Inter-company Netting
The most effective way to cut payment costs is not to make the payments in the first place. That is what inter-company netting does, it eliminates most intra-group payments and can also eliminate many external payments as well. Although mainly large multi-national groups use netting systems and services to enable subsidiaries and companies within the group to net off their payments and receipts to each other, netting can be effective in much smaller companies. Not only does netting drive down banking costs it can also help to reduce the group's overdue internal payments and improve the monthly intra-group reconciliation processes.
How It Works
Netting is a simple process. At the end of a given period the subsidiaries and companies send the details of their intra-group payments or receivables due to the multi-lateral netting centre which calculates for each subsidiary the overall net payment or receipt due to or from the rest of the group. (Receivables based netting is much more effective as the payers cannot delay when the payment is requested.) Then each subsidiary receives a Final Netting Message from the Netting Centre as to what they need to pay or what they will receive. Subsidiaries then make a single net payment to the netting centre or receive a payment in their local currency.
Multi-Lateral Netting
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Netting systems and services can also be used to settle other types of intra-group transactions including intra-group loans, interest and in-house bank commission payments and even to run internal factoring schemes. Netting can be used as well for external payments between trading partners or groups of trading partners.
It is important to recognise that netting can be effective in small companies, even for payments between as few as two subsidiaries, so-called bilateral netting.
Main Benefits
The main benefits of Inter-company Netting are clear: Bank transaction costs are reduced, e.g. the engineering group ABB a major user of multi-lateral netting calculated that in 2009 the inter-company settlement transaction across the group were cut by 94% by use of a netting system. Netting also often enables a reduction in the number of banks employed and so reduces float. FX costs are reduced due to payments being concentrated into fewer higher value transactions at better rates. In addition, the efficiency of intra-group payments is improved and the number of mismatched payments reduced.
The leading netting systems are now more like an inter-company payment management systems and are becoming a platform for payment factories.
Implementation
Implementing netting systems and services is relatively easy because no fundamental change to business processes is required and they standardise many processes across the group. The key questions to ask when reviewing whether to introduce a netting system or not include: are the inter-company invoices paid on time? Do the subsidiaries know when and for what they are receiving money? How much time is being spent reconciling inter-company payments? Are any subsidiaries financing themselves on the backs of others?
If the answer to any of these questions is Yes, then it would be worthwhile reviewing introducing a netting system or service. However, before implementing netting it is important to understand the regulations in each of the countries, where entities are located, and how they will impact the netting scheme.
Types of Systems and Services
Netting systems and services are now mostly browser Internet or Intranet based, making it much easier to send and receive payment details and reports. ASP solutions are available as well.
The main differences between the systems and services on offer include: ease of data input and collection; level of administration required; range of reports and analyses; and ease of integration with the rest of the company and any payment factory.
Suppliers of netting systems and services are banks, general treasury management system suppliers, and stand-alone dedicated specialist netting system suppliers.