Payment hubs are a buzzword in corporate finance today. But what problems do payment hubs actually solve? How can a finance practitioner decide if implementing a payment hub is right for their organization? We’ve got all those answers and more, read on!
Life without a payment hub
Without a payment hub, payments are generated from numerous departments, often from numerous different systems, and in most cases that means many different systems are communicating out to the same bank accounts. There are 3 key reasons why this is problematic:
- Increased vulnerability to fraud. Every bank connection increases your organization’s risk of fraud, because there are more ways the fraudsters can try to get in.
- More maintenance. Multiple bank connections among several systems are difficult and expensive to maintain. Without a payment hub, a company must maintain top-notch security on each of these bank connections. The impacts of these ongoing maintenance and security needs are felt within the corporate finance team, but especially with the need for added IT resources. IT resources are in notoriously short supply at almost every company, so a payment hub can help reduce the ongoing workload.
- No single source of truth. Neither the corporate nor the bank can easily tie out bank activity to actual transactions, compromising the ability for the finance team to have the most-precise data.
Because a payment hub can also assist with fraud detection, sanctions screening and communication of non-payment data, the finance organization is also faced with increased risk and inefficiencies on those fronts when not using a centralized payment solution.
What is a payment hub?
What does payment hub mean? A payment hub is a simple concept: all payment communications to the bank, for the entire company, are centralized in one single location.
Besides centralizing all payment communications to the bank, there are 3 main tasks that a payment hub performs:
- Bank Connectivity. The core offering of payment hub solutions is communication to your banks. The method of communication used by these solutions falls into one of 3 categories:
- Bank APIs: The most modern and secure form of bank communication is bank APIs. Offers the ability to send and receive communication instantly between your organization and your bank partners.
- Host-to-Host: File-based communication with participating banks where the payment hub sends and receives files. There are several disadvantages to file-based communication, including security vulnerabilities and even timing delays and delivery inconsistencies
- SWIFT: Utilizing a SWIFT service bureau or building one to communicate with SWIFT participating banks. However, SWIFT’s offerings are all file-based, so the same disadvantages seen with host-to-host should be expected with a SWIFT method.
- Message standardization of hub payments. Many payment hub solutions standardize the format of the various payment messages. Why is this needed? Different banks – and even countries within a single bank – have numerous different formats for various types of payments. Maintaining this rat’s nest of formats is a significant resource drain for the finance team and their IT departments. The formatting work isn’t just a one-time setup. Banks are regularly updating their formats, so ongoing maintenance and further resources are needed.
- Message monitoring. Success of payments is critical to business operations and maintenance of successful relationships. Whether that be with your banks or suppliers, timely and consistent payments are a large part of what is used to benchmark customers. Another benefit of a payment hub is the centralization of all payment messages. It means there is a single source of truth for all systems which should tie directly to the bank activity, simplify reconciliation, and enable consistency of payment delivery across the organization.
Beyond these three core tasks, there are 3 more things that are possible with a payment hub:
Companies must comply with the economic and trade sanctions imposed by the government(s) that control where they do business. For example, in the United States, companies must adhere to rules and regulations set by the Office of Foreign Assets Controls (OFAC), which is part of the Department of Treasury. OFAC publishes lists of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific.
Companies subject to OFAC regulations must comply with these rules, or face fines and penalties. For finance, this often means ensuring that a payment does not go to a sanctioned country or entity. If this happens, the company can expect to be hit with a fine, penalty, or worse.The centralized aspect of a payment hub makes it easier to check payments against sanctioned party lists, therefore minimizing the risk of breaking these rules.
Sanctions and the corresponding regulations for money movement are not limited to the United States. Many countries around the globe enforce similar sanctions.
The centralized nature of a payment hub also enables faster and easier detection of fraudulent activity. With everything in one spot, it’s easier to compare and identify suspicious payments, and can simplify the prevention of fraud in the future.
Communication for Non-Payment Data:
All payment hubs work with payment data. Some payment hubs go beyond that and provide additional types of data like bank statements and non-bank information. An example of non-bank information that can be provided by a payment hub is remittance or other types of financial information.
How to decide if a payment hub is right for your organization
First, clearly identify the reason to institute a payment hub. What KPIs will it impact? What problems will it solve? Which teams will it impact – positively or negatively? Some of the most common reasons that a corporation uses a payment hub are:
- Fraud. Especially for finance teams that have identified fraud or have been charged with actively reducing rates of fraud, a payment hub can make fraud detection faster and easier, and the vulnerability for fraud is reduced because there’s a central location for bank connections.
- Reducing reliance on IT. By centralizing bank connections, the level of effort required from IT is reduced, making corporate treasury and the broader finance organization less reliant on their IT partners.
- Being bank-agnostic. Companies that use payment hubs can more easily change banks. Without a payment hub, a company would need to first identify all the different connections to that bank. Not an easy task because the connections can come from a variety of departments, functions located in different countries, etc. Once identified, both finance and IT would need to work together with the bank to build the connection to the new bank and all associated payment formats from scratch, test and troubleshoot those connections, and maintain them.
Second, determine why now is the time to start using a payment hub. If your company has recently identified fraud, that would certainly be a compelling reason to consider a payment hub. Other reasons could be a desire to reduce the need for IT resources or a desire to change banks.
Key questions to ask payment hub software providers
Two key queries when considering enterprise payment hub software providers are:
- Where does the payments hub sit in our company architecture? Generally the options are on-premise or on a hosted cloud. Work with your IT partners to determine which are acceptable options for your organization.
- How does it connect to your ERP? This question really gets to the heart of how much effort is involved with integrating your ERP data and the payment hub solution. Options for ERP integration include “connectors” or “bridges” between the payment hub and your ERP or finance-specific applications that embed inside your ERP. Finance and IT teams will find, though, that the most advantageous payment hub solutions are tightly integrated with your existing systems.
Hopefully now you are armed with the information to answer the question “What is a payment hub?” and when examining your organizational infrastructure for payments to identify opportunity areas to drastically improve how you communicate with your banks and ultimately identify the best payment hub solution for your organization.