Ten years from now, I predict that we’ll identify 2020 as the turning point for liquidity management and what could be. This year has pulled back the curtain and revealed a multitude of vulnerabilities, unexpected challenges, and previously unrevealed opportunities. We currently sit at a four-way crossroads, the intersection of legacy infrastructure, new technological capabilities, unabating globalization…and a pandemic. These four forces are now intertwined. While they do not seemingly pull us in any one direction, they may ultimately lead the way towards achieving real-time liquidity management.
When asked about the shift in treasury management, nanopay’s Director, Liquidity Management Solutions, Ivy Luu, drew parallels between today’s crisis and the one that occurred in 2008.
“The last crisis caused a philosophical shift in how we viewed liquidity management, and brought about many of the treasury solutions we rely on today. Interestingly, today’s crisis will cause a technological shift in how we manage liquidity in our operations, giving birth to the next generation of liquidity solutions, and ultimately, a new generation of technologically savvy treasury leaders.”
Some continue to argue that we have yet to land on a universal definition for real-time liquidity management. However, we at nanopay believe that ‘real time’ implies being able to execute on a decision as soon as one has been agreed upon. To see why the next decade could finally have us achieving true real-time liquidity, we must look at the four forces previously mentioned:
- Legacy banking infrastructure
This has long been an issue, as the demands of modern business stretch beyond the capabilities of legacy infrastructure. With constant delays in banks’ promises to overhaul their core banking platforms, the issue may finally be coming to a head. One of the fundamental issues lies in batch processes, even for intercompany flows. When combined with clearing windows, these outdated processes trap corporate liquidity, and this problem grows exponentially for multinational corporations. These are good funds that should be available when and where global corporates choose, and with today’s technology, should be instantly accessible.
- Unabating globalization
Many multinational corporations have complex operations, which include thousands of bank accounts in dozens of currencies, hundreds of employees working in receivables, finance, or treasury departments, and cumbersome processes in place to manage liquidity. In the case of liquidity management, operational complexity is exacerbated by legacy infrastructure, as it cannot be directly addressed by the corporations themselves, who continue to be heavily reliant on their banking partners to help manage their global network of accounts.
The current banking system was not built for globalization, hence the continued use of correspondent banking, end-of-day liquidity sweeps, and disjointed reporting mechanisms. Technology today can offer so much more to global businesses, and expectations have finally begun to rise.
- New technological capabilities
Very soon, an organization’s reliance on a bank’s legacy infrastructure will begin to decrease. The world has been keeping tabs on the implementation of faster payment schemes, but it is the introduction of new technologies and new liquidity solutions that will pave the way for real-time liquidity. Next-generation virtual account management (VAM) platforms, advances in blockchain technology, APIs, and new artificial intelligence products have provided an opportunity to deliver real-time data aggregation, visibility across all global entities, and instant intercompany payments. In the not-so-distant future, these technologies will begin to coalesce and enable the functionality necessary to reach a near real-time liquidity management practice.
While innovation in this industry has historically moved at a slow and leisurely pace, the current COVID-19 pandemic has brought an intense focus on the need for digital innovation in the banking and treasury space.
- The unforeseen pandemic
Similar to the 2008 Great Recession, the catastrophic spread of COVID-19 will bring about extensive change. Except this time, it likely won’t be in the form of regulatory reform. nanopay’s Managing Director, Treasury, Kevin Hillgren, was an M.D. at Credit Suisse and advocates for a better response to unexpected scenarios, rather than a better plan for the unpredictable. When discussing the liquidity crisis that followed the shutdown of much of the world’s economy in March of this year, Hillgren had this to say,
“The best way to manage when you have a market that is topsy-turvy is not an adjustment to your models, it’s gaining access to better, faster information, and being able to execute on it immediately.”
It seems that after every disaster, regardless of the cause, treasurers always come back to their liquidity models. This is no surprise, as new data helps us better predict new outcomes. However, liquidity models are simply not enough, especially when the difference is often the response, not the plan. As Hillgren says, “When life moves beyond the models, the differentiator is to be able to execute and see instantly, the impact of what you’ve done.”
The time is now
Change often requires a catalyst. For real-time liquidity, will an event as significant as a global pandemic be enough? More often than not, a singular catalyst may not provide enough momentum to get a concept from ideation to execution. Still, we all know the saying, ‘timing is everything’ and when it comes to real-time liquidity, the timing has never been better. Not only can real-time liquidity enable treasurers to better respond to unforeseen events, but it will also unlock billions in capital trapped by payment delays, fractured visibility, and disjointed data. Ultimately, real-time liquidity will bring treasury departments front and centre, from a back office function to a driving force for growth. 10 years from now when we look back on 2020, will the year be nothing but a horrible memory, or the catalyst that sparked a new age of liquidity management?
* If you want to learn more about the technology that will have us ultimately achieve real-time liquidity, you can tune in to Get Real (Time): Liquidity in the 21st Century, presented by Ivy Luu, CTP, at AFP 2020, or book Ivy for a meeting.