by Amarendra Gokhale, Senior Director, Product Management, and Raghu Nair, Associate Director, Product Management, Volante Technologies

Payments and Liquidity Management – The Current Context

The pace of change in payments is accelerating. New instant payment schemes and regional overlay services, upgrades to existing payment rails and SWIFT, new cross border payment networks, the rise of ISO 20022, regional open banking initiatives, and other innovations are disrupting traditional banking service delivery models.

One characteristic these trends have in common is a profound impact on liquidity management. The increased demand for 24x7x365 instant transaction capabilities, multiple nostro account relationships, large liquidity needs from corporates and correspondents, and regulatory scrutiny and reporting requirements have made banks realize that real-time intraday liquidity management is now a “must-have” capability, both for internal operations and customer-facing offerings.

Legacy systems and procedures stand in the way of this goal. Even today, many banks manage liquidity using manual processes and spreadsheets. These approaches are no longer viable in a world of always-on borderless money movement. The key to staying competitive in today’s marketplace, increase profitability, improve operational efficiency and reduce liquidity and settlement risk, is intelligent modernization and digitalization.

The Business Environment of Intraday Liquidity Management

Some drivers shaping the liquidity management landscape include:

• Real-time “always-on” payments systems operating on good funds model allowing for adequate pre-funding to manage settlement round the clock
• Increased time-critical & timed payments (e.g. CLS, DVP securities settlement, large corporate payments) heightening the need for precise funding
• Volatility in the financial and asset markets necessitating banks to hold more liquidity buffers
• Demands for larger intraday credit lines from corporate clients and correspondent banking customers
• The need for nostro liquidity in volatile emerging markets and exotic currencies as corporate customers continue to expand in overseas markets
• Small and medium-sized banks moving to cloud-based payment platforms resulting in demand for liquidity management service in the cloud
• Centralized liquidity management across clearings
• Challenger fintechs launching blockchain and cryptocurrency-based settlement models
• Increased regulatory scrutiny and liquidity reporting requirements that vary across regions

Liquidity Management Challenges

Banks must consider many challenges when dealing with intra-day liquidity management. They can be grouped into two broad categories: (i) Operational and Monitoring; and (ii) Cash Flow, Risk and Regulatory.

I.   Operational and Monitoring

• Lack of holistic view of intraday liquidity across clearing, correspondent, and central bank accounts
• Liquidity impacting events carried out across multiple applications, such as payments, treasury, securities, and custody systems
• Liquidity managed in different applications by separate functions within the bank
• Multiple nostro relationships in a currency maintained by different departments or for reciprocity reasons leading to liquidity fragmentation
• Absence of intraday debit and credit advices from nostro agents resulting in banks unable to confirm positions as settled

II.   Cash Flow, Risk and Regulatory

• Marginal usage of pre-advices resulting in treasury unable to factor anticipated receipts into their cash forecasts
• Currency mismatches, where bank has sufficient liquidity in some currencies but not in others
• Lack of reliable liquidity forecasting and data analytics
• The need to control liquidity exposure to counterparties
• Regulatory reporting overheads to collate data across fragmented systems and compliance to regulatory norms

The Way Forward

The days of customized inhouse liquidity management solutions are numbered. Banks today are looking for off-the-shelf or cloud solutions to address these challenges. A successful liquidity management solution should be able to:

• Monitor liquidity for clearing, nostro and central bank accounts in real time
• Forecast liquidity positions
• Fund and defund clearing and nostro accounts
• Reserve liquidity for certain time-critical departmental and corporate payments
• Throttle payments based on clearing capacity, counterparty limits and holds
• Provide real-time dashboard analytics and decision-support alerting based on high and low watermarks
• Export pertinent data to downstream regulatory reporting systems
• Integrate easily with other bank systems and clearing gateways (for statements and balance updates)
• Scale to handle rapidly growing payments volumes

The key to success lies in recognizing that intraday liquidity management must be a core component of a compelling payments modernization strategy. As banks of all sizes increasingly adopt cloud-based Payments as a Service models for payment processing, they should also consider Liquidity Management as a Service an integrated part of their approach. The sooner banks do so, the better their ability to remain competitive, manage risk, and comply with regulatory norms.