What is PoBo and CoBo? Streamlining Treasury Operations with Laurent Geunens
Treasury management, including the intricacies of POBO/COBO (Payments on Behalf Of/Collections on Behalf Of), is the heart of any organization’s financial operations. It is pivotal in optimizing financial resources, managing risks, and ensuring liquidity. However, as simple as it might sound, managing a company’s treasury operations is no easy task, especially for large multinational corporations. The challenges of intercompany loans, executing payments, and interest calculations can make the process complex and time-consuming.
In this article, we bring you the discussion between Guillaume, our podcast host, and Laurent Geunens, a treasury consultant. Laurent shares his deep understanding of the treasury realm, shedding light on the intricate concepts of In-House Banking, Payments on Behalf Of (POBO), Collections on Behalf Of (COBO), and their practical implications.
In this article, expect to learn:
- What Is POBO COBO In the First Place
- What Are the Benefits for Corporates to Have Such a Structure
- What Are the Restrictions to Be Taken into Account
- How To Implement A POBO/COBO Structure Technologically
- Resources And Location Wise
- The Type of Structures Laurent Implemented When He Was a Treasury Consultant
- Whether Fintech Can Have an Impact on The World of In-House Banks And POBO/COBO
- And Much, Much More.
Whether you’re a treasury professional looking for a better way to manage your company’s finances or someone just getting started in this field, this conversation is packed with practical insights and information that you’ll find extremely valuable.
Let’s dive in and uncover the game-changing possibilities of these financial management tools.
Laurent Geunens: Corporate Treasury Manager of Punched Powertrain and His Insights on POBO/COBO
Laurent Geunens, the Corporate Treasury Manager at Punch Powertrain, introduces us to his role and company. Punch Powertrain is a Belgium-based global leader in innovative transmission and propulsion systems for the automotive industry and mobility providers. The company focuses on conventional, hybrid, and full EV solutions, encompassing integrated drive units, power electronics reducers, and more.
Now, you might be wondering why this information is important to us. It sets the stage for understanding why Guillaume has invited Laurent Geunens to discuss the complex topic of POBO/COBO, and also, Laurent’s role gives him unique insights into the topic we’re discussing.
POBO/COBO: Breaking Down the Complex Topic
Here comes the fun part. POBO stands for Payments On Behalf Of, and COBO is Collections On Behalf Of. These are specific structures corporations use to manage their finances, and Laurent has extensive experience implementing these structures.
In simple words, POBO is where a central corporate entity, like a company’s main office, makes a payment or pays an invoice to an external bank account that belongs to one of its subsidiaries. You might think this seems a bit complex and certainly can be, but there are some key advantages.
The Benefits of Using POBO/COBO Structures
Laurent explains why companies would choose to use POBO and COBO. It’s not because they love complexity for the sake of it but because these structures can bring substantial benefits to a corporation:
- Reduced Bank Accounts: Using a POBO/COBO structure reduces the need for multiple bank accounts, translating into lower bank charges and general overhead costs.
- Improved Cash Visibility: By centralizing payments and collections, companies can have a clearer view of their cash flow. More transparency equals better financial management.
- Better Risk Management: Centralizing payments also means centralizing risks, like foreign exchange (FX). If a subsidiary needs to make a payment in a foreign currency, they don’t need to open a new bank account in that currency. The central entity can make the payment, managing the exposure centrally.
- Simplified Operational Processes: Implementing POBO/COBO can simplify operational processes, leading to technology simplifications and scalability.
So there you have it! While the POBO/COBO structure might initially seem complex, Laurent’s insightful explanation reveals its value. POBO/COBO is a tool that can help corporations simplify and streamline their financial operations, offering greater visibility, control, and scalability. Now isn’t that something every treasury professional would want for their organization?
Understanding the Concept of In-house Banking and its Connection to POBO-KOBO
Let’s understand the term ‘in-house bank’ and its relevance to POBO-Kobo. Drawing from his experience as a Corporate Treasury Manager, Laurent explains the idea and how it benefits the organization.
In-house banking – A Quick Overview
In short, in-house banking is like having a mini bank inside your company. But let’s be clear; it’s not a conventional bank. Its primary job is to handle funds and lend them to various departments or subsidiaries.
You might be wondering why a company wants an in-house bank. Here are a couple of reasons. Firstly, it allows for better control and efficient use of cash within the group. Secondly, it’s a cheaper alternative because the money is already part of the company. It removes a lot of red tapes since you don’t have to go to an external bank whenever you need a loan.
For instance, if you’re a US company with a branch in Belgium that needs 300K, you don’t have to go through the long process of requesting a loan from a Belgian bank. Instead, your in-house treasury can quickly respond to your needs, potentially at a lower cost.
Arm’s Length and Transfer Pricing – The Technicalities
When Laurent brings up ‘arm’s length’ and ‘transfer pricing,’ Guillaume wants to delve into these terms. Let’s break these down a bit.
Arm’s length is a principle to ensure that transactions, particularly those involving pricing, are done fairly. It usually means comparing a rate or price to a benchmark, like deposit rates, yield curves, or central bank lending rates. For example, you can’t loan money to a subsidiary for free if the market interest rate is 4%. It needs to be on par with what’s happening in the market.
On the other hand, transfer pricing relates to how goods, services, or funds are priced when transacted between entities of the same group. This price has to be fair and reflect the market conditions to avoid unfair competition within the company or globally.
These technical terms might sound complex, but they’re essential to ensure fair transactions within your organization and comply with market standards.
In essence, while in-house banking brings autonomy and efficiency, it still operates within certain boundaries to ensure fairness and market alignment.
In-House Banking: Capital Constraints and Operation Mechanisms
In this section, Guillaume, the host, and Laurent Geunens, the guest, discuss the concept of in-house banking. Their conversation revolves around the resources, management, and operations of in-house banking. Let’s break down their discussion.
Understanding In-House Banking
Our first question probes whether an in-house bank’s capital is tied to the cash available to a company. Although this statement holds some truth, Laurent clarifies it’s more complex.
In-house banking involves much more than just managing the company’s cash. It includes smart strategies such as cash pooling, where excess cash from different parts of a business group (entities A, B, and C) is centralized. This centralization enables smoother cash management as any entity needing cash can borrow from this collective pool.
Balancing External and Internal Cash Needs
The in-house bank isn’t limited to internal resources if the need arises. It can approach the market, borrow funds, and use them internally. Centralizing these processes safeguards against external exposures and offers leverage for negotiating deals with banking partners.
Simplifying Transactions with In-house Banking
Regarding financial dealings, instead of having multiple subsidiaries engage with the market individually, the in-house bank acts as a central hub. This centralization streamlines processes and provides a stronger pricing negotiation platform with banking partners.
How Do Companies Monitor Cash Flow in In-house Banking?
The next inquiry is about the tracking process in an in-house bank. Although manual tracking is possible, Laurent notes it is laborious and inefficient.
Utilizing Software for Efficient Cash Flow Management
Most businesses employ a range of systems to automate and manage the process. These include a payment factory for executing payments, a Treasury Management System (TMS) for handling positions and exposure management, and an Enterprise Resource Planning (ERP) system for accounting needs.
Ensuring Accuracy through Reconciliation
To ensure accurate tracking of payments made on behalf of other entities, Laurent speaks about using current or virtual accounts. These accounts record transactions executed by the parent company for a subsidiary.
The Role of Virtual Accounts
Virtual accounts act as a ‘dummy’ IBAN. Money is transferred to this IBAN but goes into the main company’s account. However, these virtual accounts facilitate easy tracking of the money’s rightful owner.
What’s a Current Account in In-House Banking?
The conversation then moves to understanding current accounts in the context of in-house banking. Laurent explains that within in-house banking, a current account is the position account maintained between the parent company and a subsidiary. It helps to record payment transactions and keeps track of the money owed by each entity.
Understanding POBO and COBO
POBO and COBO are two key concepts introduced. A central finance entity (the header) executes payments on behalf of the other entities (the subsidiaries) in a group with multiple entities. This process enables cash centralization, better visibility, and savings regarding bank account requirements.
Deciphering COBO or LOBO: Same Concept, Different Names
Finally, Laurent brings up the term LOBO (or ROBO, Receipt on Behalf of). This is just another term for COBO, signifying the same function of collecting money on behalf of other entities. Depending on the company, either term may be preferred.
Can POBO and COBO be Set Up Globally or Regionally?
Getting into the details of in-house banking, a key question arises. Can POBO and COBO be set up globally, or do they work best regionally? The answer, as explained by Laurent Geunens, isn’t straightforward.
Determining Factors for POBO and COBO Setup
As it turns out, the possibility of establishing POBO and COBO on a global or regional scale hinges on several aspects. Here’s what you need to know:
- Company Structure: The way a corporation is structured plays a significant role. A worldwide setup might suit some, while a regional approach could work best for others.
- Global Reach: The extent of a company’s operations across various countries is another crucial factor.
- Local Restrictions: Every country has its own set of rules and regulations that could impact in-house banking operations. In certain countries, it’s not even feasible to establish an in-house bank or operate it globally.
Understanding Regional Limitations
In some places, tax and salary payments must come from a bank account within the same country. This means that POBO and COBO might need to adapt according to regional necessities. China, for instance, prefers keeping cash within the country due to stringent currency policies. They prefer having control over money movement in and out of the country.
The Role of Consultants in In-House Banking
Such complexities underline the importance of guidance from consultants. These experts can help you navigate the labyrinth of regional restrictions, company localization, and tax requirements, ensuring you make informed decisions for your treasury operations.
Why Do Some Countries Require Domestic Bank Accounts for Certain Payments?
Delving deeper into this subject, one might wonder why certain countries necessitate domestic bank accounts for tax and salary payments. Here’s what Laurent Geunens had to say:
Keeping Cash in the Country
Countries like China have stringent currency policies. They prefer control over the cash flow within their borders, making it essential to execute tax and salary payments from domestic bank accounts.
Currency Control and Tax Implications
A local bank account requirement often has a tax or currency control reason behind it. This is particularly prevalent in countries with restricted currencies, such as China or certain Latin and South American nations.
Agreements and Treaties
Moreover, agreements or treaties with the government might also impact your banking decisions. For instance, a specific tax agreement might make it more advantageous for your company to operate in one country over another.
Overall, the setup of POBO and COBO depends heavily on individual company structure, the extent of globalization, and specific regional restrictions. It’s always advisable to delve deep into the nuances of these elements before making a final decision.
Where Should Corporations Set Up Their POBO/COBO and In-House Bank?
Selecting the right location for setting up a POBO/COBO center, or even an in-house bank, might seem trivial. However, the reality is quite different. As Laurent Geunens clarifies, various factors come into play when deciding the appropriate location.
The Role of Company Locations in Setting Up POBO/COBO
Firstly, the location of your company is crucial. Setting up your POBO/COBO center where your company is already based is often sensible. For instance, if your company has subsidiaries in Belgium, the Netherlands, and the UK, establishing your center in Germany wouldn’t usually be advisable unless there’s a significant tax advantage or other compelling reasons.
The Importance of Your Treasury Team’s Location
Another vital factor is the location of your treasury team. They are already situated in a specific place for particular reasons. So, evaluating whether it’s beneficial to maintain your treasury center and set up your in-house bank or initiate your POBO/COBO operations makes sense.
How Do Tax and Regulations Influence Your Choice?
Naturally, taxes and regulations also heavily influence where you establish your treasury center. If your in-house bank generates a profit or a loss, you’ll need to consider whether you’ll be taxed on that and where the most favorable conditions lie.
How Does an In-House Bank Generate Profit?
You might be wondering how an in-house bank could make a profit. An in-house bank can take on multiple roles. It can merely support cash pooling and POBO/COBO operations without taking on any risk. Alternatively, it could take on a broader role, taking over the exposure from the subsidiaries.
In the latter scenario, the in-house bank typically receives payment for this service. This could be a small margin or increased interest in the in-house bank position. Consequently, your in-house bank could generate a profit, depending on its role and the interest rate applied.
The Concept of Management Fees for an In-House Bank
The concept of management fees for an in-house bank is not very common. If applied, these are usually included in the premium asked for the in-house bank position. However, as Laurent Geunens points out, applying a management fee could be possible.
In summary, setting up a POBO/COBO center or in-house bank isn’t as straightforward as it seems. Multiple factors, including the company and treasury team’s location, tax considerations, and the in-house bank’s role, all influence the decision. As such, careful deliberation and planning are needed to ensure you make the most beneficial choice for your organization.
Quantitative Benefits and Requirements of Implementing a POBO/COBO Structure
Setting up a Payments On Behalf Of (POBO) or Collections On Behalf Of (COBO) structure can lead to substantial cost savings for a company. But what exactly are these savings, and what requirements must be considered for implementing a POBO/COBO structure?
Cost Savings with POBO/COBO
The key benefit of implementing a POBO/COBO structure is the substantial reduction in the need for multiple bank accounts. With fewer accounts to manage, you can save on costs associated with maintaining these accounts.
You also get better pricing on your foreign exchange (FX) transactions. If you have an in-house bank, it can handle all the currency exchanges. For instance, if you have Euro subsidiaries that need to make payments in US dollars, your in-house bank can handle these transactions. The in-house bank can then ensure they are fully hedged against the currency risk in the market, resulting in more cost-effective FX transactions.
Simply put, fewer bank accounts and transactions mean less spending on bank fees and FX spreads. And if you’re a large multinational company, these savings can add up very quickly.
Size Requirements for Implementing a POBO/COBO Structure
In terms of the company size needed to implement a POBO/COBO structure, it can technically be done at any size. Even a smaller company could set up a POBO/COBO structure, though this might involve more manual work.
However, the real benefit of a POBO/COBO structure comes into play when you can leverage technology like a payment factory, Treasury Management System (TMS), or large-scale Enterprise Resource Planning (ERP) system. These systems allow a centralized team to manage all transactions efficiently.
Investing in technology for POBO/COBO isn’t cheap. But once in place, it provides scalability, making adding new subsidiaries or managing mergers and acquisitions more cost-effective. The structure essentially becomes a plug-and-play system, saving time and money.
In conclusion, implementing a POBO/COBO structure can lead to significant cost savings, especially for larger companies. However, the initial setup, including technology investment, should be carefully considered to ensure the benefits outweigh the costs.
Teams Involved in Implementing a POBO/COBO Structure and Its Interaction with Intercompany Netting
To set up a POBO/COBO structure in your organization, you need to understand various teams’ roles and how this structure relates to intercompany netting. Let’s break down these concepts.
Teams Involved in a POBO/COBO Setup
Setting up a POBO/COBO structure isn’t only a treasury affair. Multiple teams within your organization, particularly the Accounts Payable (AP) team, come into play.
When a vendor sends an invoice, the AP team takes charge. They check all details on the invoice – from the VAT number to the right company name and even the purchase order linked to it. The AP team initiates the payment once all details are verified and approved.
Your AP team can even automate the payment process if you have a payment factory or an Enterprise Resource Planning (ERP) system. This can be particularly useful for entities that lack a bank account in the needed currency. The system can automatically recognize this and initiate payment from another account.
Relationship with Intercompany Netting
Intercompany netting and POBO/COBO are related but serve different functions.
A POBO/COBO structure is primarily for external payments. On the other hand, intercompany payments, as discussed with Craig Chapman, are usually handled via a netting module or cashless settlements.
For instance, if one entity owes another a significant sum, they can settle it without moving cash. They record the transaction on a current account, thus avoiding transaction costs. This approach of cashless settlements keeps track of the debt, effectively recording who owes what and in what quantity.
In summary, implementing a POBO/COBO structure involves various teams within your organization, not just the treasury. The process might seem complex initially, but with clear roles and automation, it can significantly streamline your payment processes.
The Common Tax and Legal Implications of Implementing POBO/COBO
Understanding the tax and legal aspects is important when implementing a Payments on Behalf of (POBO) or Collections on Behalf of (COBO) structure. Every country has its rules, so let’s review some common tax and legal implications of these setups.
Tax Implications and the Need for a Business Case
When implementing a POBO/COBO, tax-related issues are a common concern. Some countries require local tax payments, which can complicate the process. For example, Japan has stringent legal and tax restrictions that make it difficult to implement a POBO structure. If you’re considering implementing a POBO in such a country, assessing your goals and seeing if the benefits outweigh the challenges is crucial.
Countries like China allow the creation of cash flow, but moving money out of the country to another continent, like the US, can be more complex. For cross-border cash movement, you need to follow strict rules. This issue is restricted to POBO/COBO and applies to getting cash in and out of the country.
Given these complexities, the key is to evaluate your business case thoroughly. Always check if it’s worthwhile to implement POBO/COBO or a cash pool, especially in regions like Asia and Latin America. In other words, the benefits of implementing POBO/COBO for your entities located in these regions should be clear.
More Flexibility in Europe and the US
While the Asian and Latin American markets might pose some challenges, the European and US markets offer more flexibility. Large corporates are increasingly accepting and implementing POBO/COBO setups due to their clear benefits.
In summary, when planning to implement a POBO/COBO structure, you must consider the tax and legal implications. This may require thoroughly examining the potential benefits and drawbacks in different regions.
Implications for Third Parties Dealing with a POBO/COBO Structure
When dealing with a company that operates on a Payments on Behalf of (POBO) or Collections on Behalf of (COBO) structure, you might have questions about what this means for you as a third party. Laurent Geunens, an expert in treasury operations, offers some valuable insights on this topic.
Understanding the POBO/COBO Structure
According to Geunens, when a new business relationship is initiated, the company will exchange crucial information with you. This exchange typically includes the setup of clients in their systems, which could be an Enterprise Resource Planning (ERP) system or a Document Management System (DMS).
The company will ask for your bank account details during this setup. Here’s where things may differ when dealing with a POBO or COBO structure. The payment may not come from the company you’re dealing with directly. It could come from one of their treasury centers, possibly offshore or abroad.
Navigating the Concerns
As a third party, you may find this payment method puzzling, considering the high level of vigilance in today’s corporate world against anti-money laundering and fraud. It might raise questions about receiving a payment from an entity (DEF) different from the one you’re dealing with (ABC).
However, Geunens assures that this process is typically seamless after the necessary due diligence is done and the process has been explained to you. The company would provide proof that the bank account in question is linked with their entity.
Geunens highlights that this setup doesn’t typically cause problems in regions like Europe and the US. However, payments originating from certain countries might draw attention, not only from you but also from the banks processing these payments.
How Does the Technical Setup of a POBO/COBO Structure Work?
As a treasury professional, you might wonder about the technical setup of a Payments on Behalf of (POBO) or Collections on Behalf of (COBO) structure. Laurent Geunens, an expert in the field, offers an explanation that sheds light on this process.
Implementing the POBO/COBO Structure
According to Geunens, the setup of a POBO/COBO structure can seem complicated, but it can be simplified. Once your business case is established and you’ve decided to proceed with a POBO/COBO structure, you must set rules within your payment hub or factory. These rules help your system recognize when to use a different payment bank account.
Let’s break down the process into simpler terms:
- Step 1: Your technical system is built to recognize a POBO/COBO structure.
- Step 2: You set specific rules for entities needing payment. Based on these rules, your system can automatically identify whether to use the entity’s bank account or a different one for payments.
Although this explanation simplifies the process, implementing these rules and systems can be intricate, requiring detailed knowledge and experience.
Navigating Payment Rules
What’s interesting about the POBO/COBO structure, as Geunens highlights, is its flexibility. You can set rules for an entity to use POBO for certain payments but not for others.
For instance, your system can identify different types of payments, such as urgent, non-urgent, and specific types like payroll and tax. Depending on these classifications, you can create rules for executing a payment via POBO or using the entity’s bank account.
Setting up a POBO/COBO structure requires careful consideration and technical setup. However, once implemented, these structures offer flexibility and efficiency in managing your company’s payments.
What are the Next Steps in Setting Up the POBO/COBO Structure?
If you’re a treasury professional who’s set up the rules for a Payments on Behalf of (POBO) and Collections on Behalf of (COBO) structure, you might be wondering about the next steps in the process. Laurent Geunens provides a detailed explanation of what comes next.
Setting up an In-house Bank Account
The first thing you need after setting up the rules is an in-house bank account. This is necessary to keep track of the POBO and COBO positions between your corporate and its subsidiaries. These positions occur when you make or receive payments on behalf of your subsidiaries.
Creating Accounting Rules for POBO and COBO
After this, you must establish rules in your Payment Management System (PMS) that recognize POBO and COBO transactions. These rules help identify the entity making or receiving the payment. For instance, if a payment is made for entity ABC, the rule recognizes this and makes appropriate accounting entries in the ERP system.
Handling Interests in an In-house Bank
Once the in-house bank is set up, you may have to consider interest settlements. You can customize these settlements to be monthly, quarterly, or based on different rates, such as LIBOR plus a margin.
Considering Long-term Loans
One of the fascinating points Geunens touches on is transforming a current account into a long-term loan. This could occur if an entity within the cash pool structure has borrowed more than it lent for an extended period. If this situation arises in a POBO/COBO structure, you can convert the current account into a long-term loan. However, it’s important to note that different principles apply to short-term and long-term borrowing, requiring different interest rates.
Integrating Cash Pool and Cash Centralization Structure
Lastly, Geunens discusses integrating the cash pool and centralization structure into the POBO/COBO system. For instance, if a company pays on behalf of another but doesn’t collect payments, it could lead to a cash shortage for the paying entity. This situation could be resolved if the collections for this entity also go to the header, which is usually the same entity executing the payments on behalf of the subsidiaries.
Do Subsidiaries Involve in POBO/COBO and Cash Centralization Need a Bank Account? How is the Technical Setup Done?
When you’re handling money movements on behalf of your subsidiaries through processes like Payments on Behalf of (POBO), Collections on Behalf of (COBO), and cash centralization, you might wonder if each subsidiary still requires its bank account.
According to Laurent Geunens, every legal entity typically needs a bank account in its own country just for setup purposes. Even if you technically might not use the account much due to central management, a bank account remains linked to each legal entity.
Furthermore, Guillaume and Laurent outline the technical requirements for implementing a POBO and COBO structure. Here’s a clear summary:
- Treasury Management System (TMS): This enables you to establish an in-house bank, a central component for running the POBO and COBO structure.
- Enterprise Resource Planning (ERP) system: You need this to record all the accounting entries and manage the financial details for the central unit and its subsidiaries in the POBO and COBO structure.
- Payment factory or payment hub: This is necessary for executing payments, often in the form of batch files, helping further centralize the process.
Guillaume also asks if some third-party systems or vendors could enhance the whole structure or bypass the need for a TMS or payment factory. Laurent confirms that some banks offer POBO and COBO solutions with virtual accounts. These banks manage positions and ensure payments are executed correctly. However, it’s important to remember that your organization usually needs to handle the accounting behind this.
Finally, it’s essential to note that regardless of your internal setup, you always need an external bank to execute payments. There’s no way around it – external banks are vital for payment execution. Regarding foreign currency transactions, the FX or exchange rates come into play, potentially requiring a spot transaction if you don’t have the necessary currency in your account.
While optimizing your internal operations with a POBO and COBO structure, don’t forget the integral role of external banks and the necessary bank account setup for each legal entity.
Does Emerging Technology Hold the Key to Further Developments in POBO/COBO?
In this discussion, Guillaume seeks Laurent’s viewpoint on the potential of emerging technologies, particularly fintech, in the evolution of Payments on Behalf Of (POBO) and Collections on Behalf Of (COBO). Laurent acknowledges that fintech can contribute to developing solutions for various corporates, much like how treasury management systems (TMS) vendors bring different advantages and disadvantages.
The Fintech Effect on POBO/COBO
Fintech companies often focus on specific markets, for example, trade finance or forex trading, and that focus could streamline and standardize processes in those areas. While large-scale TMS setup can be time-consuming and requires proper incorporation with the company’s banks and ERP systems, fintech might offer more plug-and-play solutions. These solutions could be particularly helpful for businesses smaller than multinationals but still sizable enough to need more sophisticated solutions.
Remember, while these fintech solutions might offer fewer customization options than a complex TMS setup, their simplicity can be a bonus. Not every company needs a highly intricate setup to carry out POBO/COBO effectively.
The Role of Real-Time Payments
Guillaume moves the discussion towards real-time payments and payment tracking solutions, such as Swift’s GPR. Though these aren’t directly linked to POBO/COBO, any technology that facilitates faster payments and reporting could indirectly enhance POBO/COBO.
Laurent agrees that key global drivers could boost the POBO marketplace. With globalization, companies deal with suppliers and customers in various locations, necessitating legal entities but not necessarily bank accounts in each location.
The Growing Importance of Liquidity and Treasury
Another crucial driver is the growing importance of liquidity management. More companies acknowledge how vital cash and liquidity are, bringing treasury to the forefront as a significant function. As cash and liquidity are managed more closely, companies will look for opportunities to optimize and achieve cost savings.
This is where POBO/COBO comes in, offering benefits like fewer bank accounts, cost reduction, enhanced cash visibility, improved risk management, and control centralization. All these factors contribute to making POBO/COBO a more standardized practice in the market.
What Is the Role of Corporate Treasury in The Era of Technology?
In this part of the podcast, Guillaume and Laurent discuss the importance of corporate treasury in the current age of advanced technology and share an example of how a POBO/COBO structure is implemented for clients. Here’s a quick breakdown of their conversation:
Corporate Treasury is Key
- Cash Management: Treasurers have a crucial role in managing cash. They track where the cash is, when it will come in, and when it will go out. This information aids in better decision-making, particularly in challenging times like the COVID era.
- Risk Management: The treasury function also plays a significant role in managing financial risk. This involves examining things like counterparty risk management and wallet sharing.
Setting up a POBO/COBO Structure
Laurent details a step-by-step guide to setting up a POBO/COBO structure, sharing his experience with a client:
- Defining the Scope: The initial step involves understanding what Ina’s bank will cover. This could include loans, cash pooling, and the POBO/COBO.
- Setting Up the Structure: Once the scope is defined, the next step is to set up the structure and connect all the necessary systems to recognize and execute a POBO/COBO transaction. This involves determining the main entity in Ina’s bank and the subsidiaries that will be a part of it.
- Developing Current Accounts: After the structure is set up, each participating subsidiary must be given a recognizable point or a ‘fake IBAN.’ Laurent and his team established a standard naming convention for this, ensuring clear identification of each participant.
- Managing POBO/COBO Transactions: To manage POBO/COBO transactions, interfaces were developed between the company’s ERP system and the TMS system. This was done to recognize and execute POBO/COBO payments through the TMS or directly from the ERP to a payment hub.
The Role of Treasury Technology
Laurent emphasizes the importance of technology in modern treasury management. Building interfaces, transmitting files between systems, and staying updated with market trends are key activities a treasury technology consultant must undertake.
Remember, having the right technology can make treasury operations more efficient and enable real-time tracking and reporting. The ultimate goal is to ensure you can correctly report who paid what to which entity after payment. So, if you’re a treasury professional, don’t shy away from embracing technology and its many benefits. It could be just what your organization needs to streamline operations and improve decision-making.
How Did the In-House Bank Benefit the Client?
Laurent Geunens discussed the benefits that a specific client reaped by implementing an In-House Bank and also touched upon the typical timeline required for establishing a ‘Probable Structure.’
The In-House Bank Advantage
When clients implemented the in-house bank, they gained enhanced visibility on their inter-company loans and POBO (Payments on behalf of) transactions. With this arrangement, the client could automate their complete interest process, including:
- Calculating interest
- Posting interest
- Sending all related entries to their ERP (Enterprise Resource Planning) system
Automating these processes was a crucial improvement for the client, bringing about considerable time savings. Many scheduling and automated jobs involve sophisticated EMS (Enterprise Management Systems). Moving from a manual process, the tasks became 50% more efficient, thanks to automated jobs.
This automation also enabled the system to fetch market data automatically. Interest rates were automatically fed, and all other information came directly from the ERP systems. The interest calculation at the month-end was simply a matter of validation and control to ensure no mistakes were made. Nearly all operations were automated, a massive time-saver for the team.
What is the Typical Timeline for Implementing a Probable Structure?
Guillaume then discussed the typical timeline for implementing a probable structure. Laurent pointed out that setting a fixed timeline is challenging as it could range from a few months to several years. It mainly depends on the size of the project, the company, and how broad the scope of implementation is – whether it’s just for Europe or includes the US, for example. The implementation process could also be more complex in certain countries with more stringent regulations.
Notably, there’s often a process of banking rationalization happening alongside. When setting up a new cash pool structure, companies must consider their banking partners, who will be linked to the cash pool, and calculate the benefits and potential savings. Hence, the process can be lengthy, but it’s crucial for maintaining control over the treasury function.
Conclusion
In the dynamic world of treasury management, tools like In-House Banking and concepts like Payments on Behalf Of (POBO) and Collections on Behalf Of (COBO) have revolutionized how businesses operate their finance function. These innovative systems bring more visibility and control over transactions, making financial operations more efficient and manageable.
Laurent Geunens, in his insightful conversation, has done an excellent job of shedding light on these complex aspects. He provided a practical overview of how In-House Banking, POBO, and COBO function and how they benefit an organization. Thanks to automation, Laurent demonstrated these benefits through a real-world use case, highlighting the team’s significant time savings and efficiency improvements.
The timeline for implementing such a structure can vary widely, depending on the size and scope of the company’s operations. But, regardless of the time and effort, it’s an important process for maintaining control over the treasury function. From this conversation, treasury professionals of all levels can glean valuable insights and understanding of POBO/COBO, making it easier to navigate the complex landscape of treasury management.
In conclusion, whether you are just stepping into the world of treasury management or are an experienced professional, understanding and adopting these systems and concepts can lead to transformative changes in managing your organization’s finances. Embrace these innovations and set your business toward more streamlined, efficient, and controlled financial operations.
