OPENING UP THE CASH MANAGEMENT OPPORTUNITY

James Buckley, Head of Finacle Europe

 

In recent years, payments and cash management have seen hectic action, thanks mainly to the advances in the treasury management capabilities of the corporate world and the move towards real-time supply chain operations in several economies.

This is progressing more so, due to an era of proprietary apps, private APIs and close networks, banking which is becoming increasingly open with developments like open API, Fintech collaborations, cross-industry partnerships, regulatory changes like PSD2 etc. These developments impact all areas of banking, and corporate banking too needs to be digitally-enabled and API ready. Multi-bank cash management, which today takes hours or sometimes days to process, is set for a massive transformation with APIs and will transform the way cash management works today.

There is also a regulatory impetus in the form of Open Banking, which is transforming the way companies, large and small, run their business operations. This is an opportunity for banks to earn a profitable fee income on their cash and liquidity management services, provided they make the right investments on time.

 

What are these investments?

Unlike its retail counterpart, corporate banking has been slow to adopt digital technology across its operations. Corporate banking users are exposed to convenient banking on mobile and other channels as retail banking customers in their personal life, and expect similar experiences from their corporate banks. This is creating a gap between corporate banks and their clients, who expect a digital, self-service “retail banking-like” experience that allows them to control not only banking transactions but also the privileges and limits of different treasury roles.

In addition to investing in digital technologies that can produce such an experience, in an Open Banking world corporate banks would need the capability to aggregate clients’ financial positions across all their banking relationships in different banks. This capability is (by and large) missing at present.

Most businesses juggle multiple banking relationships and source their cash requirements from more than one bank. Treasury managers lack a consolidated view of their organisations’ cash and liquidity positions across bank accounts, which prevents them from managing their resources efficiently. But now that Open Banking has enabled corporate banks to easily access each other’s data, it is time to invest in the latest cash management solutions to offer clients a consolidated view of liquidity, in real-time.

In contrast to SWIFT MT messaging which imposes significant costs and interbank agreements for data sharing, the Open Banking proposition allows – subject to conditions – even small banks and FinTech firms to access a universe of customer and transaction data. New players, such as FinTechs and challenger banks, have been quick to capitalise on the opportunity, leveraging their formidable technological prowess to provide value added services, such as cash flow forecasting. Incumbent banks must get in the game right away if they want to retain their market position.

Early movers can seize the advantage by providing services that go beyond simple cash management and forecasting, such as analyses and recommendations on next best actions.  For example, they could build out a model comparing the best approaches to sweeping, netting and covering cash positions with traditional methods of covering shortfalls (company loan, overdraft) to enable treasurers to make better informed decisions.  By providing this kind of advanced functionality, a bank could attract a larger share of its clients’ cash and liquidity management business, hollowing out the share of the other banking relationships.

Corporates also want retail-like real-time payments and faster payment systems. Another area where corporates have invested heavily is reconciliation. Adoption of solutions like virtual accounts can help corporates digitize and manage cash management more efficiently. Now driven by the challenges and opportunities in modern corporate banking combined with regulatory changes, “Virtual Ledgers” are making their way into the corporate banking space. Corporate treasures focus on factors like efficiency, fund optimization, cost reduction, and STP operations. Rationalization of banking relationships is a key area of focus for businesses and virtual account management solutions allow corporates to do this effectively. With virtual accounts and on-behalf-of operations, the benefits are manifold – reduction in cost, risk and administration, easier liquidity management etc. Moreover, onboarding/opening of virtual accounts is much simpler compared to opening new accounts which comes with its set of KYC processes et. al.

Although plurality of corporate banking accounts will remain, the bank that offers services that add the most value will garner the largest fee income from the customer. In an Open Banking, real-time environment abounding with digital technologies, the possibility to innovate such services is virtually endless.

 

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