Source: KPMG Corporate Treasury News, Edition 40, February 2015 Netting is dead. It is no longer needed. Improved ERP technology and treasury management systems, in particular, have sealed its fate. Although efforts continue here and there to sustain the final lingering forms of netting, these are unlikely to last. Soon it will no longer be met with even in the smallest of micro-ecosystems. The reason can be found in today's 'better yet cheaper' technologies.
Once upon a time, intercompany receivables and payables were settled on a 1:1 basis using bank transfers. In the wake of expanding globalization, one consequence was an increasing volume of cross-border payments. Global cash pooling was still in its infancy at the time, to say nothing of transparency of bank balances. In many countries MT940 bank statements were about as common as flip-flops in Greenland. Treasury systems were simply asset management systems with a few nice cash management and daily disposition features. Only systems aimed primarily at the banking sector included more risk management functions. The high cost of cross-border payments and the steadily rising need for liquidity due to lack of same-currency cash pooling (as in the first EUR cash pool concepts) called out for solutions. Before technical solutions began to appear, some global corporations would actually create their own manual in-house banking solutions with clearing accounts using a sophisticated fax-based process. These might send intercompany payments from a company in country A through in-house bank 1 in country B, which would in turn route the payments through in-house bank 2 in country C to the beneficiary in country D. Got that? The transactions at each stage were posted manually. And then came the era of netting, a technical solution to both issues. Instead of settling receivables and payables 1:1, could they not first be collected and netted out and only the residual difference physically settled via bank transfer (bilateral netting)? Indeed, could the concept not be extended to groups of n participants (multilateral netting)? A bewildering variety of technical implementations arose, some more user-friendly or stricter than others in matching receivables with payables. The solutions that remain on the market today undoubtedly represent the high point of what is technically feasible in this area.+
And yet there is one thing none of them can paper over: netting is like a penalty round in a biathlon, an unnecessary loop in the process. The penalty round is in the matching of mutual receivables and payables along with the complex process of the subsequent postings (which individual receivable goes with which payable, what information in the account statement is needed to automate further statement processing), including the necessary upload and download processes. So what's the alternative? How is a highly efficient intercompany settlement process structured today? Remittances are created at maturity for all payables, whether the beneficiary is external or internal. These are sent in the form of a remittance file to the central in-house bank, where they are processed so that external payments are routed through the banks as usual (with or without routing instructions, from the payor's accounts or on-behalf), while payments to internal beneficiaries are posted directly through the clearing account, without involving external banks. Thus the volume of internal payments and the number of individual items no longer has an impact on costs. A 1:1 posting of receivables and payables has the advantage of allowing downstream ledger processes to be fully automated without these extra loops. Moreover, practical experience shows that a process that is receivable-driven and not payable-driven (a direct-debit process) also makes debt consolidation more efficient. Even countries with money transfer obligations (MTOs) imposed by the central bank can be integrated into this process if the clearing accounts for companies in these countries are not interest-bearing, but rather simple information accounts (or if necessary two separate accounts, one for credits and one for debits) whose balance is settled monthly by bank transfer. The list of advantages goes on, from more uniform processes (one and the same process for internal and external payments) to use of clearing accounts to settle FX transactions, even if the company is not a cash pooling participant.
By now there are plenty of system options, whether ERP or TMS-based. What they all have in common is a clearing account logic that makes it possible to generate the appropriate posting information from remittance files. What space is left for netting?
Author: Carsten Jäkel, Partner, firstname.lastname@example.org
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