How treasurers can help reduce payment spend

Payment costs can escalate if not kept under review. Thomas Knudsen explores practical steps to limit the damage

Despite SEPA, Open Banking and interchange fee regulations, organisations complain that their payment costs continue to go up – an issue that Brexit seems to be amplifying in some cases. 

Some organisations monitor payment costs very carefully and make a point of exploring ways to reduce their spend. However, others might not have the visibility over costs to fully understand what is happening – or they are complacent about the issue. Meanwhile, payment costs are taking away an increasing chunk of their revenue.

What should treasurers do? As always, you need to understand what you pay to providers and be aware of the costs of running the payment processes. The latter is important, as a large part of cost is often hidden in inefficient processing.

Benefits for treasurers

Treasurers often only get involved if their payment provider is a bank. What’s more, in organisations with very high payment volumes, payments are often owned by someone in the business closer to operations. So, should a treasurer care about those non-bank payments? I think they should. Getting involved has benefits both for the organisation and to treasury itself, as it can draw on treasury’s cash management and analytical skills to improve payments. 

Working with clients, I have seen the following benefits:

• A better understanding of external and internal costs helps drive down costs and inefficiencies. Often, total costs are underestimated and have not been reconciled back to the rate card for a long time. It’s common to see master contracts that were signed years ago when the payments landscape was different. This can mean service definitions are out of date and new charges have been introduced that are outside the contract scope, with no review of related fees.
• An exploration of alternative payment methods could help drive down costs and even increase competition. Currently, the majority of payments run through networks where there is little competition between providers. As a result, some organisations feel they have limited options for change. The more you and others push for change, the more new solutions will be brought to market, decreasing the costs of new payment methods as their usage goes up.
• A better understanding of how payment behaviours and settlement mechanisms impact your working capital and liquidity management. Often I find a lot of high-level assumptions around how an organisation’s payments work – these may have been made without ever diving right down into the payment journey to understand how each payment works and how it impacts costs, liquidity, FX risk and cash-flow reporting. Understanding the detail and interdependencies is the first step in mapping out how and where to remove internal inefficiency before renegotiating with third parties.
• Deployment of data-analytics tools and technologies that can draw valuable insights out of even huge and complex payments data sets. Most organisations have a large amount of payments data available both in their internal systems and accessible from their providers. Now data-analytics tools and capabilities can crunch even complex and incomplete data sets coming out of older legacy systems. In some cases, the use of data analytics means treasurers can implement regular payment performance reporting in real time, enabling them to react when there are changes in payment patterns and costs.

These are all areas where treasury professionals are skilled, so why not work with others in the organisation to drive change and improvements in the payments area? There are also benefits specific to treasury, namely better forecasting, improved FX risk management based on a fuller understanding of FX in your payments, and decreased working capital needs due to better alignment of liquidity with payment cycles.

Connecting with others in the organisations with links to or responsibility for payments in the organisation is the way forward. Understand what is being done to improve payments and current strategy. Ask where the challenges are and how treasury can help. Use your network and seek out insight on what others are doing and, if necessary, bring challenge to the stakeholders in your organisation if there is little progress to improve matters. 

Help your organisation drive a payments strategy and set ambitious targets, then put your skills to work and start reaping the rewards.

About the author

Thomas Knudsen is a senior manager at PwC