The Road to Efficient Cash Management Services
At first glance, it may seem like a strange analogy but cash management can be likened to the car industry. For instance, all banks offer a product that is designed to get the customer from A to B but increasingly these customers are demanding a service that reaches their chosen destination faster and with greater detail of how they are going to get there. As a result, banks are under pressure to attract customers to use their model over a competitor by upgrading their service through the provision of new tools and services that can improve the cash flow journey.
The problem is that as soon as one bank provides an innovation, another will offer the same service and soon the services once considered ‘optional extras’ become standard and are included in the overall pricing structure. At the same time, customers are demanding banks provide more of these services at a lower overall price, squeezing margins even further.
Recent research by the Aite Group on European cash management trends highlighted the continuing gulf between the banks’ vision and their current cash management infrastructures – both for corporate and nostro accounts. While many want and need to provide greater forecasting and cash flow tools, the operational reality is somewhat different.
Cash flow forecasting and cash pooling/netting are critical services that demand timely, rich data in order to maximise their efficiency. It is little wonder, therefore, that treasury teams are wrestling with cash management service issues when many still rely on Excel spreadsheets. The over-reliance on such manually intensive methods affects cost, risk and efficiency, and yet banks and corporates still use them while fully acknowledging their limitations.
The lack of progress to date can also be attributed to the siloed nature of many institutions. Individual offices and geographies use one set of tools and infrastructures while another office, performing similar tasks, uses a different set.
Changes in the cash management industry are largely being driven by ever more sophisticated and demanding corporate clients. The demands of these organisations act as a catalyst for banks to examine their cash management infrastructures to deliver greater value.
A knock-on effect is that by delivering these services to clients, banks can use similar processes internally for nostro accounts. The final destination is the same for both internal and corporate cash management – more effective use of cash and liquidity.
Cash forecasting is a critical service, as it supports the treasurer to deliver more efficient cash handling and is an essential ingredient in effective risk and liquidity management. Treasurers are no longer investing money to meet working capital needs; their role has evolved from payments and number crunching to a more strategic level.
The prevailing tool of choice for cash forecasting has been statistical trend analysis and bank statements. However, this is a deeply flawed approach, much like trying to drive a car by looking in the rear-view mirror. The corporate treasurer now uses more complex instruments, including securities, FX and derivatives to enhance returns. But in order to do this they first need accurate data to forecast the core cash balance and available funds that determine any investment decision.
As a result, the treasurer must ensure they know where the cash is and how much is available – and in which currency, location or legal entity – at any given time. They also require different data views in order to forecast funds appropriately. This requires maintaining a bird’s eye view of cash flows with the ability to drill down into detail by various parameters.
More efficient service provision requires real-time data at its core to move away from the traditional reactive cash management in nostro accounts and deliver new services to corporates. A proactive, real-time approach helps to eliminate the costs of incurring unnecessary settlement and operational risk exposure in the market.
Cash managers require a single view to monitor different cash status levels within the nostro. This enables them to determine the probability of settlement failure and the risk of potential loss resulting from the incorrect positioning of currency balances to be reduced. As a result, ensuring responsible parties are aware of funding requirements as they occur, enabling them to act faster and manage balances more efficiently, also reduces the cost of covering overdrafts.
Improved visibility into cash exposure for future value dates provides treasuries with the information required to manage their liquidity better. This potentially reduces costs by allowing them to operate with more efficient liquidity ratios and make better use of collateral and resources. The treasurer can then use the appropriate financing vehicles or hedge strategies to effectively execute an investment strategy.
The flexibility of drilling down from a bird’s eye view to the transaction level also offers other benefits. For example, the cash manager can use the data to aggregate balances by any means – currency, legal entity, geography, line of business – and view equivalent balances in any currency.
Critically, it would also enable a cash manager to view opportunity costs and calculations against account balances, highlighting any revenue opportunities. This could take the form of avoiding the use of costly overdraft facilities when cash resides in another account within the bank or corporate. It could also mean drawing attention to netting/pooling opportunities to deliver a greater return on funds.
In an ideal world banks and corporates would have a centralised cash management team using a system that delivered intra-day reconciliation, for enhancing the accuracy of its cash projections. Banks could then initiate realignments/account sweeping before cash deadlines, reducing liquidity risk and managing balances and exposures across accounts and currencies.
Providing intra-day positions to corporate customers lays the foundations for managing positions more accurately and supporting their goal of effectively reinvesting excess liquidity. Using intra-day data can enable a bank to provide the forecasting functionality to extend its corporate cash management service and help set it apart from the competition. Providing secure browser-based access back out to a corporate is the most efficient way to deliver real-time data, enabling them to monitor positions, report and project using different scenarios.
Although the Aite Group research revealed there is a divide between banks’ cash management vision and their ability to deliver at this moment in time, this vision is achievable. There are tangible benefits to using real-time data to create a more proactive cash management operation, from lowering operational risk and cost, and improving cash and liquidity management.
As corporate treasury teams continue to evolve and gain strategic importance, they will demand efficient and effective tools. The first step is to break down silos through enterprise-wide real-time data. This undoubtedly presents an operational and IT challenge for banks but one that is definitely achievable.