Global financial markets are riding a series of shock waves: interest rates are up, inflation is high, energy supplies are dwindling, and the housing market is down. This means financial institutions are facing a mashup of major economic risks, all at once.
Liquidity levels – recently in excess due to lower spending and stimulus during the pandemic – are now shrinking. That puts financial institutions in a difficult position. Since interest rates and inflation are up, there is a cost to holding cash.
To navigate these volatile markets, financial institutions need to use liquidity more effectively and efficiently. But with so many variables and so much uncertainty, is it possible to exercise control over liquidity?
Fortunately, help is available. Liquidity monitoring tools may enable self-service, support wiser decisions and drive deposit revenue. Financial institutions that employ proactive cash management strategies could gain a competitive advantage. And it won’t just benefit financial institutions. Their corporate business customers need liquidity management, too.
In its simplest form, liquidity refers to how quickly available funds can be accessed: what’s coming in, what has to go out, and when. Without sufficient liquidity, institutions can’t meet their financial obligations, which sets off a chain of negative effects.
“End of day” liquidity has been the historical standard, but it’s no longer a relevant measure. In a 24/7 world, real-time cash positions are more important, as is the ability to accurately forecast future demands. And regulators are asking for real-time monitoring and reporting.
To manage liquidity and meet compliance requirements, financial institutions need real-time visibility into both end-of-day and intraday conditions. They also need visibility across currencies, legal entities, internal and external cash flow sources, and across direct and indirect settlement relationships.
For example, financial institutions must plan for how much cash is needed over a weekend, when banking employees are not available. Or they may put too much cash in a non-interest account when a lesser amount would suffice.
When financial institutions have more information, they respond better to current circumstances. And even small changes in behavior can positively impact liquidity.
To manage liquidity and meet compliance requirements, financial institutions need real-time visibility into both end-of-day and intraday conditions.
Not surprisingly, corporate banking customers want liquidity management tools and processes to match new payment schemes, like instant payments. In a 2020 Fiserv payments survey, Payments Transformation: Immediate, Intelligent and Inclusive, nearly 90% of financial institution respondents believed a real-time approach to liquidity management would improve intraday liquidity.
Corporate treasurers want efficient cash management services and liquidity monitoring from their financial institution. They also want more control over transactions, money movement, payables and receivables. They need self-service tools to track cash-flow needs and figure out how (and when) to source funding.
For example, without prompt updates on liquidity status, intraday credit for corporate customers may be unnecessarily increased. Or corporate customer payments may be kept on hold or delayed due to lack of funding.
Liquidity capabilities are “sticky.” They strengthen corporate customers’ ties to their financial institution.
Making wiser decisions
Financial institutions (and their corporate customers) need real-time data and sophisticated capabilities to make decisions about liquidity. Funding, liquidity buffers optimization, intraday credit measurement and cost allocation all depend on real-time processing, cross-asset visibility, forecast accuracy, limit management and the ability to interact with payment flows.
With real-time and 360-degree views across payments and liquid assets, financial institutions can improve funding, further compliance and manage cash flow and risk. For example, they can better identify the root causes of trade fails and liquidity shortfalls or more accurately predict liquidity credit for customers.
Financial institutions are under pressure to manage liquidity effectively, even profitably, without introducing undue risk. And this requires having modern systems in place.
Corporate banking customers want to manage their accounts on-demand, not around “banker’s hours.” Sophisticated, real-time liquidity solutions can attract deposit business from corporate customers who are eager for a single gateway approach now offered by fintechs and virtual account structures.
Liquidity solutions help make cash management simpler and more accurate for corporate customers, which can drive deposit income. And a well-rounded deposit strategy is necessary to meet cash flow demands.
Most organizations lack the systems and tools to achieve sophisticated liquidity management. Data management is a roadblock, since data lives in multiple systems, across many partner and correspondent organizations. Data challenges make it harder to monitor real-time risk and manage intraday liquidity.
In today’s uncertain world, if you’re only managing liquidity to maintain compliance, your institution could be at risk. Financial institutions (and their corporate customers) need comprehensive solutions to support effective, real-time liquidity management. Then they can make the best decisions, even in poor circumstances.