Receivables are the lifeblood of any business. They are foundational to the profitability of every organization.
A variety of geopolitical and macroeconomic factors are driving shifts in the business models, materially altering an organization’s liquidity profiles and funding needs. In today’s hyper-connected digital world, these shifts are causing organizations to intensify the focus on balance sheet management, and rethink working capital strategies to deploy capital efficiently, unlock trapped cash and fuel innovation.
Cash ends up becoming trapped due in the order-to-cash cycle due to a variety of reasons. According to Citi® Treasury Diagnostics, a proprietary treasury analytics tool, A/R remains one of the weakest areas for corporates, compared to other treasury processes. Less than 50% of those surveyed indicated they had implemented a centralized A/R structure at either a regional or global level. Companies that do have centralized A/R operations, on average, scored higher in areas such as straight-through reconciliation rates and the use of receipt on behalf of (ROBO) structures and electronic instruments, which are widely considered to be best-in-class.
Unlike Accounts Payables, which are completely under the control of the treasury, the Accounts Receivable (A/R)workflow is cross-functional with multiple stakeholders and no clear owner. Bringing divergent areas of the business - such as sales, fulfillment, technology, operations, A/R, and treasury - together to agree on a new, advanced approach to receivables is no easy task.
For instance, customer payment terms are typically determined as part of the sales process, which means A/R teams have little influence on Days Sales Outstanding (DSO). Things are further complicated by the fact that most companies have disjointed systems and multiple business partners that support different steps in the receivables workflow. Plus, data and funds travel separately, making reconciliation more difficult. As a result, slowdowns in DSO may become cumulative across many parts of the receivables process with no single point responsible for major delays resulting in late payments, reconciliation delays in cash application due to partial payments, and interruptions to discounts and promotions which affect incremental sales.
Renewed focus on balance sheet, cash conversation, and working capital management, coupled with digitalization, are creating unprecedented opportunities to improve A/R processes.
The influence of regulations on innovation
The regulators worldwide are promoting the adoption of instant payments and driving innovations that provide businesses with new ways of receiving payments from their customers. The push towards open banking in the UK is driving greater competition between banks as regulators mandate open banking networks that are accessible by APIs. These regulations are designed to open the door to innovations that will greatly benefit corporates.
Similarly, in Asia, regulators are fostering a big shift toward instant payments, which promises to speed commerce. Approximately 40 countries will provide instant payment infrastructure by 2020.
Banks have an opportunity to embrace these changes, combined with emerging payment schemes like open-banking and Request-to-pay to remove friction from receiving payments from their clients’ clients.
These emerging solutions utilize APIs to allow for a more simplified and streamlined process where an invoice is presented via email, including a link to the bank’s website.
The recipient can authorize the transaction directly through that link, removing the friction from the payment process – which dramatically improves the payer experience while speeding up receivables processing, making it easier for buyers, suppliers, and customers to do business. In the U.S.
"Corporates should look for a banking partner that is able to support their changing preferences and expectations, and help them succeed in today’s increasingly globalized marketplace"
The Clearing House (TCH), TCH, in coordination with its bank owners, designed and built the RTP system infrastructure from the ground up. This new service enables instantaneous availability of funds to corporates any time, any day, anywhere, and has the potential to be a great fit, for just in time supplier payments, emergency payroll, disaster relief, or insurance claims, to name a few.
Client experience takes center stage
As innovation continues to transform the A/R function, the client experience remains the primary focus for these emerging technologies. Banks are concentrating on providing a truly homogenous experience to clients, harnessing APIs, AI, machine learning, and other advancements to improve the efficiency of receivables, making it possible to conduct processes more autonomously, improve liquidity decision-making, and allow treasury to better support overall business strategies and objectives.
Highly connected A/R systems are also leveraging smart, autonomous, and advanced collection methods, including digital wallets and instant debit, enabling organizations to get more from their receivables investments. In India, for example, banks are leveraging the country’s Unified Payment Interface (UPI) to provide-commerce companies with a non-card collection method. The UPI-based solution enables companies to request payment directly from their customers’ bank accounts in real-time using an alias, such as an email address, mobile phone number, or government-issued Aadhaar unique identity number.
Collaboration is accelerating time to market
We also see an evolution in financial services where banks and third-party providers are collaborating to deliver an integration client experience. The introduction of next-generation technologies, like artificial intelligence (AI) and IOT, coupled with APIs, will soon seamlessly integrate banking functions and services into daily treasury processes, delivering a seamless connection between banks and corporates.
Many leading financial institutions have begun partnering with Fintechs to bring advanced digital solutions to bear on some of the most vexing A/R problems. For example, by harnessing AI and machine learning technology, Citi and HighRadius have introduced a solution that dramatically increases the efficiency and automation of the cash application process of matching open invoices to payments received by corporates. This addresses a common problem many corporate treasury teams face - delays in applying cash due to the difficulty in obtaining remittance information required to reconcile invoices. By bringing together disparate pieces of payment data and applying AI and machine learning, it becomes possible to use business logic to match payments received with expected receipts in a more efficient manner. The upshot is enhanced straight-through-reconciliation rates. At the same time, the treasury is able to automate manually intensive processes, thereby reducing costs, decrease DSO, optimizing working capital, and manage exceptions quickly, increasing operational efficiency.
As corporates expand to new markets and business models, they increasingly need accelerated bank account setup, flexible invoicing options, and method of payments based on varying demographics.
As a result, innovations are extending to bank account structures. More and more corporates are taking advantage of virtual account technology to get instant access to cash and segregate flows for improved reconciliation. Virtual accounts hold the promise of streamlining cash management processes and minimizing the need for future investment in sophisticated treasury management systems. As virtual accounts seamlessly integrate with liquidity management structures, treasury effectiveness is no longer constrained by the number of accounts it must manage.
Corporates need the flexibility to invoice in their preferred currency while their customers need the flexibility to pay in local currency. At Citi, we are combining bank account structures, local payment networks, and FX capabilities with the electronic invoicing solution to offer a new solution, Citi® Global Collect. This fully integrated platform connects Citi’s clients to their international payers across key markets.
Another example of A/R innovation can be found in Citi’s partnership with Vietnam-based intermediary payment service provider, Payoo. This solution facilitates consumer-to-business collections for corporates doing business in Vietnam. Here, corporates in Vietnam will be able to receive real-time payments from their customers for services, including utilities, telecommunications, and credit card bills through Payoo’s extensive digital network and physical footprint of more than 10,000 brick-and-mortar touchpoints. At Citi, we are investing in bringing all of these collections methods to serve clients and their customers in a way that is most natural to them.
These are prime examples of how banks, such as Citi, are creating new treasury services and capabilities on extensive global platforms for the benefit of businesses looking to capitalize on the latest technologies to improve A/R efficiency. Our goal is to continue to invest in providing best-in-class solutions that enable our clients to continue to manage balance sheets responsibility, unlock trapped cash, and fuel innovation.
At Citi, we are leveraging global networks and platforms, our rich suite of receivables solutions, along with collaborations with third-party technology providers, and investment in SWIFT gpi, to create new A/R solutions designed to meet treasury needs in a rapidly evolving environment. Corporates should look for a banking partner that is able to support their changing preferences and expectations, and help them succeed in today’s increasingly globalized marketplace.