Liquidity management: The invisibility dilemma

Invisible liquidity is unmanageable liquidity. This inconvenient truth remains as valid today as it was when the discipline of liquidity management first emerged. Furthermore, while it may be widely-acknowledged, it certainly isn’t widely- resolved. The number of global multinationals who can honestly claim that their treasuries have 100% real-time visibility of all bank accounts worldwide is probably a figure tending towards zero.

Yet the underlying problem that creates this situation is hardly a secret: effective plumbing, or rather the lack thereof. Ultimately, treasuries need a single consistent view of all bank accounts irrespective of the number of banks involved, but that requires consolidating multiple data streams that use myriad data formats and underlying technologies. A single consistent view of all accounts is perfectly achievable, but involves accepting that it is not a challenge that banks and corporates can readily resolve, either individually or together. Realistically, the involvement of a specialist fintech with extensive API, SWIFT, secure file exchange and financial data format expertise will also be required.

Global Banking Reality Check

Nevertheless, this is still by no means universally accepted. One frequently-cited alternative is to use a single global banking relationship that fulfills all a corporation’s transaction banking requirements worldwide. While this seems plausible at a superficial level, regardless of whether it is commercially advisable, it fails upon closer inspection of the practicalities. Firstly, is there really such a thing as a truly global bank that can offer 100% coverage worldwide using just its own network? Secondly, can such a global bank also deliver 100% consistency of technology and data formats worldwide? In either case, perhaps 90% at best, or maybe in exceptional circumstances even 95%, but not 100%.

As a result, for many global corporations, multiple bank relationships are simply a fact of life. In some industries, such as petrochemicals, relationship proliferation is an everyday reality where the winning of a new contract almost inevitably also involves opening an account with the same bank as the customer. It’s therefore easy to see how treasuries can find themselves with hundreds of bank relationships and systems to manage.

Apart from using a single global bank, another commonly proposed solution to this challenge is to use SWIFT. The promise is that this will provide universal account visibility in a multibank environment through common messaging standards, but sadly reality intrudes again. The first hurdle is simply determining the SWIFT capabilities of individual banks. They may be connected to SWIFT, but what messages do they support? For example, can they all generate intraday MT942 statements? For corporates with hundreds of bank relationships around the globe, simply discovering these individual capabilities is a major undertaking.

Then there is the second hurdle of ‘standard’ SWIFT messages that are anything but standard. Banks often implement SWIFT messages in subtly differing ways that still have to be understood and worked around if one is looking to achieve a completely homogenous data stream of bank balance information. For a corporate treasury to identify and accommodate all these capabilities and nuances would be  a huge overhead, but a specialist fintech experienced in connecting numerous banks and corporates would probably already have this information or would regard its acquisition as part of its usual role.

Some corporates have already invested in top end treasury management systems (TMS’s) that are also sometimes promoted as potential solutions to multibank (in)visibility. Again the reality is more prosaic, because the core competence of a TMS is sophisticated financial analysis rather than systems integration, a TMS will only usually be connected to just the top few of the corporates’ bank relationships.

Logon and System Proliferation

Probably the most stark physical illustration of the gulf corporate treasuries have to bridge in their liquidity management is the proliferation of bank logon tokens. It’s not uncommon for larger treasuries to have a drawer full of tokens that they must search through just to assemble a report on their overall cash position. Then rinse and repeat for all the possible investment opportunities they need to screen before placing any cash surplus. Realistically, no single bank is going to be able to cost-justify building  a single logon capability that includes all a client’s other banks. However, this is something a suitably-qualified fintech can provide, by aggregating access to all a corporate’s electronic banking systems behind a single logon. Then a treasury only needs to sign on once to see and manipulate all the corporation’s balance information across all its bank relationships. By the same token, they can also use the same portal to screen and place investments across their bank relationships, plus enjoy a consistent and enhanced experience for making payments more generally.

The easier placement of investments ultimately benefits both corporates and banks. Some banks offer excellent liquidity products, but in the current environment these are missing out through opportunity leakage. Treasurers have to traverse so many bank accounts and investments in such a fragmented manner that they may simply miss some of the most attractive opportunities, to the detriment of both parties. By contrast, in a single consolidated environment where all the necessary plumbing has already been done behind the scenes, filtering and accessing the best investment opportunities becomes trivial. This can be done manually or automatically with pre-configured rule sets.

Real-Time Liquidity Management

The already strong growth of real time payment systems around the globe looks set to persist, with some research predicting close to 30% CAGR between 2019 to 2024. This trend is fundamentally changing the whole business of liquidity management. Treasuries no longer need to be constrained by only having access to end of day batch-based data; real time intraday liquidity management across a growing number of countries is now an achievable reality rather than just an aspiration.

However, access to this brave new world inevitably depends on having the right connectivity and visibility. While some bank liquidity platforms offer some additional visibility of third party bank balances by polling for MT940s, this still constrains treasuries to ‘following day’ liquidity management. On the other hand, real time balance visibility means that investments can be made before daily payment cut off times, adding an extra day of return to surplus cash. At the same time, far more efficient management of intraday overdraft limits becomes possible, thus minimising unnecessary costs. Granted, the extent of these opportunities will to some extent depend on individual banks’ capabilities - e.g. not all support intraday balance reporting - but in most cases treasuries will be able to make appreciable gains and/or savings.

This real time balance visibility also opens the door to simpler and more cost-effective methods of inter-company funding and the optimal use of internal liquidity. Rather than the cost and administrative/legal burden of creating an entire physical pooling structure, a treasury with real-time visibility has the alternative option of funding subsidiaries on a just in time basis through an in house bank. Alternatively - subject to company policy and structure - intraday bilateral sweeping between an entity in surplus and one in deficit may also be possible.

Conclusion: Optimal Versus Sub-Optimal

One of the ironies of the growth in real-time payment systems is that in a sense it re-emphasises the sheer scale of the liquidity visibility problem that has plagued treasuries for decades. It represents an important new opportunity, but one that is effectively inaccessible without consolidated multibank connectivity. A further irony is that complete connectivity and visibility are already readily achievable with the assistance of the fintech community, but banks and corporates have hitherto opted to use sub-optimal alternatives. Financial plumbing in of itself may not be particularly enthralling, but the benefits to treasuries and banks of its correct deployment most definitely are.

Gresham's Control platform handles automated channel banking integration for corporate and wealth management clients and supports various payments-related business processes such as cash and treasury and trade finance.

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