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Corporate Account Structures, Payments and Intra-Day Liquidity Management

The world of manufacturing has seen JIT (Just In Time) for a long time now.  Machine tool operators do not need to keep large inventories of raw material next to their machines. This has improved cash and working capital and ultimately profitability for manufacturing companies.

However the same is not entirely true in the corporate transaction banking space. Corporates treasurers often have to maintain high balances at BOD. They also have to request their banks for large intra-day overdrafts and EOD overdraft facilities as the nature of their business is such that payments may go out throughout the day while inward payments (credits come only towards the end of the day).  This could also happen because banking Tech platforms may apply the debit for the outgoing payment immediately, while they apply the credit of the incoming payment only at EOD or sometimes on a T+1 or T+2 basis. For corporates which operate in multiple countries, they also end up opening hundreds of bank accounts in these regions and some of these accounts may largely be in Credit Balance ( as the collections happen there) and some may remain in debit balance.

The lack of real time instant credits into corporate accounts, the lack of real time intra- day sweeps and the lack of real time balance and transaction reporting forces corporate treasurers to maintain high balances at BOD. ( JIT goes out of the window ).

For the Corporate, all this comes at a huge cost. To maintain a high BOD balance, corporate treasurers may end up with short term borrowing. To maintain multiple accounts – some in debit balances and some in credit balances will make the corporate incur higher interest cost. There is also the cost of the intra-day OD facilities and EOD OD facilities. There is also the cost of not being able to clear those high value payments because the account has used up its balance and for a corporate treasurer this can get really frustrating as he may actually have a large Cr balance in another account with the same bank.

I was once speaking to a TB Head at a large bank, who said that since they did not want to reject the high value payments of these large corporates, they were maintaining very high overdrafts at each account level and this came at a huge cost to the bank as well since they had to maintain provisions under Basel 3 for these facilities and it impacted their bottom-line.

The solution that global transaction banks need to consider is to offer real time balance netting across a group of accounts. By consolidating the 100’s of thousands of accounts of a corporate and its subsidiaries into a CAS – Composite Account Structure and specifying net and gross limits at each account, account group, subsidiary and parent level, the bank will be able to save on its Basel 3 LCR requirements and the corporate will be saved of maintaining a high BOD Balance or for requesting high daylight exposure limits. It’s a win-win for both the client and the bank.

A payment decisioning / automated funds checking system such as this could help banks check balances in real time across multiple core DDA platforms or account management systems and check the associated net and gross limits and give a payment decision back to the payment engine. If funds are insufficient, a system such as this could place the transaction in a referral queue and do an automatic re-try just before cut off or even throughout the day. Some global transaction banks have built regional balance control systems such as these, while many have not and indeed still struggle with even a real time balance view.

In this day and age of Real time payments, when there are no limits for instant credit in some countries and limits for faster payments in the UK at £250,000.00 and 90% of SWIFT GPI cross border payments settling in under 30 minutes, I am sure corporate treasurers will want their banks to offer them real time visibility and real time balances and real time intraday liquidity sweeps and balance netting so that they can reduce the overdraft.

After all, inventory, whether its in manufacturing or in finance, represents cost.   

 

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Tapan Agarwal

Tapan Agarwal

SVP - Transaction Banking

Intellect Design Arena Ltd

Member since

19 Feb 2008

Location

London

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