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Payments evolution is being driven by a virtuous cycle where consumer demand for faster, better products is met by innovations from new-age providers that in turn fuel more demand. While the action has mostly happened in the retail space, advances such as faster payments are pushing corporate banks to catch up by adopting innovations like faster (read real-time) liquidity management.
For corporate treasurers, managing cash balances in multiple currencies in bank accounts located in multiple countries can be a huge challenge. They need to know, on a daily basis, the total cash available and its location, how much is needed to run the business, where the shortfalls or excesses are, and how to manage those.
Treasurers would be much more effective if they could manage liquidity based on real-time information. In the past two decades, several applications automating some liquidity decisions have come into the market. But most are designed for end-of-day (EOD) batch processing, the norm in the corporate world that simply reflects the way corporate banks manage their intra-day liquidity (around EOD batch processing).
That being said, there is a definite push towards real-time liquidity management from certain external forces. Apart from faster payments, these include real-time clearing and settlement, the increasing use of APIs, and open banking, all of which potentially impact a business’s cash balances from one second to the next. It is therefore important that all participants – financial institutions, corporates, and technology & infrastructure providers – start preparing for an increasingly real-time landscape, and for measuring, monitoring and managing liquidity in real-time.
Real-time liquidity management improves cash visibility and mobility, but it also creates new opportunities to save cost, add revenue, and increase return on cash. For example, when a business is able to instantly move in-bank collections to accounts in need of funds, it brings down the cost of overdrafts and working capital buffers while reducing cash fragmentation, centralizing balances at group level throughout the day. The major banks have started to offer these capabilities, alongside new tools and techniques, such as virtual accounts management enabling “payments/ collections on behalf of” solutions; these facilitate interconnectivity between payables and receivables and centralise the management of liquidity so that corporate treasurers can eventually manage cash across banks and borders in real-time.
Where does the industry go from here? We are seeing some action in the area of investment and funding. As mentioned, one of the challenges of corporate treasurers is to make the best use of surplus cash. Since companies manage cash balances at the end of the day, that’s when they move any excess amounts into overnight investments, just before their banks run their batch for the day. This will need to change once the industry switches to real-time; with money moving freely in real-time, customers will expect greater flexibility when they borrow or invest.
One area that is benefiting immensely from real-time liquidity management is cash flow forecasting. Using APIs, treasurers can see an aggregated view of balances and transactions in all accounts, across all banking relationships, which helps them make better forecasts. Also, the maturing of AI technology is enabling enhanced algorithmic forecasting. Some forecasting solutions are using big data analytics to not only predict better, but also recommend next best actions.
An important element here is the corporate banking online portal. Bank channels today are sophisticated, offering substantial self-service capabilities and analytics across many devices. Integrating the digital user experience on these channels with “real-time” enables corporates to set up complex liquidity management structures and view complete information on a single dashboard. Channels offering actionable insights – for example, adjust cash flow in anticipation that a habitual late payer will again delay payment – would deliver further value to corporate treasurers in the future.
The aftermath of the pandemic is seeing disruption of supply chains and intense pressure on working capital. As businesses struggle, an effective working capital strategy is becoming even more of a priority. Treasurers are turning to their banks for support, and it is imperative they respond with digital solutions for managing working capital and other funding needs. We have observed that progressive banks with digitized customer portals have been able to support their clients much better than other banks. Different providers are at different stages of their journey to real-time liquidity management; while the leading banks and digital players have progressed, most institutions continue in their old ways. Now it is time for real-time.
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