Technology and regulation are changing the payments scene

Payments continue to evolve under the dual forces of technology and regulatory change. Steve Baseby explains key considerations for treasurers

We last reviewed cash management in December 2014. The definition has not changed – ‘having the right amount of money, in the right currency, in the right place, at the right time’ – so what has?

Liquidity coverage ratio

The liquidity coverage ratio came into force for banks on 1 January 2018, requiring them to hold liquid reserves against a day’s cash outflows.

In simple terms, banks want your surplus funds for longer tenors. Your overnight volatility, surplus or deficit, is less attractive. The cost of volatile cash is the cost of the bank holding excess low-yielding high quality liquid assets – essentially government bonds held to ensure repayment of the customer’s cash.

Just calling customer deposits ‘sticky’ no longer works. The increasing popularity of same-day payments has aggravated the uncertainty for banks.

The bank account structure

Bank account services are now expected to earn their keep. The banks have often withdrawn into their domestic borders to meet expectations of the national regulators who funded them through the 2008 crisis. This means you may need more bankers to span borders, but want fewer bank accounts to control costs.

Important considerations remain as before, but the practices may need changing:

• The nature, size, culture and legal requirements of the organisation. You will most likely want an account per legal entity and may need one to carry out even the most basic movements of capital and distributions. The range of duties performed by each entity may drive the accounts required. For example, separate accounts to provide better internal control over receipts and payments. Counter to that is the increasing use of shared service centres (SSCs) coupled with enterprise resource planning systems that combine to reduce the transactions performed at operating entities, while the banks are promoting the use of virtual accounts, which can look like a discrete entity account to a third party, but are a subset of the SSC’s bank account.
• Types of cash flows vary. A manufacturer of large capital goods will have different banking requirements to a services provider with millions of customers. The former will have few, large receipts and many payments, the latter millions of receipts with relatively few payments. Each needs an account structure suited to it to enable efficient operations, satisfactory internal control and management supervision.
• Cross-border requirements. Identifying the right structure to support cross-border activities will require understanding the benefits of local versus overseas accounts in relation to operating costs, transaction costs and the speed with which payments and receipts can be processed and applied.
• Efficient use of funds. Seamless cash pooling in centralised treasuries is a long-sought target to concentrate cash and to offset deficits in one currency with surpluses in another. Constraints are time zones, thinly traded currencies and legal restrictions, which need to be understood and managed. For example, some jurisdictions do not enable overdrafts.
• Post-2008 banking regulation has added to the cost through credit margins that may outweigh the benefits of pooling and swapping. Some jurisdictions remain wary of cross-border and inter-entity transfers, which they regard as covert distributions.

Funds transfer processes

There is an international move towards real-time gross settlement, which seeks the same-day, prompt settlement of payments. Long-standing payment systems are under review. The ACT’s policy & technical team is directly engaged in the UK exercise to review the CHAPS same-day payment system.

Alongside the broad-based review, there are developments to enable better control of cash. SWIFT has launched its global payments initiative (SWIFT gpi), which enables payees to track payments as they travel through the banking network to remove uncertainty over delivery of funds. The UK is taking steps to reduce the growing problem of push payment fraud with Confirmation of Payee, ensuring the payee’s name is verified before payment delivery.

UK/EU27 – where will Brexit take us?

We would expect some coordination, but at the time of writing, both the UK and EU governments are preparing contingency plans for a hard, non-negotiated Brexit. This may affect cash pooling, the efficiency of SSCs and the use of payment systems.

We will endeavour to keep members up to date through our Brexit link, and a Q&A we are coordinating with the CBI, which can be reached at the same place.

Conclusion

The flow of regulatory and process change has not stopped. Banks continue to reorganise in reaction. Payment systems are changing. Treasurers need to monitor their banking requirements, challenge costs, and make themselves aware of changes they may be required to make.

The ACT Cash Management Conference takes place in London on 12 February 2019. Share best practice, hear practical case studies from leading corporates and network with fellow cash management and treasury professionals.

About the author

Steve Baseby is associate policy & technical director at the ACT