Corporates lack investment options on liquidity pools
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Corporates lack investment options on liquidity pools

Despite the frenetic pace of innovation in transaction banking in recent years, a lack of viable investment products is resulting in low returns on corporates' large liquidity pools.

Post-crisis, corporates have been stockpiling liquidity as a response to shifting market dynamics: some balance-sheet-constrained banks have restricted funding to lower credit-quality borrowers; many companies covet cash-flow flexibility in the event of a shift in the economic cycle; while a lack of demand in the real-economy has led to diminished R&D opportunities.  

At the end of 2014 $1.73 trillion was being held by US non-financial corporates alone, figures from Moody’s show. With $178 billion in cash, Apple represented 10.2% of all corporate cash holdings. This was followed by Microsoft with $90.2 billion, and Google with $64.4 billion. 

But low interest rates have capped returns on corporates' liquidity pools. Corporates are seeing only 20 to 30 basis point returns on their traditional cash holdings. Large corporates are finding few positive-yielding investment opportunities in which to place their surplus cash.

Alexander Kemper, chairman and CEO of fintech company C2FO, says: “At the present time there is a significant amount of liquidity available, but we are not seeing economic growth. The funds that are available are not being utilised to encourage growth.”

He adds: “The static pools of liquidity within corporate banks accounts are not earning them any money.”

Corporates that are choosing to hold cash on their books are barely generating positive carry. In fact, in some markets such as Denmark, some small to medium-sized enterprises face negative rates on deposit accounts. 

Charles Henri Royon, vice-president EMEA at payment platform Tradeshift, says there is a wide-spread feeling of low confidence that is stopping liquidity being put to good use. He says: “Opportunity outlook and confidence should be improved first. And this is a question of policies, both fiscal and monetary.”

This excess in funds comes at a time when further down the chain access to liquidity is scarcer than ever. Banks are facing regulatory difficulties in lending to smaller companies, but some businesses reckon this presents an opportunity for lending to their supply chains through accounts receivable.

Mark Thomas, director client operations at C2FO, says: “There are record amounts of cash in the financial system after years of quantitative easing. However, it is not getting to the SMEs who need it most, and who have always been the primary engine of economic growth.”

Kemper adds: “There is a desire to de-risk in the supply chain. Through using accounts receivable it is possible to release funds earlier.”

Thomas says: "Acceleration of payments allows liquidity to flow to the suppliers who need it at a cheaper rate than their alternative cost of financing, allowing them to invest for growth.  As the invoices are already approved for payment, this is risk-free to the large corporates and the return they receive on their cash from the discounts is far higher than other options."

Bank involvement can help make the most of funds during times of low returns. Amit Agarwal, head of liquidity management services, EMEA, TTS, Citi  says: “A corporate's balance sheet is adversely impacted by the cost of negative rates on their short-term deposits. Citi is helping our clients to reduce or even eliminate these costs and subsequently improve their bottom line. This is done through advanced cash management consultation, in depth flow analysis and eventually through the development of the right liquidity structure."

Agarwal says there are a number of options: “Institutional investors who are looking to make the best use of their finances should look to maximise their short-term liquidity through the utilisation of regulatory-friendly deposit accounts. These products pay a premium on top of the normal rates, enhancing the interest earnings of the depositors without necessarily adversely impacting the risk or liquidity profile.”

The process of freeing up the funds could benefit from more radical thinking. Although there is the suitable climate for change, there does not seem to be a great deal of movement in the development of new products by banks. From them, there is the issue of ensuring that solutions are compliant with regulation, and can still be attractive and profitable products. This takes time to develop.

Further bank involvement to create additional investment methods could open up additional channels for growth and development. Agarwal says there have been some developments to date: “Another interesting investment option for a corporate's excess liquidity is layered solutions, where the bank applies different investment instruments per different liquidity tranche.

“Short-term and volatile liquidity is typically invested on money-market funds or deposit accounts and mid-term liquidity can be deployed on dynamic discounting programmes, achieving discounts for earlier repayment of invoices, thus enhancing ebitda for the firm. The key success factor for the efficient utilization of these solutions is the level of integration into the cash management structure and the option to easily leverage these tools in an automated manner.”

A number of factors are still holding back the potential for such product growth, including a slow reaction to the evolution of new technology. Royon at Tradeshift says this is another hurdle to overcome, but could open up an array of new opportunities: “The state of technology means there is still a lot of things to develop, such as better know-your-customer processes or real-time data availability through the internet of things. Banks still have a slow responsiveness to participation in co-development or cooperation partnerships with fintech companies.” 

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