By dramatically reducing the number of financial transactions and foreign exchange payments, FIDI’s proposed netting initiative can reduce Affiliates’ costs by substantial amounts every year, says CEO of AGS Group and FIDI Treasurer Cédric Castro
FIDI has always been about providing tangible values for our Affiliates.
These include FASI, protecting you from financial losses through trading with FIDI agents; FAIM, providing you not only with a quality framework but also a strong sales tool to your customers; the Academy, turning your staff members into motivated and trained human assets for your company; and many others. These FIDI services represent true value for money, and it is therefore with a lot of confidence that FIDI is now proposing to implement a netting system for our membership.
Netting is basically a way to reduce your risks in financial contracts with your fellow FIDI agents, by combining and aggregating multiple financial obligations (payable invoices) to arrive at a net obligation amount. It is like an offset between agents, which you do regularly anyway, but on a FIDI scale, involving all FIDI agents and all their inter-FIDI invoices during a given month.
Today, there are 600 FIDI Affiliates, trading with each other on a daily basis, involving anywhere between 50,000 and 80,000 invoices per year, all triggering money transfers from one bank account to another, in another country, and often in a different currency. The aggregate of all these invoices is hard to estimate, but it is likely to be in the vicinity of €120-€200 million annually. Each financial transaction has a cost attached to it, in the form of bank charges, currency losses and admin time.
If you already apply offsetting with a few loyal agents, you will know that this can often be a complex matter, with a lack of cut-off dates, resulting in a mounting mutual account.
With netting, however, you can reduce this cost considerably. In fact, if you are only trading with FIDI Affiliates, the international transfer of money would be reduced to one transaction per month, payable or receivable.
How does this work in practice? To put it simply, as a booker of business, you’ll be receiving payable invoices from your FIDI agents. Once a month, you’ll be asked to upload invoices due for payment into the system, just as every other FIDI mover will do.
The netting centre will than calculate the net position of each participant, and will let you know what your position is, either a payable sum or a receivable sum. There will be a few days for you to verify and reconcile, after which those who have a net payable position, will be asked to pay the netting centre.
A couple of days later, the netting centre will pay those who have a net receivable position that month. All participants will receive a file of paid invoices, so you can reconcile in your accounting. And then a new cycle starts.
So, instead of making multiple payments to multiple agents in multiple currencies, each month, netting will ensure you pay or receive one sum per month in your chosen currency, and in one go several – or many – payable and receivable bills are settled and ready to be reconciled in your accounting system.
The system is payable driven, meaning that the booker/debtor of the business will need to upload the invoice, when it reaches the payment term agreed. The agent/creditor will approve the uploaded invoice details online, after which that invoice is added to the netting operation of that month.
Your role as a netting participant is relatively simple. Obviously, your finance person will have to be familiar with the netting cycle and online system.
Once logged into the secure site, it is a matter of uploading payable invoices due for settlement, reconciling and approving any receivable invoices, handling any disputes that may arise, resolving mismatches and, ultimately, paying the FIDI netting centre, providing you have a net payable position that month. If you have a net receivable position, you sit back until the money hits your account.
FIDI will entrust the operation to a secured netting system called Coprocess, and will be assisted by a professional treasury management company who will oversee the daily running.
But what is in netting for you? Financial savings, to say the least.
This obviously depends on how much trading you do with your fellow Affiliates, but a conservative estimate for very modest use of the system by a smaller Affiliate shows a saving of €5,000 and more. For extensive users of netting, the savings can run into tens of thousands of euros, annually.
A large part of the savings obviously come from fewer bank transfer fees. But an even bigger part comes from managed foreign exchange of currencies.
Specialists estimate that for an annual volume of €200 million, the foreign exchange (FX) cost outside of a netting system is close to 0.65 per cent, or €1.3 million. With netting, this annual FX cost is reduced to a fraction of usual levels, likely 0.02 per cent, or a (comparatively) mere €20,000. These savings are directly for the benefit of the participants.
Apart from the financial savings, it will help your cash management. Once an invoice is uploaded, you can be sure that payment will follow on the date indicated in the netting calendar. This will free up valuable time for your accountants to do more meaningful jobs, rather than endlessly chasing reluctant agent debtors for payments.
All good news, right? It is, but there are a few conditions for this to be successful. Netting requires a significant investment from FIDI, and it is therefore vital that every Affiliate participates in the netting.
Traditionally, we know that there will be some early adopters of the system, followed by the early majority to sign up and provide critical mass. Once these are in, the late majority will follow, until finally the laggards see the light, completing the project. This will take some time to settle in.
Implementation of the netting system is actually rather fast; it can be done in six months. But we do think it will take another year and a half before all Affiliates who can legally do netting will be participating and reaping the benefits.
The path to a successful netting is uphill and looks free from obstacles. Yet we know there will be some bumps in the road, perhaps a bit of backtracking will be needed, or the odd diversion. But the goal is there, right in front of us: a netting system once again delivering true value to our FIDI Affiliates.
Please join in the effort.