Cash management technology – race towards centralising, digitising and future-proofing

• Cash management banks have utilised information technology in three core areas – centralisation, digitisation and collaboration - in the face of a difficult operating environment
• Banks have introduced varied solutions such as pooling, interest overlay and virtual accounts that help clients centralise their various accounts
• Banks have turned to digital solutions to get better data analytics and expand its market including among SMEs
• Banks are transforming their IT architecture to facilitate easier external collaborations through various solutions such as application programming interface

According to the latest Asian Banker Research annual survey of transaction banking institution across Asia-Pacific, the cash management business is fast shaping up to be a technology arms race. Transaction banks today face the triple whammy of increased cost pressures, heightened demand for complex working capital solutions and external disruptions. In the face of these, banks are focusing their IT investments on three key areas – centralisation, digitisation and collaboration.

Centralising for efficiency

Corporate treasurers looking to maximise yields on their surplus cash and lower the costs of banking services are looking to centralise both their internal working capital and banking relationships.

Many companies in Asia have answered the call to regionalise their businesses, which give rise to more complex cross-border and multicurrency treasury requirements. Coupled with the need to maximise the yield from internal capital, regional treasurers are increasingly demanding cross-border cash pooling services from their cash management banks.

For corporates with businesses in or with China, this trend was given a further boost with the introduction of Shanghai Free Trade Zone reforms. Corporates can now integrate their onshore cash pools in China with their offshore global treasury centres through the two-way automatic sweeping of the RMB. Over $50 billion was moved as at end of 2015. Other free trade zones such as Guangzhou have introduced even easier qualifications for cross-border cash pooling. On the flip side, volatility in the RMB has driven the Chinese authorities to tighten capital controls in order to limit net outflows. Meanwhile, the slowdown in China trade and continuing weakness of the RMB have caused the currency’s share in trade settlement and payment to decline to 1.72% from 2.79% a year ago according to latest figures from SWIFT.

The current demand is centred on physical pooling structures. While notional pooling has higher efficiency and offers better onshore control of liquidity for the corporates, the restrictive currency controls in countries like Indonesia and complex regulatory environment make it less popular. Moreover, newly revised Basel III capital standards, which come into effect in 2019, will make it much harder for banks to provide notional pooling profitably. The new rules increase regulatory reporting burden on top of requiring higher liquidity coverage for notional pooling arrangements. 

Similarly, virtual accounts also saw a rise in popularity. Virtual accounts eliminate the need for multiple physical accounts while enabling collections on behalf and payments on behalf of multiple group entities through a single account. Corporates enjoy simpler cash management structures, lower transaction fees and an opportunity to achieve higher automation while maintaining a consistent view over payment and collection activities. For banks, virtual accounts are typically part of the front-end system and do not affect the underlying core-banking system, allowing for new capabilities without touching critical systems.

For some corporates that are just looking at higher yield, banks are offering interest overlay solutions that calculate interest based on the corporate’s net position. This solution is usually packaged as one of the incentives banks are using to encourage the concentration of cash management relationships. A bank in Singapore is
bringing this a step further by offering lower transaction fees between related entities and even the client’s clients who bank with them.

Operationally, we are also seeing banks across Asia centralising and insourcing their technology departments to achieve greater control and agility. A bank in Thailand has recently insourced their entire IT operations back from a vendor citing closer strategic alignment with the business. An international bank also set up a regional transaction banking technology group in Singapore to provide faster turnaround time to the increased IT demand.

Digital ready

Banks have spent the past years focusing on enhancing efficiency through achieving higher levels of straight through processing and automation. This laid the foundation for banks to drive greater efficiency through innovations in two key areas – digitisation and data analytics.

The enhanced systems laid the ground work for banks to drive profitability through the creation of more cost efficient products. One key innovation in 2015 is the introduction of open Application Programming Interface (API) banking. 

API banking differs from traditional host-to-host platforms by allowing clients to access banking services seamlessly from their internal ERP systems, eliminating the need for manual file upload of traditional host-to-host connections. This allows client to work in a familiar environment while enabling real-time transactions. Moreover, this solution requires less customisation on the client systems, which translate to faster client onboarding. All these lead to lower operational costs for banks and customers.

With a higher level of digitisation, more digitised information which creates more data points that can be accessed and analysed. Banks are starting to apply advanced analytics to the data to identify pockets of value and opportunities. For the clients, this translates to value-added services such as cash flow forecasting. Internally, banks can identify bottlenecks in their business processes as well as opportunities for cross selling of products and services. Deeper insights into the clients’ transactions also mean better credit risk review.

The provision of more cost efficient digital services coupled with advanced data analytics allow banks to expand their products suite to a wider base of customers, including SMEs which traditionally are overlooked because of their size as well as lack of reliable credit information. Servicing the SMEs is currently high on many banks’ agenda due to thinning corporate margins and new credit review approaches that make them a potentially attractive segment if managed well. However, servicing this segment can be expensive due to its higher risk and support costs. With digital channels and services less resources is required to service them while data analytics enable better risk review. An Indonesian bank successfully implemented a transaction based credit review system between corporate and its SME suppliers using data analysis. This method resulted in the reduction of loan processing time from four months to one. 

Open for collaboration

However, technology investment aimed at optimising existing operations and channels may no longer be sustainable . Banks now need to ensure
the investments are also future - proofed by having open architecture. This means the systems are agile to facilitate innovation quickly and allow for easy external
collaboration.

While the threat of fintechs might have been overstated for the cash management business, it is without doubt that this shift in mindset is partly influenced by these fast and nimble players. Banks are starting to explore ways to partner them. 

A bank in Singapore has successfully partnered with a fintech to provide payments collection service to micro SMEs such as childcare centres, a market it previously has little engagement with. In this arrangement, the fintech handles the front-end payments gateway and connect with the bank’s cash management services via API. This allows for real time debit/credit of collections and payments. It also offers real time account information among other account services traditionally accessible only though bank owned channels such as internet banking. The potential of this kind of arrangement will only grow as banks start exploring the delivery of more services through API, while leaving the front-end user experience improvement to the fintechs. 

The Competition and Markets Authority of UK considers the development of open API standards as having the greatest potential to transform competition in banking.