Getting down to business

Technology is playing an ever more prominent role in the cash management world, but it is not necessarily driving the trends. “[Cash management] isn’t more IT-driven than a few years ago, but rather it is more business-driven, and this is good news, as the business-driven agenda is critically dependent on technology,” says Edward Glassman, head of transaction delivery channels, transaction banking at ABN AMRO. “The level of investment in and dependency on technology, on the bank and corporate sides, has been raised dramatically over the past three to five years.”

He highlights the continued drive for improved efficiency, and the strong desire, at every corporate level, from large multinationals to small businesses, to streamline operations and get the best use of working capital. “Technology plays a critical role in facilitating that,” he says.

Geographic differences

The level of progress in digitised information varies widely across regions. While market practices in Asia are still often done manually, in the US and Europe, straight-through processing rates are estimated to be well into the 90% bracket. The basic thrust is to squeeze out inefficiencies in these corporates’ operating systems, which market research group Killen Associates says can entail staggering amounts of capital. The group estimates that a typical billion-dollar company spends about $27m a year on unnecessary working capital and inefficient processing functions. The heavy investment in e-procurement in recent years has not fed through into automation of the payment process and there remains a lack of progress in this area. Although e-ordering now takes seconds and goods can be delivered on a next-day basis, it can often take months for payments to be moved.

Another report by technology adviser the Aberdeen Group claims that most companies still rely on manual and spreadsheet-based processes. The majority of 160 corporates surveyed in a recent report lacked integrated processes for managing cash, with almost half of all processing still done manually.

Electronic banking

There is a scramble on the corporate side for IT systems that allow a corporate to address these problems by using real-time information. As a result, there has been a significant movement into electronic banking by corporates of all sizes and, with the decline in cheques and more traditional cash management payment methods, these companies are looking for a more real-time view of their cash flows.

“They’re leveraging some of the things we’ve done, such as real-time updates of debits and credits and real-time nostro,” says Tony White, development director at Wall Street Systems, which provides transaction-processing software.

“Corporates are taking the view that because of the amount of capital involved there is a need to improve their cash management to get a better intra-day view. With the increase in payment volumes, these clients are looking for more efficient methods to distribute cash, and more rule-based payment factory type solutions that they can link into the most efficient way to settle their funds.

“The big thing on the corporate side is more use of real-time intra-day information, while the big frustration is that a lot of corporates have relationships with local banks, which may not be the best banks with the best cash management solutions.”

To maintain their corporate relationships, smaller banks are struggling to offer these types of services, but in many cases they lack the technology and infrastructure to provide corporate customers with real-time reporting. “This makes it inefficient for the clients, but that’s where the driving pressure is for the banks – to provide the same sort of information to their corporate customers that they expect from wholesale banks,” says Mr White.

Tim Martin, business development manager at SmartStream Technologies, explains that one of the key areas the technology provider is trying to achieve in the delivery of solutions is proactive (rather than reactive) information management. “Historically, we found that many clients would wait for a bank statement to get into their system and use that to drive their cash management process,” he says. “That’s after the fact and it has already incurred some element of cost because you may have gone overdrawn. People are still driving cash management calculations through bank statements. What we’re working on with clients now is to get real-time information feeds coming in to update their balances. The objective is to get the latest and best information in order to be able to make informed decisions.”

Significant savings

This provides multiple benefits for the client, with significant savings in overnight interest charges, the ability to perform sweepings or realignments across a company’s accounts on value date two, sweep out excess balances into the common pool and eliminate unnecessary overdrafts.

“These savings can amount to hundreds of thousands of dollars a year,” says Mr Martin. “We work predominantly with banks, but the requirements with corporates are similar. From a technology point of view, the underlying components of our applications fit into both worlds. The banks are moving faster than the corporates on this front, as it is now largely a question of volumes and this is influencing the spread of technology. As volumes have risen, it has become almost mandatory to employ systems to take out the legwork.”

ABN AMRO’s Mr Glassman says that the most sophisticated companies are at the leading edge in many areas. The bank works with these clients in developing very tight process innovation between what they do within their business and what the bank does within its own, and how that interrelates with the global clearing systems and the flow of information. Those same drivers exist below the multinational level as well.

“We are seeing that enterprise resource planning (ERP) systems are showing up similar needs in the middle market, in that they also want to have one-touch processing and end-to-end integrated financial information and business transaction information,” he says. “When it comes to optimal use of capital, smaller companies are now dealing on a more global basis. It is routine for some smaller businesses to be significant importers or exporters as a portion of their operations. Management of capital and the cross-border flows for middle-market companies with account structures throughout the world, allows them to leverage our more sophisticated liquidity management services with things such as global notional pooling.

“These are sophisticated instruments that were previously leveraged by the treasurers of large multinationals. This is now showing up as part of the standard remit of the treasurer at a much smaller company, and this shows that businesses are becoming more sophisticated and are looking for banking partners who can offer them services that tightly integrate with the way they do business. This leads to better use of capital and is fundamentally dependent on having cutting-edge technology.”

Banks will typically use IT providers as well as their own in-house technology capabilities to provide solutions for their corporate customers. Banks look to buy things that are more standard services and components and selectively build where they see a distinct market advantage. The model is often a hybrid, where a bank will work with a best-in-class partner on buying a standard kit and then have them build special modules that are used solely by the bank.

Sectors diverge

While the global banks have been pulling ahead of the corporates in cash management operations, a huge amount of paperwork (estimated at up to 80%) is still processed manually by back-office personnel. The two sectors have diverged, as the banks have more choice than corporates in how they deal with cash. In the past, corporates were far more efficient in their cash management operations. Banks are not only using cash to ensure they are liquid, but are also using real collateral, such as bonds.

There is now an awakening among the financial institutions that there is a lot of ineffective collateral management about to fund their cash management operations. People are looking to bring these disciplines together under one umbrella, and this is one of the major trends that has developed in financial institutions in the past couple of years. On the bank side, the needs are crystallising in a triangular cash-liquidity-collateral management, whereas with corporates it is still purely cash management. They have a need to fund their operations, so they invested a lot of time and energy in cash management. Now that the banks have taken the lead, there is a lot more real-time information available.

“There are more demands for solutions for cash, liquidity and collateral management in the bank sector,” says Mr White. “Experience in the corporate sector has been useful in financial institutions, which don’t have accounts payable and receivable systems, but do have a lot of cash flows coming from their front office, commercial and retail systems. They’re essentially looking for the same type of thing – to add all these up and get a net position, which is exactly what the corporates have done. People are trying to make best possible use of capital and they don’t want to be unnecessarily tying it up in their cash or liquidity management operations.”