Fresh Gains to be Made in Cash Management Outsourcing
Traditional or classical cash management can be seen as settlement outsourcing. This is a process where corporates – large or small – handover the final settlement of any transaction to the bank for execution, whether payables or receivables. Further, every settlement involves a change in the nature of the underlying asset or liability. For example, cash converts to raw material on execution of a vendor payment instruction, or work-in-progress converts to finished goods on payment of salaries or utilities and so on. Current cash management services focus on transitions of balance sheet items rather than the items themselves. The future of cash management is to focus on the individual balance sheet items themselves – be they cash, payables, inventory or outstanding as much as to focus on services which merely change the states of the balance sheet items.
Every transaction has its life-cycle, from prospecting to negotiation to contract, delivery and settlement. These days corporates expect banks to complete the entire settlement aspect of the transaction life-cycle so that corporates can concentrate on the core operations of delivery.
Take the example of payroll processing. Every employee has his or her own contract with their employer with its own terms of salary, perks, allowances, responsibilities and privileges. However, the actual payroll processing itself is outsourced to a third-party, which can be a bank or back-office processing organization. Similarly, on the receivables side, collections may be outsourced to a bank or collecting agency. The banks take responsibility for picking up the cheques from the dealers or stockists and to handing it over to the local branch of the main bank or its nominated correspondent. The bank also provides a feed of the data to the corporate and bank head-office. These operations have become highly automated and have evolved an astonishing degree of precision and sophistication in countries like Indonesia, India, Thailand, Philippines – and similar countries with a large geographic spread and large number of clearing locations.
This situation has taken a number of years to evolve but is now stabilizing in most of the countries in the Asia-Pacific region. Stability often means that service differentiation is disappearing – most cash management offerings of banks now provide complete settlement outsourcing, extending to ERP integration, event notification, positive pay and other services which were considered innovations just a couple of years ago. The situation is now ripe for the next level of radical differentiations that banks can initiate with their corporate customers to usher in the next generation of cash management.
Most corporates agree that the bank or the cash management provider is servicing very few line items of the balance sheets, especially in current assets. If one were to consider the working capital cycle of any company – in manufacturing or services – the core cash management services are around the beginning or the very end of the cycle. Traditionally, payment products are at the beginning with vendor payments, salaries and utility payments and collection products at the end, concentrating mostly on converting receivables into cash.
Fig. 1.0 – Working Capital Cycle
Banks need to consider two key areas to expand the scope of cash management services – one is to focus on individual items on the balance sheet of the corporates and the second is process integration – tighter integration with the processes within the corporate to ensure a more seamless transaction experience. Let us look at these concepts in detail.
Currently, cash management services touch upon the accounts receivable and accounts payable functions of the corporate. Banks should seek to focus on specific items in the balance sheet including current assets like cash, inventory and current liabilities, such as payables, statutory obligations and corporate actions.
Let us look at some of the additional activities that can be taken up under cash management on the balance sheet:
Cash management services are seen as an add-on to the production cycle rather than an integrated service. Banks need to think of applying typical manufacturing practices like just-in-time and greater technological integration of systems and data to make the user experience smoother. Let us look at some places where banks can aim for such integration in cash management services.
As basic cash management becomes established and even common, banks have to strive to provide the next level of cash management services in order to differentiate themselves. This requires them to take a holistic view of the corporate balance sheet and look at all the services they can offer to the corporate across the various line items. Further, these services have to be integrated into corporate operations to provide all participants a seamless transacting experience.