Sponsored TTM statement: RBS - Flexible tools for the era of surplus cash
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Sponsored TTM statement: RBS - Flexible tools for the era of surplus cash

Since the financial crisis, corporate treasurers have been thinking differently about their cash. New products are helping them ensure that cash is available when needed, where it is needed.

Michiel Ranke head of investment services, international liquidity and investment management, RBS Global Transaction Services

Michiel Ranke head of investment services, international liquidity and investment management, RBS Global Transaction Services

The financial crisis prompted a re-think about liquidity management among corporates. The focus on visibility and control of liquidity became even more important. Moreover, the crisis helped to change corporates’ liquidity priorities: yield was relegated as the primary driver of investment choices while risk management became crucial. As the financial crisis has subsided and economic growth has returned, the lessons learnt have not been forgotten. "The importance of liquidity management and the changed priorities of corporates in relation to liquidity remain in place despite the improved conditions," says Michiel Ranke head of investment services, international liquidity and investment management, RBS Global Transaction Services. "The new emphasis on risk is firmly established. Investment policies around the world have become dominated by the need to recapture quality, liquidity and transparency of investments; thus yield is no longer the driving force when making investment decisions."

What has changed in the more than 12 months since growth has started to recover is the level of cash being generated by companies. In many instances revenues have increased markedly, while strategic investment has been slow to recover given the uncertain global economic outlook. In addition, corporates became very effective at optimising liquidity during the crisis and consequently have become more efficient at managing their cash. Overall these developments have resulted in an increase in available cash.

"Corporates have much more idle cash," says Ranke. "However, CFOs’ and treasurers’ memories of the crisis and difficulties in obtaining credit are still fresh. Consequently, they don’t want to lock their cash up." Moreover, corporates are fully aware of impending regulatory changes for financial institutions, such as the Basel III rules that could result in a decrease in the availability of credit for some types of companies.

Changes to the way we look at cash

Although constrained by tighter investment policies, treasurers today are also looking to increase yield on short-term funds. Many companies are holding larger excess cash positions as a result of uncertain trading conditions (globally and across sectors) as well as the perceived difficulties in accurately forecasting short-term cash flow and keeping funds accessible. The overarching dilemma seems to be clear – balancing flexibility against the search for yield in a low-interest environment.

Just four years ago, before the financial crisis began, most corporates thought of cash in two ways: either it was operational cash – essentially frictional cash derived from daily operations – or it was fixed-term cash that could ordinarily be committed for a fixed maturity and was used for core investment with a reliable forecast. "The financial crisis resulted in the advent of a third type of cash, which we describe as flexible cash," explains Ranke.

Flexible cash is usually available for three to 12 months and combines the characteristics of operational and fixed-term investment cash, namely providing liquidity, high yield and adding a flexible flavour to the tenor of the investment. As such it can be used as a liquidity cushion and meet risk management criteria for lower risk investments. With a paucity of information about the financial and economic outlook, many companies are unwilling to commit this cash to fixed-term investments. Indeed, with most companies now using short-term liquidity as their primary source of working capital funding, corporates are eager to retain access to this liquidity. However, at the same time, they are keen to find ways to put this cash to work.

"People often say that in transaction banking, change happens rarely and is often slow to start," says Ranke. "However, the creation of this new type of cash – not required for operational purposes, but also kept liquid to counter the effects of unreliable external cash flows – is genuinely a new development in corporate behaviour. This change has occurred in a remarkably short space of time and, as a result, leading transaction banks are concentrating on finding innovative solutions to offer clients."

RBS has responded to these new circumstances by developing a suite of solutions that provide corporates with the flexibility they require while still ensuring a higher yield than would ordinarily be achievable. "We’ve worked closely with clients to develop solutions that address flexible cash so that they can retain access to their liquidity but gain rewards for specific behaviours, such as maintaining a stable balance or keeping cash in an account for a certain period," says Ranke.

New accounts from RBS

In creating new accounts that respond to the phenomenon of flexible cash, RBS carefully analysed CFOs’ and treasurers’ expectations in terms of risk and reward while also responding to the clearly articulated need for both convenience and visibility in any new investment product. The two new accounts created, the Yield Call Demand Account (YCDA), launched last year and now being rolled out globally, and the Growth Deposit Account (GDA) both fully meet this brief.

The YCDA is an account that rewards clients with a bonus rate for stable balances over an agreed interest period and a basic rate for fluctuating balances over that same period – a similar concept to some retail bank accounts. The YCDA is available for calendar periods as well as for flexible rolling periods of 30, 90 and 180 days, meaning that the YCDA interest is paid after the end of the interest period.

"The YCDA is designed for clients who hold stable flexible-term balances, have reliable cash flow forecasting, steady cash accumulation and periodic pay outs but desire daily liquidity," says Ranke. "For companies with such consistent and stable flexible cash positions, the YCDA offers improved working capital and enhanced current assets through a competitive rate of return, with the benefit of visibility and total liquidity."

RBS’s other new product that targets flexible cash is the GDA, which rewards the age of the deposit through the last-in, first-out method of accounting. There are up to five age tiers – each attracting different market interest rates. Clients receive term value if funds have met the required term (so interest remuneration is age-linked).

The GDA is designed for clients looking to earn term yields on the real-life behaviour of their balances but which have unstable cash flow or difficulties in forecasting inflows and outflows. Similarly, it is suitable for corporates that aim to do one-off payments for tax, acquisitions or executive payments over irregular periods of time. "In comparison to the YCDA, aged balances are rewarded, thus appealing to companies that have frequent inflows of flexible cash with the expectation to grow balances over a longer period of time. Again, this solution provides transparency and daily liquidity," says Ranke.

Visibility and control

The YCDA and GDA introduce a flexible class of accounts that break new ground in transaction banking. "RBS appreciates the need to simplify complexity for CFOs and treasurers when new and innovative solutions are introduced," says Ranke. "Visibility and control remain of utmost importance to really add value for clients.’’ To meet these requirements, RBS has enhanced the capabilities of its existing channels by adding the Liquidity Solutions Portal (LSP). The LSP gives clients a full overview of all current and investment accounts, including current account balances, investment services such as the new types of accounts: YCDA and GDA as well as access to the Money Market Portal - enabling customers to trade online across a diversified pool of money market funds including the Global Treasury Funds. Furthermore, the LSP offers key market rates and the ability to configure multi-bank cash concentration contracts. A comprehensive reporting capability has also been added that provides a better view of all liquidity positions and investments with an increased level of control.

‘’Among the added functionalities of the LSP is a greater opportunity for self service, giving clients online access to a wide range of investment solutions in one convenient portal," explains Ranke. "Historically, changing investment products or strategies was essentially a back-office function, but the volatile environment of recent years has brought the need to take rapid action to the fore. The LSP gives the CFO or treasurer full control, including over their investment products."

While the LSP enhances clients’ self service capabilities, RBS’s advisory teams remain available to address clients’ queries and requirements."

Expanding opportunities

RBS’s investment services are potentially applicable to almost every type of company. "Clearly, firms in cash-generative industries such as technology and professional services have been eager to use these solutions but they have potential benefits for firms with a wide range of cash profiles," says Ranke.

Uptake of the YCDA has been rapid and expectations are high for the GDA. The next step for RBS as it seeks to improve its offering to clients is smart analytics. "Real-time data is all about visibility," says Ranke. "Clients want to know where their cash is and what their options are. End-of-day reporting facilitates that and enables more effective decision-making. We believe that smart analytics can take visibility one stage further and enable better management through greater insight. Indeed, smart analytics – used effectively – can help to drive business decisions and even provide a competitive advantage."

In a challenging funding environment, it is well worth revisiting liquidity management structures to ensure day-to-day operational cash is available where it is needed, when it is needed. Ranke explains, "Through regular and open discussion, flexibility and innovation, banks can help their clients to unlock and re-deploy cash trapped in the business as well as providing solutions to match their external short-term funding needs."

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