namely payments-on-behalf-of (POBO) and receivables-on-behalf-of (ROBO), are also becoming more familiar and widespread. While these techniques (outlined in Box 1) are most commonly adopted in Europe, where there is a high degree of currency and regulatory synergy, these techniques are also valuable and viable for businesses in Asia, despite the diverse financial and regulatory landscape.
Defining POBO and ROBO
A regional treasury centre (RTC) or shared service centre (SSC) makes payments "on behalf of" its participating group of companies through a single account (usually by currency). These payments are booked on the originating entity's intercompany account. The beneficiary uses the entity name held on the remittance information to identify on whose behalf a payment is made, and reconcile the payment.
A RTC or SSC collects incoming payments "on behalf of" its participating group of companies through a single account (usually by currency). These incoming payments are reconciled centrally and booked on the relevant entity's intercompany account. Virtual accounts are often used to help identify incoming flows to improve automatic reconciliation.
Enabling your business through POBO and ROBO
As both Asian corporations, as well as foreign multinationals, set up regional treasury centres (RTCs) in Hong Kong, Singapore or other emerging locations, a growing number of these companies are considering the implementation of POBO and/ or ROBO. These techniques are relevant to a wide range of industries and profiles of companies, and provide a useful way for corporations that are growing internationally to reduce costs, make better use of resources, improve and standardise efficiency and control, optimise working capital and simplify cash and liquidity management (Box 2). For example, manufacturers and fast-moving consumer goods (FMCG) companies can use on-behalf-of solutions to establish a common, centralised payments/ collections processing model to support complex distribution and sales models, and facilitate change without adding to administrative, banking or technical overheads. Furthermore, by building a structured, streamlined approach to payables and receivables, new entities can be added, either through organic growth or M&A, without adding to the number of external bank accounts.
While POBO and ROBO have become well-established in Europe and North America, with well-documented benefits, the situation has been more uncertain in Asia, with different views on the viability of these techniques. In particular, the number of currencies and currency controls, restrictions on non-resident account, regulations in intercompany lending and central bank reporting requirements, such as in India, Malaysia and China (where entities need to be registered as a financial institution) have posed obstacles in some parts of Asia. However, the number of success stories in Asia is growing. Banks, regulators and corporations are working through the opportunities and constraints that exist, particularly for USD-denominated flows, while ROBO and ROBO are becoming widespread in locations such as Singapore, Hong Kong, Australia, New Zealand and Japan.
"Clients are keen to explore the potential for POBO or ROBO within their business, leveraging our experience and expertise derived from successful implementations across different industry segments, and our close engagement with regulators to design a strategy that works on a country-by-country basis. Engaging a banking partner that has relevant expertise to provide guidance and support on POBO or ROBO is critical to ensuring that the design and implementation of these strategies are realistic, and achieves the company's liquidity, cost and governance objectives."
Navinder Duggal, Group Head of Cash Product Management, DBS
Another difficulty, although not unique to Asia, is that banks and clearing systems may use different formats to manage and exchange information. This can lead to remittance information being truncated or removed from payment messages between systems/ counterparties, making it difficult to identify and reconcile incoming payments, and potentially resulting in a large number of supplier queries. However, with the use of XML ISO 20022 formats becoming more prevalent, this challenge is becoming less of an issue, as data is passed consistently through the payment process. ISO 20022 formats also include a structured field to indicate the entity on whose behalf a payment is being made, therefore supporting POBO and ROBO, and supporting automated reconciliation and account posting.
New opportunities through virtual accounts
A major advancement in automating the reconciliation of incoming flows, is the launch of virtual accounts, which has become integral to the ROBO proposition. Virtual accounts enable companies to provide customers with account details that are specific to that customer, (or to an entity, business line etc.), which are then linked to a central collections account. The virtual account information makes it possible for companies to identify, reconcile and post incoming flows to its customers' accounts automatically.
"DBS provides single-country virtual account solutions in key markets of Asia, which have delivered significant value to our clients in their reporting and reconciliation processes, whether or not they use these solutions in conjunction with ROBO. For example, a shopping mall with multiple tenants can reconcile rents more easily, as can FMCGs with a large number of distributors. We are enhancing this solution to cater to multi-currency, multi-country requirements, with enriched remittance information to support automated processing and enhanced reporting."
Navinder Duggal, Group Head of Cash Product Management, DBS
A disciplined approach
Irrespective of the countries in which POBO/ ROBO are implemented, the market and regulatory considerations also need to be balanced with the needs of internal stakeholders, for whom these techniques may represent a major change from existing practices. Effective communication of the benefits, strong senior management support and a proactive approach to change management are essential. In addition, participating business units have an essential role to play in the success of POBO/ ROBO implementation, so they need to be fully engaged. Intercompany agreements between participating group companies and the payments/ receivables are likely to be required, and there may be legal issues to address with customers to ensure that a payment made by one entity settles the debt of another, which may require a change to the contractual conditions.
There are technical implications too. For example, systems used for payments processing need to support the 'on behalf of' field contained in the ISO 20022 format. With a strong business case, dedicated and appropriately skilled teams that include RTC or SSC, the bank, technology vendor(s) and business unit finance leaders, together with a disciplined approach to change management, the advantages of POBO and ROBO can be transformational, and provide a robust platform for growth.
Example reasons to consider POBO or ROBO
| || |
|Bank relationships and accounts||Rationalise bank relationships and reduce the total number of accounts by channelling payments/ collections through a single account per currency|
|Liquidity management||Simplify liquidity management by rationalising accounts|
|Standardise working capital metrics||Implement more consistent payment terms to improve control and visibility over liquidity requirements.||Implement more consistent customer credit terms to improve control and visibility over liquidity, and refine credit risk decision-making|
|Use of resources||Centralise payments/ collections processing to concentrate expertise and free up local resources|
|Technology||Rationalise and centralise technology, reducing IT maintenance and administration |
Streamline and standardise bank connectivity
|Process and control efficiency||Leverage consistent technology and a centralised organisation to improve consistency and efficiency of processes, controls and reporting|
|Tackling fraud||Achieve more consistent training, awareness and control over both internal or external fraud attempts|
|Improve payment automation and digitisation||Achieve more consistent use of electronic payment instruments, reducing costs and improving control and auditability||Offer customers greater flexibility in the use of electronic payment instruments by upgrading and standardising collection practices and systems|
|Accelerate collection reconciliation and account posting||By implementing ROBO in combination with virtual accounts, RTCs and SSCs can automate reconciliation of incoming flows and post to customer accounts more quickly, freeing up credit limits to allow more business to be conducted|
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