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Unlocking trapped capital in the 21st century

‘Trapped capital’ is not a new term, and it certainly is not a new problem, but it is a growing one. Trapped capital refers to cash or assets possessed by businesses and banks, that are temporarily inaccessible for use in paying off loans or investing in new opportunities. This problem is a significant one, as there is currently trillions of dollars which should be accessible, being trapped due to inefficiencies in processes, insufficient technologies, and lots of red tape. Unlocking trapped capital sounds like it could be the plot of the next great heist movie, but alas, it is the very real, and very daunting challenge currently facing thousands of corporate treasurers and CFO’s. 

A problem without a solution: Working capital

For many businesses, capital is trapped by an inability to either convert inventory into sales, or reduce the time it takes to be paid by customers. This is a challenge for businesses of all sizes, but for multinational businesses this problem is exponentially magnified.  

According to PricewaterhouseCoopers LLP, which examined approximately 14,700 publicly traded companies around the world, averaging well over a billion dollars per year in revenue, there was a total of $1.5 trillion worth of capital trapped by inefficiencies. That number represents more than $100 million per company and does not include the capital trapped at major banks. The problem is, converting inventory into sales can take months, and the average time taken to collect on a payment is still nearly 60 days, locking up close to one-third of all working capital. 

However, CFO’s cannot simply demand faster payment, and companies must hold a certain amount of inventory, which means that finding efficiencies requires creative thinking. Customizing payment terms for return customers, reviewing aging inventory, and examining current processes could all lead to small changes, as would cross-functional collaboration. Still, reducing trapped working capital in any significant capacity continues to be a struggle for most organizations. 

Trapped capital does not have a ‘solution’ per se, and requires new processes, methodologies, and technologies for any significant improvement. However, there will likely always be some amount of working capital trapped by the payment cycles and inventories required in most industries.

A problem with a solution: Cash and Liquidity Management 

Another cause for trapped capital is legacy banking, specifically, cash management tools provided by the banks. We believe this type of trapped capital does not receive enough attention, and can be addressed with innovative solutions. The cash and liquidity management space has long been due for an overhaul, with corporates becoming increasingly reliant on tools provided by banks to help manage their global operations. The main issue is out-dated batch processes and antiquated systems that trap corporate liquidity which, with today’s technology, should be immediately available to corporate treasurers. This problem is exacerbated, as it cannot be directly addressed by the corporations themselves. Many of the systems still being used today were first built in the 1970’s, with multinational corporates growing beyond the capabilities of the banks’ cash management toolbox. 

For example, liquidity sweeps are still arguably the most valuable tool in a treasurer’s toolbox, and most corporations are severely limited by their options: batched end-of-day (once-per-day) sweep, or the newer, (still batched) intraday sweep. This limitation is also aggravated by the fact that corporates have little control over their sweeps. Banks still own the sweeping process, which is inefficient, expensive, and lacks transparency, especially for those multinationals that function in multiple continents. It is difficult to quantify the amount of money that gets stuck in the system, especially when accounting for thousands of corporations sweeping money across multiple time zones in multiple currencies, but the effect is felt globally. Additionally, this problem does not exist solely for corporates, as banks have difficulty managing their own cash, not just their clients’.

New, innovative TMS (Treasury Management System) providers have done a decent job filling in the gaps for corporates, but ultimately the banks need to improve their offerings so that their clients can move money efficiently, transparently, and for less. Financial Technology providers, like nanopay, can now work alongside banks to help their clients achieve what was once not possible. By implementing new products, like Virtual Account Management (VAM) platforms, capable of executing intercompany transactions in real time, corporates can better manage their FX risk, create customized dashboards, and implement what we call ‘anytime, anyday sweeps’. This innovative, real-time sweep, would unlock enormous amounts of trapped capital by giving corporate treasurers immediate access to excess cash that once took multiple business days to be centralized and consolidated. This new technology can also give the control back to the treasurer, as some VAM platforms are self-service. Without relying solely on the bank, treasurers are empowered to execute decisions and make changes using minimal resources (and minimal cost) whenever necessary.

Forging a path forward

Real-time cash and liquidity management could prove unbelievably useful for many of the banks’ clients and we believe that a partnership model, rather than one that sees FinTechs and banks as competitors is the best path forward. A partnership approach would allow banks to keep clients with new, improved offerings, and allow FinTechs to enter a space that was once considered a black box. Most importantly, partnerships would bring new products to market faster, allowing corporates to free up billions of dollars of capital that has long been trapped by old technology. 

Reducing trapped working capital will continue to be a prolonged, arduous journey for most businesses, but reducing capital trapped by legacy banking doesn’t need to be. This is not to say that businesses should stop looking at ways to unlock working capital, but rather, focus their energy on more efficient ways to create liquidity. For decades, technology has not been capable of improving the cash management space, but times have changed. Still, it is up to corporate treasurers to demand new solutions from their banks, or risk receiving the status quo.

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