The next frontier in liquidity management: the transaction banker’s vision

The banking industry is embracing the rise of FinTech. Robo-Advisors and Chatbots are gaining popularity in the retail banking and wealth management space, changing how banks and clients interact with each other. Automated trading of equities and FX, and automation of even the most coveted investment banking tasks are not new.

The realm of transaction banking, cash management and more specifically, liquidity management is no exception. From hybrid cash pooling structures with virtual accounts today to various innovations to efficiently automate processes and intelligently redefine how cash pooling will be done tomorrow, this article shares snippets of what the future of liquidity management holds for banks and corporate treasurers in the new era of technological revolution

Leading the Changes in Cash Pooling Landscape Today
Traditionally many corporates maintain cash deposits for their subsidiaries in multiple accounts across a number of banks to support operational and treasury-related transactions. This includes customer receipts, supplier payments, payrolls and more.

As corporates aim to achieve further efficiency, virtual accounts for receipts and payments became a popular tool to achieve seamless reconciliation and gain greater visibility and control of funds with minimal complexity. Consequently, virtual accounts in many cases have proven to be a viable solution to even replace straightforward cash pooling products, such as physical and notional pooling. Half the battle is won for corporate treasurers when account rationalisation is realised via virtual accounts.

However, using virtual accounts and cash pooling solutions effectively can be a challenge in regulated markets with stringent controls on non-resident account opening, intercompany lending, FX, tax, etc. Complex regulatory nuances and the manual overload to manage approvals and supporting documents are hindrances to a fully scalable liquidity management solution. Therefore, in practice, a blended solution of cash pooling techniques, reporting tools, and virtual accounts plays a central role in corporate’s liquidity management strategy and is a solution which benefits both banks and corporates today.

What’s Next: Disrupting the Status Quo
Since January 2017, SWIFT has been working with 33 global transaction banks in the proof of concept for real-time Nostro reconciliation using a SWIFT-developed distributed ledger technology sandbox, which will help financial institutions reconcile Nostro accounts more efficiently at lower cost and operational risk (footnote 1).

Thinking beyond the current construct of liquidity management tools and platforms, cash pooling services will not look like what they do today when unprecedented level of transparency and efficiency can be achieved by adopting the upcoming technologies:

AI (Artificial Intelligence) – Exciting possibilities:  

That there is ‘no one size fits all’ is probably the most common cliché in liquidity management but a true mantra due to the complexities around designing a cash-pooling solution. From understanding and capturing the client requirements to devising the optimal liquidity management solution based on bank’s cash pooling capabilities and complex local regulatory, tax and accounting considerations, designing a customised solution is typically a lengthy one that requires multiple iterations via human-to-human interactions.

A few cash management banks have recently developed tools to transform the overall product recommendation journey for clients. Driven by decision tree algorithms, these applications can automatically generate a customised solution based on direct inputs and structured database of various considerations. Visualisation of the proposed solution, flexibility to instantly make revisions for cost benefit analysis and benchmarking against the client’s industry peers are value-added features that help find the most appropriate liquidity management solution for a corporate treasury and to speed up the sales cycle for the banks.

Another area of development is AI-driven automation to streamline the manual and repetitive tasks required in client on-boarding and after-sales client service today. Processing and lodging of documents, answering basic client queries and assessing standard terms and conditions in product agreements are some examples in which further efficiency and enhanced client experience can be achieved.

With clean real-time transaction data and AI-empowered liquidity forecasting tools, corporate treasurers would be able to obtain enhanced visibility of their cash positions and funding requirements in a timely manner. AI-driven investment advisers can influence how investment strategies are defined and decisions are taken by corporate treasuries to optimise yield and how counterparty risk with banks is managed. Needless to say, AI is opening exciting possibilities for liquidity management and cash pooling solutions.

RegTech – Solution to regulatory challenges

RegTech, an offshoot of FinTech that addresses pressing regulatory requirements, has been focussing much on improving compliance and internal control systems for financial institutions. RegTech can be extended to handle risk management processes, facilitate regulatory reporting and enable banks and corporates to stay abreast of regulatory changes in relation to managing cash pooling structures.

RegTech would help banks and corporates to automate the mundane compliance tasks to help achieve close to real-time clearance of regulatory requirements and at the same time, reduce operational risks and overhead associated with meeting regulatory reporting obligations. As and when regulators gain comfort in corporates and banks leveraging RegTech solutions, it will enable broader usage of cash-pooling capabilities, virtual accounts and more.

Open Banking and Open APIs (application programming interfaces) – Changing the business model 

Building an agile and sustainable API-based infrastructure has become a popular theme in the banking industry to address the ever-growing client expectations and technology advancement. Regulators are also encouraging the banks to publish open APIs; PSD2 (Payment Services Directive 2) is scheduled to go live in January 2018 in the European Union and European Economic Area while in countries like Singapore, the MAS (Monetary Authority of Singapore) is a vocal proponent of open APIs and already launched a first set of 12 APIs in November 2016 to lead by example (footnote 2).  Standard Chartered launched an open API developer portal (footnote 3) for transaction banking in February 2017, starting with a repository of cash-management-focused API services, and has become one of the leaders in this area.

As the open banking framework matures and expands into the corporate banking space, cash management banks will need to review the portfolio of products and services offered today. Instead of every bank building and maintaining its own in-house systems, overall efficiency, profitability and flexibility can improve by collaborating with the right partners.

An example would be the series of account and transaction information based reports and dashboards that could be made available by the trusted third-party service providers who would have access to bank’s data. No more old school online banking portals and treasury management systems. Move to open banking will help existing bank clients to enjoy access to more variety of such innovative services.

Pit Stop Reality Check

These are glimpses of what might be in the changing technology landscape. Today, the reality for many banks, financial institutions and corporates is that they are still in the early stages of their digitisation journey, some even struggling to unwind the legacy processes and systems or comprehend the rich but unstructured data on hand. Even the most advanced and intelligent applications would not be able to live up to potential without access to accurate and detailed data.

Regardless, this wave of change is real and cash management banks need to reconsider and prioritise their core competencies to be more than providers of basic transactional services. Corporate treasuries should also carefully assess the implications of new technology and partner with their core cash management banks to plan a strategic roadmap that will deploy the most appropriate cash and liquidity management solutions to keep pace with their treasury evolution cycle. 

Author:
Kwan Hoon Park, Global Commercialisation – Liquidity Management, Transaction Banking, Standard Chartered

[1] SWIFT press release on 13^th October 2017 (https://www.swift.com/news-events/press-releases/swift-tests-show-blockchain-has-potential-for-global-liquidity-optimisation)

2 MAS media release on 11^th November 2016 (http://www.mas.gov.sg/News-and-Publications/Media-Releases/2016/MAS-Launches-First-Set-of-Data-APIs.aspx)

3 Further information and an application for access to the API developer portal can be found at https://developer.sc.com