OK for most of us this sounds crazy. Cash management is a commodity. All the big banks do it. All the small banks offer it, even if they have to outsource it. Companies need it but there’s nothing new under the sun. Right? Wrong!
Business banking is going to change. Today banks are primarily used as ways to carry out financial transactions. But in the future, banks will be primarily considered as trusted advisors. Of course they are to a degree already. They provide advice on risk
management in particular. They do this through hedging products, investment advice, etc.
What is Cash Management Today?
Cash management today is heavily transaction-oriented. Most obviously it includes basic account management (deposits, savings, CDs, etc.) and payments. Bigger banks offer services in the areas of receivables management. This may include services like enhanced
ACH receipt and image lockbox. They also often offer payables automation services. Examples would be bulk mixed payments and invoice presentment.
Some banks also offer credit services overtly. (Most cash management products actually carry some form of credit risk). These are typically forms of working capital financing. Working capital finance bridges the gap between the expense of providing a products
or service, and receipt of payment.
Why Will It Change?
Over time, independent less-regulated companies will be able to take over mundane transactional activities. They will do so with greater speed and lower cost. Banks may lose significant non-interest income, which they can’t afford to do. So they will need
to find new ways of generating revenue.
Change will become possible because of emerging technologies. These will enable services that cash management banks have only dreamed of before.
It’s All About KYCB - Knowing Your Customer’s Business
Banks have a ton of data about the customer’s business, whether they realize it or not. For businesses that have only one bank, all payments and receipts flow through them (other than cash). But today, most of this data is only a historical record of transactions.
What if banks could effectively use all the data available to them?
Your business customer has a core competency. It may be in providing particular products or services. It may be consulting or marketing. It may be manufacturing or publishing. It is most likely not (unless they’re an accounting firm) financial management.
They do cash management because they have to. They try to manage financial risk because they don’t want to get burned. But most companies are not skilled at making optimal financial decisions. Cash management activities like short-term lending and borrowing
are difficult. So is optimization of payments timing, discounts for early payment offered and so on.
They don’t have time to compare their financial management with their peers. They can't model the impact of various potential economic scenarios on their bottom line.
What if they could depend on the experts – banks – to make and act on recommendations for them? What if decisions could be based on detailed analysis of their transaction flows, payables, receivables, and financial assets and liabilities?
What couldn’t banks do if they had access to this data plus advanced analytics, business intelligence and AI capabilities? This is how banks will differentiate themselves down the road.
Technology Game-Changers for Cash Management
I see three major game-changing emerging / developing technologies that will impact cash management.
Blockchain. This is what everyone it talking about and without a doubt in the long term it will impact cash management. In particular payments infrastructure will be transformed . Blockchain will allow for greater efficiency, security and convenience.
Cross-border low-value payments in particular will become easier for banks to offer.
Trade Finance may at last become a predominantly electronic business, as blockchain pervades the international supply chain. Other examples will occur to the reader.
But generally these are operational efficiencies that will simplify operations and make them more efficient. They will not, however, revolutionize the role banks play with their business customers in the cash management realm.
Advanced Analytics. For a long time, banks have sought to help businesses with management of payables, receivables, working capital and so on. But the approach has been largely transactional in nature. With advanced analytics, given enough of the
right data, banks can use their industry expertise to analyze, model and predict implications of changing strategies. This includes strategies for early and late payment. It includes offering discounts to certain groups of customers for early payment. It covers
inventory and receivables finance, and short-term investments.
Artificial Intelligence. Several aspects of AI will contribute to banks’ role in their business customers’ cash management. This will include machine learning as banks continually improve on the quality of advice. Natural Language Processing will
come into play as banks offer real-time chatbot-assisted solutions and answers. Neural networks will enhance the advanced analytics as banks look to create advice not just with the customer’s own data, but industry and global economic data as well.
Some of these capabilities already exist and some are in development. IBM’s Watson is a commonly-cited example of an existing very powerful tool set. It is difficult to deploy, but some of the results have already been quite stunning.
The Future of Cash Management
So, in a nutshell, what will characteristic cash management in the future? If banks are more advisors than transactors, what should the average corporate treasurer expect from their banks?
- Day-to-day advisory services in which banks propose things like:
- which bills should be paid when
- which customers should be offered discounts
- how much should be borrowed from what source to bridge a cash shortfall
- how excess funds should be invested
- Longer-term advisory services covering such areas as:
- Financial balance sheet management
- Risk reduction and hedging strategies
- Modeling of bottom line impacts from changes to payment terms
- On-demand AI-assisted answers, advice and transaction initiation through chatbots. This includes referral to human assistants as indicated by complexity or customer preference
- Seamless flow from acceptance of advice to execution of transactions
- Ability to model the financial impact of advice, allowing for value-based pricing
The Bottom Line
These are just ideas – indications of what might be. But what is certain is that banks need to consider their core competencies to be more than transaction execution. They are well-placed to be trusted advisors, understanding and assisting with the financial
challenges of their business customers.