Cash management – changes, challenges and opportunities

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Cash management is key for firms operating cross-border

Cash management is especially critical for organisations operating across multiple geographies or multiple lines of business. What’s more, a corporate or SME business typically has multiple banking relationships, with close to 100 or more accounts across those relationships. With one physical bank account for all the payments and collections, tracking and reconciliation of payments, collections, account receivables and account payables becomes a mounting challenge.

We look at some of the key factors impacting cash management:

Payment innovations: Banks are working to leverage innovations like Swift gpi which, with its end to end tracking, faster settlements, and stop and recall service is bringing in a long awaited and slightly delayed revolution in the cross-border payments space. With payment schemes like SCT Inst in Europe, real-time payment schemes are on the rise and businesses demand 24/7 processing. RTP in the US is designed to cater to corporate payments with options for messages like Request for Information on top of normal pacs.008 or such payment messages. Swift gpi is playing a significant role in fostering faster, near real-time credits, creating enhanced propositions for banks.

Open Banking/APIs: From an era of proprietary apps, private APIs and close networks, banking is now 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 operates.

Changing corporate expectations: 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. They 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 digitise and manage cash management more efficiently.

Regulatory changes: Regulatory changes like the upcoming Basel III norms, norms related to BEPS, and thin capitalisation rules in various jurisdictions have now made some of the traditional products like Notional Pooling and Domestic/Cross border sweeping less appealing and very complex as well as costly to maintain. The implications of certain norms like IFRS IAS 32, presentation norms on offsetting and cash pooling are impacting the traditional liquidity management products like Notional Pooling. It is against this backdrop that banks as well as corporates are looking to rationalise their accounts and operational costs. This is where solutions like Virtual Accounts and on-behalf of payments/collections are gathering momentum.

Virtual Solutions: 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 own set of KYC processes and more.

It is critical for corporates to ensure that the accounts are funded optimally, overdraft positions are covered, interest is optimised at all times, and ensure that they have a holistic view of their liquidity positions across banking relationships. Businesses need to manage the “Cash in the business” at the “Balance Point” or at least within the “Optimal Zone” as required.

By James Buckley, VP & Head of Europe – Infosys Finacle