Intraday cash management: why banks must get to grips with their money

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Q: Financial institutions are, by their nature, concerned with money of every type, but some may not know exactly where all their money is all the time. How can that be the case?

Mr Chambadal: It’s a combination of factors. The first one is fragmentation of systems, business units and debts. It’s very difficult for a bank to get a single view of their positions, and incoming and outgoing payments in a single place. That is compounded by the fact that there has been a lot of merger and acquisition activity among banks, and if you merge two very large banks the fragmentation is compounded.

Even more critical is the lack of automation we see in the marketplace: about 82% of treasurers use either manual processes or spreadsheets to manage the cash.

Q: Are these problems caused by a lack of data?

Mr Chambadal: If anything, there's too much data. What's lacking is the ability to collect that in a single place and view it intraday or near to real-time. There needs to be a formal representation of the instruments and the ability to cut across all the different business units.

Mr Castor: Essentially, a lot of the banks created many systems to handle stove-pipe processes for particular product bases in recent years. What's happened since then is that there are a lot of transactions flowing around that cut across many of these different product types and across banks themselves. When there is an error introduced into the system through one of the manual processes, banks then have to spend a lot of time trying to patch them up. Most bankers will say they can look after your money and they know where it all is, and they're right to an extent, but at any one moment they don't really know where every cent is at every point of the day, in every country, in every legal entity, in every institution.

Q: How important, and how urgent, is it that financial institutions get a proper view of their cash positions?

Mr Castor: It’s hugely important. We have some of the most complex processing on the planet within the banking and financial system. The past few years have made that very clear to people, so the value of being able to get an intraday handle on what's going on with your money is, to a degree, the elephant in the room. There's been a lot of talk about overall liquidity in the long term, but knowing what you've got that day, so you can invest it, for example, is fundamental. 

Why does that matter? Number one, there's a straight revenue equation; if you're investing money at the end of every night, the more accurate you can be, the better. We know of many organisations that say they are flattening their positions, but on analysis we discover that they're not. One financial institution discovered that they were losing approximately $15m per annum on minor currencies alone just through not investing. The other urgent issues here are regulatory, and the effect on client service, because if you're only offering early cut-off times, your clients will go somewhere with a later cut-off time. If you're having errors on your client transactions, then again, they’ll move to a financial institution that doesn’t.

Q: What are financial institutions risking if they don't remedy the situation?

Mr Castor: The regulators are getting more and more interested in intraday liquidity. There's been a lot of talk about breaking up banks, about bonuses, and of course about stress-tests and about having capital buffers. Basel III’s Principle 8, for example, talks explicitly about the need for having a handle on intraday liquidity, which means knowing where all your money and assets are during the day. Similarly, [UK Financial Services Authority] Policy Statement 0916 talks about the cause of the crisis being down to intraday liquidity, which is absolutely spot on. Other regulators are doing things without writing any regulations. We know of one bank that was told directly by the Monetary Authority of Singapore and by the Hong Kong Monetary Authority that a particular software was not a suitable system for holding intraday information.

Regulatory bodies are showing that they wish to react in the wake of the crisis to make it clear that they are taking steps to rectify things.

Q: What do banks need to do to comply with the wishes of the regulators?

Mr Castor: Firstly, banks need to get into a position where they can be very clear about where all their money is. The big differentiator here is to be able to validate that against actual messages that come during the day from other financial institutions. And that’s something that has begun to grow and will continue to.

They also need to be able to consolidate this across the myriad of different entities, currencies and departments in their organisation. One financial institution I’ve been working with found that it had done a C$500,000 [$511,000] placement into the market on the same day that another part of the same legal entity borrowed the same amount from the market.

It is also necessary to automate this and make sure that it is all straight-through processing. The volumes are just too high to be handled manually.

Q: Illiquidity, rather than actual insolvency, was one of the key issues during the financial crisis. If banks had been able to manage cash in real-time, might the effects have been less severe?

Mr Chambadal: No question. If banks had known the position in the course of real-time, instead of just once a day or the next day, then the impact would definitely have been less. The issue was a liquidity management issue, not necessarily a systemic issue. If banks have a clean trade warehouse, then they can leverage the existing data to move to a proper cash management solution and when there are issues, both the regulators in the marketplace and the financial institutions themselves, can isolate and resolve the problem very quickly.

Q: Regulatory compliance is obviously essential to doing business, but how else can financial institutions benefit from proper cash management?

Mr Chambadal: If you have proper risk management, proper reference management and proper management of your cash, you can deploy your cash resources much more efficiently and so make more money out of your existing assets. At the same time you can improve your client service, which I think is critical. Buy-side and corporate clients want banks to move to a real-time or quasi real-time world to get proper access to their funds and make sure that they are properly compensated for the cash they have sitting in the bank.

Q: Does that reflect what SmartStream is hearing from its clients?

Mr Chambadal: We have 1500 clients, including most of the large banks and money managers, custodians, as well as fund-servicing firms using our solutions. They want to eliminate fragmentation across the whole trade cycle to get a single view of their positions and a single debt model for all instruments. That way they can have one representation of their risk, one representation of their client’s and one representation of their instruments. Also, If you're using a single solution end-to-end to manage the trade lifecycle, you're going to get much lower costs per trade.

Mr Castor: If you get a good handle on where your money is, you can invest it for the best return overnight, especially as interest rates rise. That way you can avoid any problems from the regulators and can be sure that you're giving clients the best possible service. 

You can also start looking at the management of payment liquidity intraday, for example, and introduce a delivery versus payment control. On top of that, you can start looking at your management information systems to manage your network of agent banks better. That way you can actually start pushing the errors back to them, bring in funds or transfer pricing, then link that to asset liability management, which at the moment is typically run quite separately from day-to-day activity. It’s just taking control of what's going on and it opens the door to really managing and controlling your bank as a business, rather than always playing catch-up.