ING: Pros and Cons of CEE Payment Factories - Marten Bleijenberg and Rob Rühl




European companies increasingly favour centralising their payment functions in countries where labour costs are low. Some have found, however, that cost over-runs and staffing problems have often eroded value. So where and how can payment factories pay dividends? Marten Bleijenberg and Rob Rühl from ING Bank discuss this issue with FDE.

Centralising payments processing offers many efficiencies, particularly if a company takes advantage of low-priced labour in, say, Central and Eastern Europe (CEE). Business analysts expect the number of payment factories in such regions to grow rapidly on the back of this value proposition, but some companies have learnt the hard way that they must choose their location with great care.

‘Payment factories are popular, but there are obstacles to implementation. The technology is there. Many companies have invested heavily in systems and want to make use of it. Next to economies of scale, an important additional driver is to have more control. The push for centralisation to provide a more regional focus has a lot of management ambition behind it, but the devil is in the details,’ says Marten Bleijenberg, head of channel management for ING's payments and cash management.

The CEE region, for example, has infrastructure, expertise and resources that are attractive to businesses in Western Europe, and will offer labour cost savings for many years to come, but there is great variation between countries in terms of how friendly they are to such operations.

Legal frameworks vary, as do tax regimes and the availability of skilled labour. In fact, a recent survey by PricewaterhouseCoopers, which admittedly provides a slightly skewed picture as it includes call centres, still showed that only around 60% of companies are satisfied with their experience of offshoring. This means a lot of projects – including some centralised payments facilities – are failing to deliver on the value they initially promised.

‘The dissatisfaction is often caused by cost over-runs and staff turnover. We are starting to see these problems emerge in the CEE region. As demand grows it becomes harder to keep people so labour costs are rising, though there is still an advantage. That is clear if you compare the labour costs in Sweden to the labour costs in Bulgaria.

However, you have to take into account that labour productivity in Sweden is much higher than in Bulgaria,’ remarks Rob Rühl, senior economist of ING's economics department.

Planning ahead

The main problem that Rühl and Bleijenberg see with the common methods of offshoring payments processes is that companies fail to plan for the long-term, instead targeting quick wins and a boost to earnings.

This, they believe, often results in a failure to take into account the scale of investment that must support a payments factory.

‘It is important to note that capital and technology investment is needed too. Labour cost is only part of the total cost of setting up a payment factory. Companies must also remember that apart from the technical aspects they must centralise organisational governance,’ says Bleijenberg.

An offshoring project can, therefore, demand a fundamental review of a company’s operating structure, and significant investment in new systems, premises, people and processes. Cost over-runs, and the prospect of higher initial costs yielding value further down the line can act as a disincentive to some companies, especially if costs hit at a very early stage in the project, which is perhaps why so few have followed through on their strategy for centralised, offshore payments processing.

Viewed in the right context, however, upfront costs reveal value over a longer timeframe. Furthermore, accepting that set up costs will be higher in the short-term makes them more obvious and, therefore, more manageable.

‘Cost over-runs in the first year are a risk, but this will improve over the years if you have a long-term plan. Of course, there is some lowhanging fruit, but remember that moving to a centralised location means replacing old systems, too,’ explains Bleijenberg.

‘Companies must also plan ahead for the next ten years. They should also look at relationships with tax authorities and regulatory bodies in each region to make sure there are no surprises,’ advises Rühl.

Where to go in CEE

ING has long recognised the many opportunities that the CEE region offers in terms of payments and cash management. It has carved out the role as guardian of the gateway to the CEE, having offices in 20 European countries and via its ING – SEB Alliance in Scandinavia and the Baltic states. Its local presence gives it an intimate knowledge of market regulation, investment rules, and possible restrictions on cash concentration and cross-border pooling.

The value of its commitment to the region has been borne out by the increasingly benign economic and political conditions in many CEE countries. CEE economies are growing at a much faster rate than countries in Western Europe, often driven by domestic demand as well as by high levels of foreign direct investment.

Though economic performance varies, the more mature economies in the region are expected to beat the average growth in the Eurozone and the US for years to come.

Some countries have made a great effort to attract payment factories, while others may have exchange restrictions if they are not part of the EU, punitive tax structures, or restrictions on crossborder cash pooling. The ING payments and cash management (PCM) monitor chart, above shows clearly that great variation emerges as soon as a company looks beyond labour cost arbitrage.

‘Some CEE countries are friendlier than Western Europe, being more liberal than states like Italy, France and Greece. The Baltic states, Hungary, Slovenia and the Czech Republic are at the top of the list, while Poland is on the low side,’ notes Rühl.

He stresses, however, that the PCM monitor is only a guide, and that each company must take into account its own specific requirements for international payments. Russia, for instance, scores far lower than others, but if a structure of a company’s operations generates a significant amount of internal payments within Russia, then it may make more economic sense to set up a payment factory there.

Similarly, Rühl notes that scale can be another defining factor in determining a country’s suitability as an offshoring location. Slovenia, for instance, scores high against ING’s ten measures, but it is a relatively small economy.

Interest in positioning payments factories in the CEE region will no doubt continue to grow, and there are no absolute answers to the question of where best to locate them. ING’s team, however, certainly feel that from their experience in the region, there are substantial opportunities for efficiency gains and cost savings. Particularly if a company is willing to examine its own needs in a detailed manner and commit to a long-term plan instead of short-term wins.

Without the right perspective, Rühl and Bleijenberg fear that many companies risk failure when there is such great potential for success. Having the right advisor on board, who understands the peculiarities of the individual CEE countries, and who has extensive infrastructure and experience in the payments market, is the best first step any company can take.

Marten Bleijenberg, head of channel management for ING's payments and cash management.
Rob Rühl, senior economist of ING's economics department.
Figure 1. 100 is the most favourable payments and cash management environment (Source: ING Wholesale Banking, economics department and financial markets research).