Banks’ Biggest Real-Time Liquidity Challenges

Faster and real-time payments capabilities continue to proliferate in the global financial services arena, and consumers aren’t the only beneficiaries of the trend. Corporates, too, are beginning to explore opportunities in real-time transactions in areas like payroll and intra-company payments.

The acceleration of the movement of money is likely to have significant implications for how organizations of all kinds – particularly banks and financial institutions (FIs) manage liquidity. Indeed, faster payments can support banks’ need to get cash where it needs to go in a timely manner. But in a recent conversation with PYMNTS, Planixs Financial Services Director Pete McIntyre said the drive toward real-time payments – and real-time liquidity management – is not only a difficult achievement, but one that introduces new challenges for treasurers of financial institutions.

“The challenge for the treasury manager is to be able to understand, right now, where all their cash sits across the various markets and time zones around the world,” he said. “Where is your cash right now, and is it in the right place?”

For larger, multinational and older institutions, decades-old infrastructures and siloed systems make it extremely difficult to aggregate data on cash positions in real time. But cash is never stagnant, and as money moves faster, it becomes ever more important to obtain that data on-demand.

Inflows and Outflows

McIntyre explained that in many ways, managing and accessing external information about transactions can be much easier for a financial institution. Data coming in via SWIFT messages and Fedwires enables a bank to obtain data each time cash goes in and out of accounts and gather a clear picture of the current state of cash flows.

It’s when FIs are tasked with managing the data of their internal operations and their own future cash movements that they can face friction.

“Building a view of what’s actually going on is much more straightforward than trying to view what you expect to happen, because the answer sits within your internal systems,” McIntyre said, adding that unlocking data from internal system silos can limit that visibility. “For an organization that’s been around for some time, they have such a wide range of architectures where this data sits, so that consolidating it into one place – so you can say, ‘I know what should settle in the Canadian dollar today” – can be the biggest challenge.”

Achieving that insight, however, is key to managing liquidity, particularly in a cross-border context. Understanding where cash lies today is essential to knowing where it needs to go tomorrow, and in what currency.

Real-Time Predictability

On-demand access to data on cash coming in, going out and moving around can certainly enable financial institutions to more effectively manage liquidity – and real-time payments capabilities can help those FIs move money to appropriate places more efficiently.

At the same time, however, faster payments add a new challenge to banks’ liquidity management challenges by making it more difficult for these institutions to be able to predict future liquidity positions.

“If you know in advance when transactions should settle, life becomes easier,” McIntyre said. “You know everything that’s supposed to happen today because it’s contracted in advance. It becomes more difficult when your payment activity is driven by what your customers do.”

In a retail banking environment, for example, a bank may not be able to predict that one of its customers will withdraw $100 from an account at a particular time on a certain day. When transactions move in real time, being able to reach that transaction with the appropriate liquidity adjustment isn’t easy.

“Although the bank will know about this transaction, and although it will be processed instantly, they didn’t know about it a minute ago,” added McIntyre. “The challenge is predicting what is going to happen on the bank settlement accounts when you cannot get pre-notified by a customer of payments going out or money being received.”

Increasingly, historical data has become critical to understanding future activity, he noted. Corporate treasurers who rely on current data to understand and manage liquidity are discovering that past information about the movement of money can enable more accurate predictions of what banks’ clients will do with their own funds, enabling those treasurers to more effectively prepare for liquidity highs and lows and make more efficient use of available cash.

There’s no doubt that real-time payments are impacting bank treasurers’ liquidity management strategies. While faster payments can support FIs’ need to more quickly move cash around the world, it can also hamper their ability to understand current (and predict future) cash positions.

As real-time becomes the standard for the way business is done, McIntyre believes that large corporates and their treasury teams will face these new hurdles and opportunities in their own liquidity management initiatives.

While unlocking data from silos and aggregating it in real time is certainly a major hurdle for banks and corporates alike, organizations may face an even larger challenge ahead.

“It’s probably less about technology and taking advantage of the data to analyze it,” said McIntyre, “and more about the usual inertia in any large corporation to do something different.”