AS THE GLOBAL economy picks up and companies build up liquidity and cash reserves, many of them are looking to the next step: how to improve returns from surplus cash.
With cash forecasting having been the focus for the past few years – when companies worried about scarcity of bank credit during the downturn and how to husband their cash resources – those that now have a clear picture of their flows can start to look at improving the process by which they invest that cash for the short term.
If corporate treasurers wait for cash position information to flow into treasury systems and then spend time researching investment decisions and calling up banks for pricing, they might lose a day’s float. By automating this process, they can increase returns on short-term liquidity, cut out the float that is left if they don’t concentrate and invest their offset position within the company’s varied global entities.
Andrew England, head of product management at Deutsche Bank, relates the growing interest in this process to companies’ persistent caution about investing for growth and desire to sweat higher returns from the cash that they are hoarding: “If you look at the current corporate space, companies have more cash at their disposal,” he says. “They are putting more attention on collections and paying down debt, and there is not so much borrowing going on in bond markets. Companies are generally building up liquidity. The next step will be to look at what they are going to do with that extra liquidity, and one option may be to look at building on their short-term investing strategies.”
There are three options for automation of investment management. One is having access to online trading systems that connect directly to a company’s accounts so funds can be invested in real time, settlement and confirmation can occur and information be fed back to the company’s in-house systems in real time.
Automated guidelines The second option involves setting up automated investment guidelines, according to which cash is automatically invested in certain pre-approved vehicles on a daily or weekly basis. This means that companies can sign up for a short-term investment option – primarily money market funds at the moment – where liquidity would automatically be invested. This would involve moving liquidity into one single account at certain pre-approved cut-off times and having funds automatically invested in the requested products.
The third option involves outsourcing the investment management process to a bank. The bank would automatically invest short-term cash for the company following specific guidelines.
There are a multitude of benefits for companies that decide to streamline this process, such as unlocking value in cash across the organization, increasing yield, and reducing costs associated with investment. In addition there are the advantages of removing the possibility of human error and minimizing other risks, improving straight-through processing, and freeing up time to work on other areas.
Given the range of options, corporates need to establish clearly what their goals are before taking any kind of decision. One market player says: “Is it to free up resources on their end, to do the same things as now but increase returns on short-term liquidity, or is it that they want to have liquidity available as quickly as possible? All of these will affect when and how they choose to automate.”
The next step is to ensure that there is a clear picture of the cash to be used for investment. Karin Flinspach, head of liquidity and investment, Citigroup Global Transaction Services EMEA, says: “Companies really need to have a good understanding of the cash that they have. They must get a picture of how quickly they concentrate and invest and what efficiency gains are being realized versus what could be realized. Most companies think that they are really efficient but there are always countries out there that haven’t been included in their pool, for example.”
John Gibbons, managing director, working capital cash flow advisory, at ABN Amro, says that in a recent survey the bank found that clients’ forecasting accuracy reduced from 72% out one week to 56% out two weeks. “So the number one reason why cash managers are inefficient investors is because they are inefficient in their cash management,” he says. “If we can help them become better cash managers by giving them a better overview of their predicted flows, that will solve one big problem.”
Enough cash in the pot So before taking a step forward to invest more efficiently in the money markets, companies must first take a step back and ensure that they don’t miscalculate the funds available to invest.
England at Deutsche adds: “The most important thing that a company must do is to make sure that its required liquidity remains in the account to ensure that its payments do not get compromised.”
Typically, cash managers continue to be concerned with liquidity and safety, not yield. So concurrently they are concerned with efficiency. Gibbons says: “We want to make the aggregation of cash as easy and efficient as possible, thus putting them in the best position to consider their investment management strategy.”
But, says St John Potter, regional manager for liquidity & investments, EMEA, at JPMorgan, liquidity concentration is fairly well established now, and corporates can look towards the next step. Outsourcing liquidity investment is a big stride.
“With investment management, where risk/return plays are a judgment call, you have all sorts of different views out there,” he says. “By putting money with different banks you can play a relationship game and get credit or other services and products, so to give up the investing process to just one bank might not be something all clients are willing to do. And clients who are considering it are then looking for a high degree of flexibility.”
Thus for some, keeping investment decisions in house is crucial.
For those companies that want to maintain control over the investment process, the question becomes how to make that process as efficient as possible. This is where systems providers can help. Most international cash management banks, trading platforms and in-house system suppliers are now connected on one level or another – if they were not they wouldn’t last long in the global marketplace.
And many have already begun automating elements of this investment process, explains Bart Parren, senior product manager at system supplier XRT. “We are striving for STP,” he says. This means that treasurers will input everything only once and the whole process will be automated after the investment decision is made. They can do a transaction on an online trading platform and we will take care of downloading that into our systems, which are interfaced with banks, counterparties and the company’s accounting systems. So you have a fully automated cycle.”
A complete service Parren says systems nowadays can offer all of this: “They provide access to market information to help in determining the right price; they allow you to set investment limits and keep track of risks; they handle the administration piece and send out settlement instructions; then they account for the whole thing and update systems. That complete chain is covered with full security and audit trails. That is the service that we provide in this.”
Mark Lewis, director of global sales support at solution provider Trema, says the key thing is providing information access: “On the short-term side the biggest way we help is in getting the initial numbers as fast as possible from banks and reconciling that very quickly through our automated reconciliation process, so the cash manager will spend most of his time decision-making, not collating data.”
In addition, some banks offer bespoke platforms where a client can access the site, get market information, movements, yields for the day and so on. Then if it wishes to proceed and make an investment or redemption, it can select the fund in which it is interested and hit the button. Settlement, confirmations and so on are then dealt with automatically. Most online platforms support some short-term investment products, be they money market funds or others such as SICAVs in France.
The passive approach However, those companies for which having complete control is not necessary – which are willing to give up some of that control to benefit from the proficiency of their banks and in order to create a more fully-automated, process for investing their cash – might take the passive approach and either outsource or set up automatic investment accounts.
JPMorgan’s Potter says: “Most companies are unlikely to have the expertise and access to low-cost delivery and execution that a bank has. So there might be enough value in it for them to select automated or outsourced solutions. This is a fast-moving environment.”
Citigroup’s Flinspach says this is more about automation at the banks. “What treasurers want to focus on more is making active investment decisions and designing investment policy, rather than execution. In order for this to be possible, we first need to see money transfer between banks on an automated basis, so the treasury doesn’t have to actively take the step to make a funds transfer. If the process can be automated on the bank end, it frees up resources.”
The problem, however, is that most bank systems are still rather isolated from the rest of the banking world, and even their online platforms still offer access to just their own or a select few investment vehicles from partner firms. And many of those products can only be straight-through-processed through accounts with the bank whose platform is being used.
The move towards a multi-bank marketplace, where clients can access investment vehicles from all the leading players and still have automated settlement and confirmation through any account they choose, is still work in progress. But, say market players, this will become the pattern.
Paul Galant, global head of cash management, Citigroup Global Transaction Services, says that the group is designing a treasury portal to fulfil these functions “What we are really trying to accomplish is to create an environment where companies can have complete transparency among all their banking relationships on one screen that shows cash, credit, and securities,” he says. “We are in the business of delivering that kind of information to our clients going forward. This is front and centre.”
John Nicholas, head of business development, global payments and cash management Europe at HSBC, says that technology is moving swiftly to meet these changing needs, by providing faster information globally, and giving access to rich sources of data upon which to make earlier investment decisions. “Enterprises are looking to their banks to offer ways to manage their cash assets alongside traditional deposits.”
He says that developments in technology, such as customer-to-bank (C2B) XML, which is a universal standard for payment initiation, are driving this change. “TWIST and RosettaNet are also providing additional benefits, such as user-specific transaction references and widely supported open standards. Technology enables such services as cashflow forecasting, providing decision support tools that enable further improvements in investment decisions.”
Although automation in this space is certainly a developing interest across the market, it is, at present, the domain of the leading banks that are implementing new technology and investing in new treasury solutions. Many other banks are not as yet even looking at the idea of setting up automated investment vehicles or taking on outsourced investment management.
England at Deutsche says: “From a bank perspective, you must look really closely at how you offer this, each bank must go through its own due diligence process to have a clearer picture on how it wants to move ahead.” The main issue is cannibalization of revenue, he says. “There is unlikely to be a clear business opportunity where you know from the outset that you have a positive proposition. You really have to be careful in how you position this capability. Up to now this is not a priority for us as we do not see clear benefits to be had in this space. This might be something, however, we will review given changes in client demand.”
But for other leading cash management banks this is indeed part the puzzle they want to put together for clients. Whether by simply providing access to their own single-bank trading platform which is integrated to in-house systems, by providing automated investment vehicles controlled by user-defined limits, or by taking on the entire investment management process, automating cash investment is becoming a viable option offered by cash management banks. As integration between banks improves, it will become ever easier to manage the entire cash management cycle with the click of a button.
