For corporates, the purpose of a bank-agnostic model is to deliver the benefits of centralized cash and liquidity management while addressing local operating requirements. Implied is a level of cross-bank standardization that supports simplification, rapid deployment and easy switching.

Yet treasury practitioners know that beyond the bank-agnostic pipe (the standardized connection to their banks around the world), not all bank capabilities are equal. Differing features, functionality and expertise can chip away at the bank-neutral ideal. A few examples include various bank offerings for multicurrency account services, payment cutoff times and pre-negotiated FX rates. With tactical and strategic execution closely intertwined, even small nuances in capabilities add complexity that diminishes treasury’s efficiency and effectiveness.

Still the benefits of a bank-agnostic model have outweighed the challenges—until now. New requirements for balances under Basel III and a new framework for intraday liquidity management affecting banks from the Basel Committee will emphasize the importance of differences in bank capabilities. Sub-par tools and services could exponentially increase the cost and complexity of managing liquidity.

Therefore, it is vital that corporate treasury:

• Understands imminent changes to liquidity management.
• Assesses disparities among banking providers.
• Determines which steps are necessary to maintain the benefits of centralized cash management under a bank-neutral approach.

Why intraday liquidity management will impact corporate treasury

Many corporates are now familiar with the ways in which Basel III requirements have altered the way banks think about deposits. Intraday liquidity (IDL), on the other hand, refers to funds accessible during the business day for banks and companies to make payments. Companies have become accustomed to timely settlement of payments throughout the day, which is achieved in part by banks extending intraday credit in order to continue to make payments even when a client account is overdrawn. Banks do so with the knowledge that such overdrafts will be paid by the end of the day, and provided sufficient funds are received into the account by end of day to cover any overdraft, companies may even avoid overdraft charges. In fact, IDL is arguably so readily available, companies may not even be aware of how much is being extended, especially since intraday credit lines are typically not disclosed by banks to their clients. Therefore, it is not a consideration in how most companies manage their payments and liquidity flows.

This practice will likely be impacted by new rules and in an environment of rising interest rates and higher IDL costs to banks. Starting with the larger institutions, banks will need to monitor and report their IDL (and large credit) exposures to local and offshore regulators as well to demonstrate they have the adequate liquidity in place to cover these exposures. In turn, this may require banks to hold more liquidity at an additional cost. Banks with global scale, deep access to liquidity, and the ability to invest in people, processes and systems to manage IDL will clearly have an advantage.

Broad implications for managing payments and liquidity

These developments have broad implications for how corporate treasury manages IDL. The possible consequences of not managing IDL usage include:

• Increasing costs. In order to manage down IDL costs, companies will need to move away from a high degree of reliance on bank-provided credit lines and liquidity and towards a cash settlement approach, where inflows and outflows in specific currencies are more closely matched across accounts. To be successful, corporate treasury must have access to up-to-date information on cash inflows and outflows. With different reporting standards and capabilities among bank providers, the cost and complexity of monitoring multiple positions throughout the day increase significantly when cash flows are diversified across a larger network of banks.
• Payment delays. Any corporate treasury that continues to fund cash accounts at end of day may see delayed settlements, since payments may be held pending incoming funds to those accounts. Delayed payments pose reputational risk and more. For some companies, delays threaten fragile supplier ecosystems where tight payment timing is vital to working capital needs. This could add supply chain risk that affects the timely delivery of goods, cost of goods sold and customer satisfaction. Penalties for late tax payments or other time-sensitive disbursements may even have a direct bottom line impact.

The capability gap and why it matters

Treasury must manage their operating flows and mobilize adequate IDL to efficiently self-fund payments and avoid additional costs and payment delays. Therefore, payment timing itself becomes a vital tool in optimizing IDL along with a real-time view of liquidity that is at once broad in scope to cover multiple currencies yet granular enough to ensure that payment inflows cover outflows.

Banks are providing the tools to support such monitoring and control, but differences in these capabilities already exist. This gap will widen, and the banks that continue to innovate and deliver solutions to address corporate treasury’s emerging IDL needs will separate from the pack.

Addressing liquidity, maintaining the benefits of centralized cash management

Increasingly, companies have been focusing on the immediate implications of Basel III. Based on the new definition of operating cash, companies are revisiting their approaches to bank relationship management as credit banks ask for a greater share of operating services business and associated deposits. In some instances, banks are exiting the treasury services business in response to Basel III and intensifying profit margin pressure. And, given that a main driver of the bank-neutral model is to reduce concentration risk, new regulatory reporting requirements for banks—including capital adequacy metrics and stress test results—will increase counterparty risk transparency for companies. All of these trends increase the value of the easy switching afforded by a bank-agnostic approach.

Nonetheless, treasury practitioners must now also digest the implications that the likely reduction in available IDL and credit from banks will have on their cash management practices. Similar to Basel III, such dramatic changes will bring differing capabilities among banks into sharp relief. Treasury practitioners must understand these differences and adjust their strategies to avoid the very complexity, cost, inefficiency and new risks that a bank-agnostic pipe aims to avoid.