Corporate customers increasingly have multiple accounts and a presence across borders, making it hard for banks to provide real time visibility of their liquidity position. Open banking offers all parties the perfect solution, writes Darryl Proctor
Cash is king. And to prove it, since the 2008 global financial crisis many corporates are holding record levels of cash, according to a report by Celent and HSBC. It's the Treasury departments' responsibility to use these cash piles effectively, but they are being hampered by increased regulation, low or negative interest rates and money market reforms.
The pressure for efficient management has grown as liquidity costs have risen – research by McKinsey, in its report Liquidity: managing an undervaluated resource after the crisis of 2007-2008, suggests they have increased by 10 to 50-60 basis points over this period. It also estimates that the increased liquidity costs can be mitigated by up to 50 per cent though better liquidity management, including improved transparency and better data. A lack of visibility is also making the job harder and more expensive than it need be.
Cash visibility and liquidity came out as the top two themes in our recent global survey, undertaken with Ovum, Understanding the Corporate Treasurer. This is nothing new and is not a surprise. What is surprising, though, is that more banks are not using the available technology to allow them to meet these challenges more effectively.
Many banks still can't deliver real-time cash balances, let alone aggregate feeds from their customers' other banks: only 13% of international corporate treasurers can see their cash position in real time while more than a third of our respondents have at least 11 banking relationships. Without this aggregation, Treasury departments must spend time filling in spreadsheets and use historical balances to work out the company position. The drawbacks are obvious – the work is time-consuming, the data out of date before it's even compiled, and errors can creep into manual processes.
But it doesn't have to be like this. As the world becomes smaller and the average number of banking relationships increases, open banking makes more and more sense. Europe has already made a start. PSD2 must be adopted into member law by January 2018 and makes it compulsory for a bank to share data with third parties once mandated by the account holder.
The rest of the world will follow. It's a connected world and data sharing is the future and open banking will allow banks to automate the process. We're not talking about wholesale system change – although many banks are finding huge benefits from replacing their complex legacy systems with digital core platforms. No, it is possible to provide access to third parties and offer mobile services without ripping out a core system. The key is application programming interfaces, or APIs.
APIs allow banks to offer all kinds of services that will deliver improved visibility and ease liquidity challenges. For example, a payment needs to be made in the US by a French firm, and the Treasury department based in Paris needs to know if there are sufficient funds in its US bank account. APIs giving open access in real time will allow a bank to deliver this information, possibly saving its customer from borrowing dollars unnecessarily.
According to our corporate treasurers' survey, only 38% of corporates use their lead banks for cash visibility, leaving 62% in the dark. Banks using API-driven feeds could clean up. Even Swift isn't there yet as it doesn't deliver real-time balances.
Similarly, mobile services remain a clear opportunity for APIs. Just under a third of treasurers said gaps in the functionality available on corporate mobile services were a big challenge. They are looking for real time balances, payment or trade confirmations, customisable alerts on liquidity and trading positions, the onboarding of new accounts and cash management.
Blockchain is following hard on the heels of APIs. Open banking will become easier using distributed ledgers.
But it's not just the banks' clients that will benefit from improved visibility and liquidity. McKinsey says in its liquidity report that banks themselves must "significantly improve their liquidity management systems", citing research that shows using historical rather than current market rates for pricing loans can give the appearance of profitable lending when in fact the bank is incurring a loss.
The key to profitable activity is visibility and liquidity. That's never going to change. Banks need the right technology to support their customers and thanks to APIs, digital banking, opening access and eventually blockchain, they can provide corporates with both to help them maximise the utility of their liquidity, meaning cash will retain its crown, stronger than ever.