In the decade or so since anyone last had to think about the consequences of rising interest rates, the field of liquidity management has been thoroughly transformed, thanks to new technology and data gathered across different sectors. Now bankers are putting these new tools to work.
“Right now there is a tremendous amount of cash liquidity in the system,” says Phillip Lindow, managing director of Treasury and Security Services (TSS) Liquidity Solutions at JPMorgan in New York. “But as the Federal Reserve looks to tighten monetary policy further, cash is going to get tighter and become more expensive, so optimizing cash will become more important.”
Clients in Asia, whether home grown or multinationals with business in the region, are keen to make the most of their cash.
“Liquidity management has always been absolutely core to cash management offerings in Asia, but as we are coming out of a low interest-rate regime, clients are taking a closer look at it,” says Suman Chaki, Asia-Pacific head of corporate cash management sales at Deutsche Bank.
“It’s not that they weren’t concerned – almost every RFP [request for proposal] would have a focus on liquidity management – but clients are trying to ensure they are maximizing the return on their liquidity, and there is an increase in discussions about it.”
Corporate treasurers look for efficiency, security, ease of mobility and yield.
“They will be conservatively invested and need their cash to be extremely liquid” says Lindow, in order “to get cash to where you need it at the right time.”
Plus they want to make the best of “both ends of their liquidity,” says E-May Neoh, Asia head of liquidity management at Bank of America Merrill Lynch in Hong Kong, namely “yield on their excess cash, and using internal funds to reduce borrowing costs.”
While treasurers’ needs have changed little during this period of low rates, the banks have developed much more sophisticated services in terms of data and analytical tools.
Martijn Stoker, head of liquidity solutions and escrow for Asia Pacific at JPMorgan, describes how data is “really bringing liquidity management to life,” providing clients with the kind of insights into optimizing their cash that they previously couldn’t achieve or act on simply because they couldn’t see them.
Analytics, technology and data have led to big improvements in fields such as the deployment and use of cash across multiple jurisdictions. Many companies that are active in Asia need to have their cash in several different places and currencies, with some requirements in-country and others at a group level. Making sure all of that cash is not only in the right place at the right time, but also working for the client, is tricky.
“That’s where the technology and investment have become more complicated,” says Lindow. “You look at the accounts that are short and long, and then put an overlay on top of that: multiple-currency, multiple legal entity, administered by group treasury.
“You might use your yen positions to offset your short euro positions or your long dollar positions, and through it all you get visibility and control and automation in one place.”
Clients who operate in global businesses and in numerous jurisdictions “want as much just-in-time funding across different currencies as possible,” says Chaki. “They don’t just want a dollar pool, or a yen or euro pool, but a multi-currency cash concentration pool where they can maximize their use of funds across multiple geographies.”
“Companies that get more out of their cash – by pooling it together and offsetting positions – are able to liberate a lot of working capital,” says Lindow.
He gives the example of a treasurer at an oil company who estimated the group was able to raise $1 billion of working capital by making the most of one of these solutions.
At a time when borrowing costs are increasing, that freed-up cash can be used to pay down debt and reduce borrowing requirements.
Sandip Patil, liquidity management services head for Asia Pacific at Citi, cites the example of a company active in 25 markets that set a new governance policy across all its group entities based on a benchmarking tool to offset surpluses and requirements.
“They managed to release $2 billion of cash and used it to reduce leverage,” Patil says. “Imagine the economic benefit the company derives from that. Their business is now much more self-reliant than it was in the past.
“Many customers have huge piles of cash they don’t necessarily need to use,” he adds. “Whether it’s surplus or not, rising rates always give the opportunity to become more efficient in seeking returns on that cash.”
Lindow and other bankers stress the importance of simplifying cash management matters.
A client may have hundreds of accounts around the world, with the cash held in “big, complex pools,” says Lindow. “Rather than all that complex structuring around account management, we can make it smoother.
“It sounds straightforward,” he adds. But it isn’t, bankers say. Achieving this simplicity requires a full understanding of exactly where cash is going back and forth, where it is needed and when, the spot FX that might be needed to cover movement between accounts, the hedges involved. Behind the scenes, it’s surprisingly complicated.
Lindlow says: “But once it is done, it simplifies FX exposures, reduces fraud risk in the system and creates a more comprehensive, sophisticated product.”
And it means it is a lot easier to follow what is going on with the cash.
“Today a treasurer in any part of the world has far higher visibility of where their cash is lying than they used to,” says Chaki. “Using big data, AI and digital solutions is bringing this to a better level: clients will have more accurate cash forecasting; as they become more efficient, their liquidity management will improve.”
It’s no surprise that all the big banks are pouring data into new models.
JPMorgan’s Stoker describes a “data lake” full of transaction information; the bank then looks for patterns and can filter out payments, match patterns and flows, and work out places where it can be helpful.
The bank is in the process of feeding “tons of history” into it, says Stoker. “The data lake essentially aggregates large volumes of information, including payment and balance intelligence, from diverse and disparate sources.”
Pulled together, it allows clients to see their currency and funding patterns “on a scale not previously achievable.”
“If you’re a big multinational, you never know when the client is going to pay,” says Lindow. “But we can forecast. We can look at hundreds of data points, look at patterns, use complex machine learning technology and crunch it all down to reliable forecasts. We are taking liquidity management to a new space.”
Similarly, Citi runs a product called Citi Treasury Diagnostic.
The bank collects insights and data from its client base across industries, pools it together, and tracks performance against key performance indicators. Then it can bring that data to life when working with an individual customer, benchmarking them against industry norms and giving ideas as to where treasury or technology efficiency can be improved.
“Big data allows you to give real-life ideas to clients,” says Patil. “Instead of just preaching, you are practising, helping them to get the benefits.”
This can produce some surprising findings. Clients often don’t know what they don’t know, and even the most efficient can be puzzled by what they find. One bank recalls the treasury services division of a German multinational being stunned at some of the flows they found happening when the bank ran a diagnostic on its liquidity management.
All banks have seen something similar.
“Even our most diligent and detail-oriented clients have found anomalies in their payment files using our data visualization tools,” says Stoker. “Payment patterns that they weren’t aware of surfaced.”
Such knowledge is very useful to have, because clients can see how to enhance liquidity and manage their funding more effectively.
|E-May Neoh, BAML|
But blind spots can arise when companies acquire other businesses. “When clients grow through acquisition, when you look at the whole account structure, you often find a lot of loopholes,” says Neoh at BAML.
She and her team once did a diagnostic for a client with its own enterprise resource planning (ERP) and treasury management systems and host-to-host connectivity, which is used for transferring large amounts of data quickly between client and bank.
“We realized that a lot of users within the portal had unlimited access and unlimited approval limits – some of whom didn’t even work in the organization any more,” Neoh says. “A diagnostic creates a lot of red lights where a company needs to review.
“The busiest times in my team are spent in workshops and white-boarding sessions with clients, where you sit down and design, from the foundation, account structures up to liquidity management,” she adds.
“We’re bound to see more of that as digital advisory services evolve,” says John Laurens, group head of global transaction services at DBS in Singapore. “The whole patchwork quilt of exchange controls and regulations and what you can and can’t do in Asia can be daunting.”
Through Prism, if a treasurer tries to drag and drop rupees from India to, say, a Singapore-based pool, he or she will receive an error message warning that regulatory controls don’t allow that.
“You will see more use of data and AI in liquidity management analytics,” Laurens adds.
What you don’t yet see in this space is much use of blockchain, which tends to be of more practical use in trade finance than in liquidity management.
“We deliver immediate cross-border payments across our network without the need for blockchain,” says Laurens. “All a customer is concerned about is that they need to get money from A to B as close to instantaneously as possible. Whether the bank is using blockchain or other technologies, that shouldn’t matter: the underlying transport mechanism is not the key. It’s about what works for the customer.”
The new technology is not without its drawbacks.
“E-commerce and technology disruption is positive, but from a treasury point of view it creates newer challenges,” says Patil at Citi. “The changing payment ecosystem, use of the blockchain and mobile banking all create efficiency, but on the other hand you have disruption on supply chains as well as expanding 24-by-7 treasury needs.”
Plus regulations can change without notice, with consequences for both treasury operations and tax reporting.
An example is the growth of APIs (application programming interfaces) with immediate settlement systems.
For example, on new insurance products with increased use of automation and AI, as soon as a system has made a decision to settle a claim under a policy, the payment is made immediately, no matter what time of day.
|John Laurens, DBS|
“It used to be that liquidity management was more concerned with end-of-day positions, but with the increased use of APIs delivering near instantaneous settlement that’s no longer enough,” says Laurens at DBS. Indeed, the whole idea of end-of-day is becoming harder to define as technology enables transactions to happen at any time in any time zone.
“End-of-day closing is now happening beyond the end of the day,” Laurens says. “To get balances crystallized at the last second of the day – which is what increasingly you need – requires investment in automation.”
Patil at Citi notes “a change taking place in expectations as everything is becoming real time. The time between customer demand and fulfilment is converging, whether for physical or digital goods. Wallet ecosystems like Alipay are crunching the cycle time in cash flows as well.”
A client who uses perhaps 20 currencies, with huge operations on both the supply and distribution side, “with changes happening all around them… they need insights from people like us who are touching multiple such clients and leveraging learning from serving their evolving requirements,” says Patil. “We can give them ideas on experiments they can make to improve KPIs and costs. If they are working on the efficiency of their liquidity pool, they can try an experiment across select entities or currencies, see how it goes, then roll it out more widely.”
Asian clients can have very specific needs when it comes to liquidity management because rapid growth, particularly through acquisitions, brings its own challenges.
“Many Korean, Chinese and Indian companies are now at a similar level to their counterparts in the west,” in terms of treasury and liquidity management, says Chaki at Deutsche. “Many of them have acquired western companies and inherited sophisticated treasury management systems.”
Chinese companies attract particular attention.
“In my experience, when Chinese corporates have gone overseas, they want to go straight to what’s world-class and best-of-breed, and that includes treasury management,” says Laurens at DBS. “Treasury operations at Chinese multinationals have come a long way up the curve. A few years ago it would have been a jump to reach the standards of western counterparts; today, they’ve moved on.”
“There are several kinds of Chinese companies,” says Chaki. Some, particularly in the technology, media and telecoms (TMT) sector, have acquired technology from an early stage, often setting up in Hong Kong or Singapore and then moving west. “They are focused on how they can optimise global liquidity.”
Others, with huge domestic operations in China, begin to grow overseas; they might require assistance setting up an entity in Hong Kong through which they can raise offshore financing, both renminbi and dollar, and can manage their international treasury operations.
Still, they share some common characteristics.
“Chinese clients make decisions very quickly,” says Neoh at BAML.
“They generally prefer to set up their international headquarters in Hong Kong, simply because of the proximity to China, and so investment and M&A will start from the office in Hong Kong. It is easy to set up a treasury centre there too.”
Chinese client needs can differ from the international norm.
“The trend is for companies to want to have fewer accounts,” Neoh says. “But they still like some segregation of accounts, with a subsidiary requesting funds from HQ.”
The proliferation of real estate companies in China and in Asia generally has consequences for the sort of liquidity solutions companies require.
“We have got situations in real estate companies where you have four tiers of cash concentration, with different legal entities for each building,” says Laurens at DBS. “To get everything back to a single position can get quite complicated. That’s where automation makes a big difference.”
Another service popular in Asia is the use of virtual accounts, for example if a client has a lot of retail customers from whom they receive money electronically.
Virtual accounts allow the client to reconcile the many credits into one; there may be thousands of underlying accounts, but these all feed into a single account for the client. That way “you don’t allow your liquidity to become fragmented,” says Laurens.
This trend has been noticeable in Hong Kong and Singapore, and more recently India, driven by the development of the Unified Payment Infrastructure there.
Patil notes that the need to free working capital through efficient liquidity management is perhaps particularly important in Asia.
“Asia is the manufacturing facility for the world: many operations in this region are always in demand for cash and always funding their working capital cycles,” he says.
However, all agree that a decision taken far from Asia – US tax reform – will have repercussions in the region.
“Following US tax reform, many clients are looking at how much tax they need to pay on offshore earnings that are not repatriated back,” says Neoh. “They are reviewing their structures, first to settle their tax bill over the last eight years and then to look at whether they need to repatriate cash to the US. That opens a discussion around liquidity management.”
Patil at Citi adds: “The US tax regimes will have a significant and profound impact on American companies operating in Asia, and the other way around as well.”
Clients moving internationally from Asia are only half the story; clients coming in have their own needs, particularly when it comes to the peculiarities of local regulation.
“When it comes to some non-Apac-headquartered companies, you do have to spend time explaining why China has made certain rules overnight,” says Neoh. “But over the years, their knowledge base has increased, and they are no longer surprised something can be implemented without consultation the next day.”