Real Time Nostro: Benefits Become Reality
There have been a wide range of ‘real time’ initiatives in recent years, most of which, it can be argued, have targeted improvements in transaction information. It could also be argued that each has had as its main objective the reduction in risk and improvements in efficiency, so frequently requested by regulators and governments alike. Today, the industry is at a point where open markets and globalization are driving the demand for information to even greater heights. However, it is also a time when technology and market demand are conspiring to deliver transaction information that is not just valuable and reliable, but more importantly is available in real time.
Real time information has long been heralded as the missing link between market and regulatory demand, and the actual delivery of an effective solution to improve liquidity management and mitigate risk. Following the launch of the Cable & Wireless Real Time Nostro (RTN) service, one of the first applications to take advantage of real time information, the Cable & Wireless (C&W) RTN User Group has been formed. This group comprises banks, either looking to implement, implementing or using the RTN service. Members representing a broad mix of areas within banking have begun examining the benefits of real time solutions in terms of costs, and the extent to which real time information is proving an effective panacea to the changing market and regulatory environment.
It is this group of over twenty banks which has requested, and subsequently developed, a macros-based model which can be used to define the benefits of implementing real time information systems, and which will measure in precise costs the impact real time information has within key operational areas. This model identifies twelve areas within a bank which will yield benefits of real time information, but to varying degrees.
For example, cash and treasury management, exceptions management, credit risk and exposure management, will reap strong rewards. Reconciliations and investigations, regulatory and compliance, customer services, relationship management, accounting and control, product management, institutional sales and international network management will also benefit, but to a lesser extent. This quantification of the benefits of real time information has been crucial at a time when budgets and profit margins have shrunk. Richard Pattinson, senior director of Group Treasury, Barclays, and chairman of the C&W RTN user group, says: “It is easy to sell the story of real time information, but the user group realised it had to have a method of demonstrating the value. For the past two or three years most companies have been sweating over the balance sheet and looking to cut costs. How do we persuade the finance director or the CIO – the person who will authorise the spending – that the cost is justified?”
For the banking industry, it is no longer enough just to identify different areas of value. They need a model in which they can input their own figures into in order to examine the cost savings and hence real impact of real time information. This can then be used to market the use of real time information internally to peers within the bank.
Frank Harris, head of correspondent banking, clearing and settlement business at Mizuho Corporate Bank in London, recently said: “The model developed by the user group identifies more easily those areas within a bank that will benefit from using real time data. It allows people from different parts of the organisation to see how their particular business or operation will obtain additional value from using the data. The model’s spreadsheets can provide a broad indication of where hard dollar value can be realised.”
The first spreadsheet to be developed covers Cash and Treasury Management. Under current processes, the reconciliation of the prediction made on settlement day to the actual position shown on the statement usually happens on the day following settlement. Using real time applications, transaction information relating to a bank’s nostro accounts is delivered up to a day earlier than in the current scenario. The immediate availability of transaction and balance information enables financial institutions to fund based on their real, rather than predicted, position while markets are still open. The model attempts to quantify the percentage improvement in funding that financial institutions realise by using real time information. Gaps in funding positions can be analysed and the potential of what could have been achieved with real time information can be measured.
Information is the lifeblood of customer services – clients are becoming much more demanding of their financial institutions and require a rapid response to enquiries. However, before some enquiries can be completed, access to the day’s real view of the account must be available. This view usually becomes available on the following day (through the nostro statement, for example), thus significantly delaying completion of the enquiry.
The earlier availability of transaction information means that enquiries that require today’s view of activities can be completed a day earlier. Andrew Rourke of UBS, and a member of the RTN user group, says: “From a client services perspective, real time information enables the bank to turn around investigations much faster, giving clients a much quicker response.” When a bank is receiving aggregated real time information on its accounts, it will be able to extract that information and provide it to corporate clients as a product in a way that could not have been done until this year.
In current processes, the reconciliation of a statement to the ledger is made on the day following settlement. The reconciliation process is when exceptions are identified. Using real time information, the earlier availability of transaction information enables ledger to statement reconciliation to be performed much earlier. The subsequent earlier identification of exceptions can provide significant benefits, particularly reducing the number of transaction fails and errors that are costly to investigate and repair.
There can be up to 14 different areas within a bank where reconciliation takes place. Once a correspondent receives its nostro statement – usually the day after the value date of activity – the Reconciliation and Investigation process can begin. The earlier availability of transaction information means that the Reconciliation and Investigation process can be started earlier.
For the above areas and all the other segments that comprise areas of value identified by the user group, it is important to stress that while banks differ in the details of their operational processes, at a higher level, the processes are similar. Payments information is the lifeblood of international banks – it touches upon every single area of a bank. If one department is interested in implementing a real time information application, the other departments may have a “what’s in it for me?” response.
Mizuho’s Harris says it is crucial to have a ‘champion’ within the organisation who can promote the vision and value within different parts of the organisation. “It is also important to build a stakeholder team internally that will promote understanding to a wider audience within the organisation and obtain a consensus that there is a value to be extracted,” he says. The spreadsheets developed by the RTN User group aim to quantify the funding gap that occurs when real time information is not used versus when it is used.
Some banks may dismiss this gap as the cost of doing business, but that is less justifiable when cost reductions are still being sought. This cost is manifested in the bank having to borrow overnight if short or missing out on credit if long. Every liquidity manager in an international bank would love to be able to manage that gap down to zero, gaining a perfect view of all accounts in real time.
And of course, real time information will also address regulatory issues, such as Basel II and Sarbanes-Oxley, both of which are focusing the minds of bankers worldwide. An understanding of treasury positions and interbank loans is required for compliance with a raft of legislation that has been unleashed on the financial world in the past few years – most of which needs no introduction.
For too long, the industry has been locked in a T+1 approach; the industry has always accepted that any problems that might arise are resolved the day after the event. Real time information and developments such as Real Time Nostro in particular, has provided opportunities to manage payments on a transactional basis as they occur, rather than on an account level basis. The efficiencies of such an approach have an impact right across the industry because, as the C&W RTN user group model has proved, value is not just contained in the reconciliation process, or the cash management area.
One year on from its launch and RTN, is now being specified in RFP’s. The RTN user group is now looking to exploit this information to derive the efficiencies and develop services for their customers, both internally and externally, wholesale and corporate – evidence that this is the time for real time information.