The dawn of T+3 minutes liquidity management
By Nadeem Shamim, head of cash and liquidity management, SmartStream
In addition to increasing pressure from regulators, the global momentum around instant payments is making real-time intraday liquidity management a must-have. There are now more than 40 real-time/instant payment systems that have gone live or will be implemented globally. In a real-time world, settlement happens in minutes rather than days and settlement cycles occur throughout the day.
It is no longer sufficiently acceptable to know the daily liquidity needs at the beginning of the day. Focus has shifted to know the liquidity demand at any time of the day, i.e. what is the demand right now versus at 10.00 am. Financial institutions need to monitor in “near real-time” to ensure adequate funds are available to meet payment obligations.
To meet this challenge, treasury and cash managers will need to enhance their cash forecasting so they can better manage demands on their liquidity at different points throughout the day and predict when demand for liquidity is at its highest. A failure to do so means institutions are more likely to have to rely on costly overdrafts or unnecessarily high liquidity buffers.
For many organisations, this level of visibility and control over their intraday liquidity introduces considerable challenges as it requires them to consolidate information from different operational silos and systems to form a consolidated view of their liquidity across multiple accounts and currencies. While large global financial institutions have invested in automated cash and liquidity management solutions, for many firms, liquidity management is still a daily manual activity with spreadsheets, emails and phone calls used to collate and share information.
Even for those firms that have implemented automated solutions, many may not deliver the fully integrated real-time view of their cash and liquidity that is needed. Yet, without these solutions, financial institutions cannot track and monitor their liquidity in real-time and have little chance of reducing the hidden costs associated with poor and ineffective liquidity management.
A technology tipping point
Help is at hand. Next-generation technologies like cloud computing, artificial intelligence (AI) and machine learning can help organisations achieve real-time proactive management of their global intraday liquidity. For too long, treasurers and cash managers have relied on manual processes and their knowledge and experience to help them understand how liquidity changes throughout the day.
Using AI, financial institutions can more accurately predict when receipts are likely to arrive. No more relying on costly overdrafts or last-minute borrowing as non-urgent payments can be better managed to optimise the use of available liquidity. AI and machine learning can also help treasury and cash managers more accurately predict seasonal changes in liquidity around significant dates (Christmas, Easter, public holidays) or market events (Brexit, counterparty or market-wide stresses).
Equally, the cloud makes it easier for institutions to deploy advanced data analytics such as AI and machine learning. Cloud computing significantly reduces the upfront investment and time it takes to deliver an automated and integrated cash and liquidity management across disparate operational silos. A subscription-based pay-as-you-go model means institutions can easily access the functionality they need. Firms also benefit from economies of scale, regular technology updates and ongoing investments in security
There has never been a better time and incentive for financial institutions to proactively manage their liquidity. Regulatory, operational and cost pressures demand it, and technology is finally at an inflection point where legacy IT systems are no longer a barrier to an institution’s real-time ambitions. The benefits for financial institutions from actively managing their liquidity are not just confined to regulatory compliance: lower cost of liquidity; better visibility of how liquidity is used by different customers and business lines; the ability to incentivise liquidity saving behaviours; more effective management and control of liquidity to help institutions better manage risk. The time for active real-time intraday liquidity management is now.