If you can’t see it, you can’t manage it; it’s one of cash management’s fundamental issues. So how can treasurers begin to see in the dark? It’s all about the financial plumbing…

Invisible liquidity is unmanageable liquidity. This inconvenient truth remains as valid today as it was when the discipline of liquidity management first emerged. Furthermore, whilst it may be widely-acknowledged, it certainly isn’t widely-resolved.

Yet the underlying problem that creates this situation is hardly a secret, says Bill Wrest, Senior Strategist – Cash Management Solutions, Gresham Technologies. It is, he believes, a matter of “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.

Reality check

One solution is to use a single global banking relationship that fulfils all a corporation’s transaction banking requirements worldwide. Whilst this seems plausible at a superficial level, regardless of whether it is commercially advisable, “it fails upon closer inspection of the practicalities”, says Wrest.

Firstly, he questions if there really is such a thing as a truly global bank that can offer 100% coverage worldwide using just its own network. Secondly, he asks if such a global bank would also deliver 100% consistency of technology and data formats worldwide.

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,” he notes. “It’s easy to see how treasuries can find themselves with hundreds of bank relationships and systems to manage.”

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,” says Wrest.

The first hurdle is simply determining the SWIFT capabilities of individual banks, he explains. “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 a completely homogenous data stream of bank balance information is to be achieved.

For a corporate treasury to identify and accommodate all these capabilities and nuances would be a huge overhead. Some corporates have already invested in top-end treasury management systems (TMS’) 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,” notes Wrest. “A TMS will only usually be connected to just the top few of the corporates’ bank relationships.”

Log-on and system proliferation

Probably the starkest physical illustration of the gulf corporate treasuries have to bridge in their liquidity management is the proliferation of bank login 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 it’s a case of ‘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 login capability that includes all a client’s other banks,” comments Wrest.

Perhaps not, but with the fintech community already offering real-time-enabled single login platforms capable of aggregating access to all a corporate’s electronic banking systems, it is a solvable problem, says Wrest.

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,” observes Wrest. 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”.

Access to this brave new world depends on having the right connectivity and visibility. Whilst some bank liquidity platforms offer additional visibility of third-party bank balances by polling for MT940s, this still constrains treasuries to ‘following day’ liquidity management. However, with real-time balance visibility, investments can be made before daily payment cut-off times, adding an extra day of return to surplus cash. At the same time, more efficient management of intraday overdraft limits becomes possible.

Granted, the extent of these opportunities will to some degree depend on individual banks’ capabilities – not all support intraday balance reporting – but in most cases, treasuries will be able to make appreciable gains and/or savings.

In practice, real-time balance visibility also opens the door to more cost-effective methods of inter-company funding and the optimal use of internal liquidity, says Wrest. 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 – he says intraday bilateral sweeping between an entity in surplus and one in deficit may also be possible.

Optimal vs sub-optimal

One of the ironies of the growth in real-time payment systems is that 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, says Wrest, banks and corporates have hitherto opted to use sub-optimal alternatives. But as he comments, “financial plumbing in and of itself may not be particularly enthralling, but the benefits to treasuries and banks of its correct deployment most definitely are”.