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Third-party money: A new form of cash management for treasurers

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Priyanka Rath, global head of liquidity and account solutions specialists at JPMorgan, and Lula Sheena, third-party money product executive at JPMorgan, explore some of the key considerations for corporates holding or processing third-party money flows.

As the world goes online and companies intensify their pursuit of e-commerce opportunities, companies are exploring new ways to digitise traditional value chains and embed themselves more deeply in the digital ecosystem of their customers, suppliers, employees, and other third-party stakeholders.

In turn, this digital and business model transformation is provoking growth in the types of companies operating activities that involve holding or processing funds on behalf of third parties, or third-party money (“3PM”), as JPMorgan calls it.

Examples of this abound – from fintechs, e-native marketplace and gig economy operators looking for ways to create and capture more value from customers or suppliers in their ecosystem, to traditional bricks-and-mortar companies setting up loyalty programmes or digital marketplaces selling complementary third-party goods or services alongside their own.

Consider a company looking to use its product returns process to drive loyalty across its customer base and enhance the end user experience. Rather than returning the funds directly to a customer’s account or payment card – outside the company’s digital ecosystem – a company could instead create the capability to transfer the customer’s refund amount into a digital wallet that resides within the company’s own ecosystem and offer, as an added incentive, a discount coupon to encourage the customer to purchase something else from the company with this money. The funds in this digital wallet are third-party monies, as they are being held by the company but ultimately belong to the customer.

So, what does this third party money (“3PM”) mean for corporate treasurers?

A different form of cash

At its simplest, 3PM is a very different type of cash to manage versus a corporate’s own cash (i.e. day-to-day working capital or investible proceeds and retained earnings). This is primarily due to ownership and the legal obligations associated with this type of case. Whilst corporate cash is proprietary and falls under cash/cash equivalents on a company’s balance sheet, 3PM is cash held on behalf of eligible third parties, and is therefore classified as such and accounted for separately.

A company that holds or processes 3PM is typically also subject to a multitude of additional legal, regulatory and risk considerations including licensing requirements, customer due diligence, and safeguarding. Corporate treasurers need to navigate jurisdiction by jurisdiction these dimensions and many others, if they are to successfully enable their company’s e-commerce ambitions, whether domestic or global.

Treasurers also need to assess how best to optimise currency management across corporate and third-party monies, and ensure timing mismatches do not result in real opportunity costs for the company or a fragmented user experience for their end customers. In a fast moving, consumer-led economy, customer satisfaction and the overall experience are paramount.

A company that holds or processes 3PM is typically also subject to a multitude of additional legal, regulatory and risk considerations including licensing requirements, customer due diligence, and safeguarding

A corporate may, for example, be collecting from its customers in one location and hold funds for a period of time that ultimately belong to a seller in another location (hence 3PM) until they are paid out. Ensuring such fund flows are managed appropriately and efficiently is the responsibility of Treasurers and requires a heightened focus on currency optimisation, reporting (to attribute accurate cash positions to the right counterparties), and regulatory obligations that may include the need to segregate 3PM from corporate funds.

The good news is that corporate treasurers are not alone in this journey. In this scenario, the corporate could leverage a bank’s balance sheet and access cash concentration, notional pooling and other optimisation solutions. Further solutions, such as virtual accounts, are also available to enable granular sub-ledgering and reconciliation across thousands of corporate entities and potentially millions of third parties a company may have within its ecosystem.

Help is also at hand to enable corporate treasurers identify the most effective corporate structure and funding strategy, and strategically evaluate how far they want to go in terms of owning or managing the flow of 3PM. The core business ambitions of a company and the investment required (in technology and talent) to manage the inherent risks and constantly evolving regulatory and reporting obligations associated with 3PM are all factors that play into this evaluation

Treasury teams looking to leverage 3PM solutions also need to implement aligned, consolidated reporting to help them assess the impact on their balance sheet. Some corporates already employ this type of reporting, but working with a globally connected bank affords access to a strong balance sheet for moving cash across borders to minimise funding gaps and lags.

Corporates also need to be cognisant of the risks created by inefficient processes as the cost of capital rises, especially as 3PM can have significant implications for the amount of cash sitting idle on the balance sheet in different currencies. If a corporate does not understand how best to combine these elements and have the right funding, liquidity solutions and account structures in place, the risk of significant cost being added to the bottom line is very real.

Read the other articles in this content series:

ISO 20022: A transformational standard

The megatrends revolutionising payments, and the world

Disclaimer: The views referenced in this article and video are of a general nature, and do not constitute financial advice. Please consult a professional adviser before making any investment decisions.

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