It’s time to transform liquidity management

In September of last year, we predicted that our future selves will view 2020 as the turning point for cash and liquidity management and ‘what could be’. Nearly 6 months has passed since that prediction, and change has already begun. Citibank, HSBC, J.P. Morgan, and even Goldman Sachs, are now all reevaluating the way they, and their clients, view liquidity management. Goldman Sachs, for example, is brand new to transaction banking, having only opened its doors to clients at the start of 2020.

As Goldman is not a traditional player in this space, their focus since Day 1 has been the use of new technology and building the global transaction bank of the future. And in only 1 year, Goldman Sachs has attracted nearly $28 billion in deposits. While that number is quite small in comparison to Citibank or HSBC, it speaks to the shifting trend, especially among multinational corporate clients, who are now focusing on attaining better visibility of their holdings, faster access to data, and ultimately, real-time access of funds. What was long believed to be a relatively static function, treasury is rapidly evolving, and treasurers have begun to ask some critical questions.

What does the future hold in store for cash and liquidity management? What is attainable in the next few years? And most importantly, what do organizations need to do today in order to be positioned for success in the future?

The problem

The questions mentioned above may seem obvious, but the need for change in liquidity management has been mounting, not for years, but decades. End-of-day processes, working capital requirements, forecasting, managing funds across borders in various currencies- all of these tasks could benefit from a shift to real-time data, real-time visibility, and real-time payments.

Banks have long been trying to improve their offerings to their corporate clients, through processes like intraday sweeping and additional clearing windows. However, as the world speeds up, so do the demands of businesses, and these improvements, while important, are no longer enough to keep pace. It is time for both banks and their clients to rethink what is possible and take the next great leap forward. Liquidity management cannot be held back by ‘band-aid’ solutions to significant needs. Banking infrastructure must be rebuilt from the ground up in order to support a real-time environment.

We at nanopay think of this opportunity in similar terms to the quote attributed to the great Henry Ford, “If I had asked people what they wanted, they would have said faster horses.” These current improvements to the legacy systems are the ‘faster horses’, whereas the industry requires ‘new modes of transportation’. Rebuilding the infrastructure may seem more costly upfront, but will actually lead to significant long-term savings for both banks and their clients. Corporations will be enabled to make better, faster decisions, and execute those decisions without concerns for end-of-day processes. Most importantly, banks and their clients will be able to release billions of dollars in trapped capital. However, none of this will be possible without the focus required to align future aspirations with current organizational roadmaps.

The next few years

While we at nanopay believe in the transformational potential of the next decade, it’s important that we focus on what is achievable in the short-term.

According to a recent Citibank report, only 10-15% of large corporations operate in ‘advanced states of optimization’. If your treasury practice is not in that 10-15%, it’s time to immediately focus on your processes or risk being left behind. The use of readily available products, such as treasury management solutions (TMS), virtual accounts, and virtual account management platforms, can help enable corporate treasuries to consolidate control, improve visibility, and increase efficiency. The Citibank report also suggests using a multi-currency notional pooling offer to help manage FX challenges associated with cross-border flows, but incorporating a VAM solution that provides a ‘virtual pooling’ offer would be far more useful and forward thinking.

Treasurers must then focus their attention towards data. Speed and accuracy of data are critical to enabling improved decision making. More than 70% of corporate treasuries still rely on manual inputs as part of their forecasting process, and this process is slow, cumbersome and prone to errors. The use of automation, specifically AI and machine learning tools, can and will drastically improve the process from both an efficiency and accuracy perspective. Blockchain-based solutions are also practical, as they create an immutable, tamper-proof ledger- key for improved security and auditing. Some of these tools are already available today, but are not being leveraged nearly enough.

The long-term 

Real-time payments and 24/7 clearing and settlement is going to change our world view. In fact, approximately 50% of countries now have some form of faster payments infrastructure, with North America on its way. While instant payments can be leveraged today to some extent, when combined with open banking schemes and APIs, corporate treasurers will finally be able to realize their full potential. Unfortunately, those who do not focus on aligning their next 12-24 months with their 5-10 year plan will fall even further behind.

Similarly, banks that do not emphasize technology, and put transaction banking at the center of attention, will no longer have an opportunity to compete with either the world’s leaders (Citibank and HSBC) or the new challengers (Goldman Sachs). Leveraging partnerships with FinTechs can have enormous benefits for mid-market and large regional banks by accelerating their speed-to-market and expanding their global reach. What was once a faux-pas for banks has not only become the norm, but has in fact proven to be most beneficial in retaining clients, attracting new customers, and ultimately, building brand loyalty. As a bank, it’s not enough to tell clients to focus on technology and optimize for the future. Banks must do the exact same and lead by example.

Addressing the questions of ‘what does the future hold in store?’ and ‘what is attainable in the short-term?’ requires banks and corporates alike to align their long-term roadmap with their short-term tactics. Think about 10 years out, plan for 5 years out, and execute in the next year.

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