Introduction

In today's post-crisis world, liquidity solutions are more critical than ever to corporations. Liquidity is considered king — it keeps a company solvent and provides it with the flexibility to seize business opportunities. However, the scope of liquidity management has increased in recent years to include:

  • Visibility of cash through the entire cash cycle — both for liquidity and risk purposes
  • Evaluation of risks to liquidity among counterparties, suppliers and customers
  • Maximizing liquidity across the supply chain
  • Improvement in exposure forecasts for purposes of hedging risk and identifying working capital challenges

In light of the more intensive emphasis on liquidity management, the role of the treasurer has expanded to encompass not only transactional functions, but also a constant, clear view of corporate liquidity and the provision of key input into senior-level strategic decisions. Small and midsize companies are looking to leverage business opportunities around the globe, particularly in emerging markets. The net result is that firms are increasing the rigor of liquidity management — evaluating and monitoring liquidity faster, more broadly, and with greater intelligence — and providers are stepping up to give corporations the data, tools, and analytics they need to excel at these activities.

To respond to these increased needs, banks must offer an integrated liquidity solution that serves an evolving, sophisticated client base. Some banks are recognizing this opportunity to generate incremental revenue by providing the global capabilities to the small and midsize companies more effectively through technology.

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Other banks are differentiating themselves through liquidity capabilities and are thusincreasing client retention, client share of wallet and bank revenue and profits. Such banks are also able to construct more stable deposit portfolios due to the central role they play as their clients' primary operating bank. Because banks are focused on their core competencies of risk management and business partnering, most are bringing in third party vendors to build out liquidity portals. Within this white paper, we will define the scope of the term "liquidity" and delve into why it is paramount to daily corporate business, and how banks are responding.

The Corporate Liquidity Market

The corporate liquidity market is growing in size and importance — requiring a greater focus from bank providers. The primary goal of corporate liquidity management is to understand the organization's current and future cash position to ensure payments are made, funding and investing decisions are optimized, and cash is used in the most efficient manner. Liquidity management activities can be segmented by how often they are completed:

Liquidity can be defined as cash, deposits, short-term investments with maturities less than three years, and short-term borrowing. Liquid securities include bank deposit products, money market funds, and other direct instruments that can be converted to ready cash at par with little risk to principal. Short-term borrowing — both from banks, non-banks and within the supply chain — is also a source of liquidity for corporates.

While liquidity solutions and activities have existed as long as organizations have been in existence, recent economic and cultural shifts have caused an unusual growth in liquid holdings worldwide.

Particularly in the U.S., holdings of cash have grown significantly over the last decade. The U.S. Federal Reserve reports U.S. corporate cash as of 12/31/11 was $2.23 trillion. This figure was at a level of $1 trillion in December of 2000. This represents an increase of approximately 123% over a decade. To put this growth in perspective, the growth of corporate cash can be compared to that of GDP over the past two decades. As demonstrated in the graph below, corporate cash growth, in the U.S. and Europe, has significantly outpaced growth in GDP.

This large increase in liquidity is due to corporations' heightened sense of risks post-crisis and the current uncertain economic and regulatory environment. With these factors in mind, corporations want to have cash on hand in case it is needed to address business needs quickly and to remain conservative in relation to counterparty exposures. The low interest rate environment currently offers few alternatives with higher yields as well.

Corporate liquidity can also be viewed by the instruments in which a corporation invests.

 

This view demonstrates that corporate liquidity is heavily weighted towards bank deposits at a global level — this reflects corporate demand for instruments that provide liquid access and low risk. However, corporations in North America invest approximately 40% of their liquidity in direct instruments (repos, commercial paper, etc.) and only 33% in bank deposits. This reflects deeper money markets and a lower level of reliance on banks in the U.S., although banks are still critical as primary providers, outlets for liquidity, and a final provider of payment settlement.

Corporate liquidity has been highly impacted by market forces and, specifically, by the current prolonged interest rate environment. We have seen unprecedented levels of corporate cash held in bank deposits, despite low or even zero interest rates. Two market forces contribute to the high levels of corporate cash, unlimited deposit insurance and the depression of yields on alternative investments. The unlimited insurance on non-interest-bearing checking accounts created a risk-free option for corporations, encouraging them to park their cash. The low interest rate environment and new regulations depressed yields on alternative investments (e.g., money market instruments and funds) making these options less competitive.

Recent record levels of corporate cash holdings also reflect corporations' reactions to the crisis. The increase in cash levels reflects corporate liquidity concerns and the relative uncertainty that surrounds expansive monetary policy and new regulations. Corporations are concerned about future rate volatility and are concerned that regulation could result in limited opportunities to invest cash safely. Additionally, many corporations have continued to increase cash levels as a hedge against operating and market risk.

Growing Importance of Liquidity to Corporates

The crisis increased the importance of liquidity and its ancillary risks to corporations, and this change has also affected banking providers. As mentioned above, liquidity has grown significantly over the past decade, and corporations therefore require increased transparency and management of their funds. Corporations have placed a higher emphasis on global transparency and their underlying risks/exposures. Much of this increased work and responsibility has been put on the shoulders of the Treasurer. Treasurers are now asked to be more strategic and to continue to complete the analytical and operational components of the role, but with greater rigor, in a more complex environment. Given these expectations, Treasurers are looking for tools that can make their work more efficient, accurate, and timely. Treasurers are no longer back-office support, but are expected to report on real-time exposures and liquidity balances and detect and assess the impact of key changes in the environment. In a time of economic and regulatory uncertainty, management wants to have a sense of the funds on hand — and their composition and location — in case quick action must be taken to react to market or internal issues/risks. Treasurers have also become more and more accountable to the Board of Directors. The graphic on the next page demonstrates the different "hats" a Treasurer wears today.

With this in mind, Treasurers have emerging liquidity needs that their banking providers must deliver:

  • Real-time and future visibility – Treasurers need to be able to report on cash balances in real-time and have an accurate view of future cash positions to ensure that sufficient liquidity is available to withstand potential risks.
  • Counterparty risk evaluation – Corporations must now put additional controls and greater rigor around their evaluation of counterparties because senior management has a heightened awareness and sensitivity to risks post-crisis.

  

  • Integration – Bank systems providing data and services to corporations must integrate directly with corporate ERP and TRM (treasury and risk management) systems so that all related data is leveraged to provide a comprehensive view of liquidity.

The growing importance of these needs is demonstrated in changes that Treasurers report they have made in their investment policies. Many are focused on the type of instruments allowed in investment policies, while others also evaluate credit ratings, standards and counterparties.

Another factor that is causing an increased emphasis on liquidity is the dynamic nature of corporations and their expansion into the global economy. Globalization is having an impact on businesses of all sizes and even middle market firms are becoming profoundly global. These corporations may have international exposures and one of their largest pain points is being able to have a view into their global positions. With this in mind, corporations are focused on their ability to access balances and exposures in multiple currencies, access a global view of cash, and view a full cash picture of all entities.

All of the above factors are forcing Treasurers to look outside of their organizations for tools and data to understand liquidity. Corporations are reaching out to their banking providers for enhanced functionality and richer data and analytics. Because of their role as a provider of final settlement, banks have an unparalleled view into corporate transactions and liquidity, allowing them to provide dynamic liquidity insights and analysis. Banks are rich with data and this makes them the logical provider of liquidity solutions. For example, bank account structures typically map to legal entity structure, which is the basis for hedging of rate and currency exposures.

Corporations look to their banks to partner with them and create an advisory relationship. A key corporate need is regulatory and compliance advice, and banks have an opportunity to deliver value-added services to their clients, such as helping corporations make sense of a changing environment.

Additionally, corporations look to banks to partner with them on technology, not just meet their needs. This provides a chance for banks to customize their products and provide corporations with an integrated view of their liquidity.

Increasingly, banks are providing Treasurers with tools and integration, transparency, and intelligence. Today, many Treasurers are still using time-consuming and error-prone Excel spreadsheets and publicly available information to measure exposure to counterparties, monitor limits, and evaluate the creditworthiness of counterparties. 1 This presents not only a challenge but also a crucial risk. Treasurers have more than ever on their plates and need a tool that is efficient and accurate with historical and prospective information. The manual process today is prone to errors that do not allow corporations to mitigate counterparty risk. In conjunction with this risk management need, corporations are migrating from treasury management systems to treasury and risk management systems (TRM), because TRMs provide an integrated view to liquidity and risk.

Bank Behavior

Banks have developed liquidity capabilities to serve more sophisticated clients. They are providing solutions that are part of what Treasury Strategies terms "Liquidity 3.0." Liquidity 3.0 focuses on three key treasury needs and weaves them into solutions.

1. Integration

  1.  Across all liquidity solutions: End-users are looking for information across all cash management product (DDA, MMDA, time deposits, MMFs, direct investments, credit facilities, etc.).
  2. Across all liquidity management tools: Tools such as cash positions, cash forecasts, workflows, information reporting, etc. should enable users to interact with the suite of cash management services in an integrated manner.
  3. With payables and receivables: Insights from the payables and receivables general ledger and workflow is available as inputs to liquidity exposure estimates.
  4. With end-user processes/software: Best-in-class liquidity management solutions will easily (and securely) share information with client-side software solutions such as accounting packages and TRMs.

2. Transparency

  1. Access and availability of data: End-users look to their financial services providers to furnish them with access  to all data related to their cash management activities throughout the lifecycle of a transaction. Best-in-class providers will also share other non-confidential data, such as aggregated peer metrics.

3. Intelligence and Analytics

  1.  Analytical tools: To support decision-making by Treasurers, best-in-class institutions are developing analytical   tools    such as trend analysis, performance management, benchmarking, what-if scenarios, and action-prompted analytics.
  2.  Intelligent and proactive information: By proactively prompting end-users with insightful information,  financial institutions are positioning themselves as their clients' trusted advisors.

Banks are also providing enhanced solutions for large corporations and corporations that are intensely global. These solutions include the above functionality as well as tools that are relevant for more global businesses, such as cash pooling. Clients that are global or growing rapidly are moving their business to banks that can provide enhanced liquidity solutions. These firms often represent the most valuable clients, due to the size of their business and the volume of FX trades they conduct and balances they hold.

Based on the intense and growing corporate demand, and the development of liquidity solutions by bank providers around the globe, there is a sense of urgency in building out competitive solution sets at large and small financial institutions alike. Large global banks are ahead of others, and eating away at market share of smaller financial institutions. To retain business, regional banks must adopt advanced liquidity solutions that can meet the needs of their growing and globalizing clients.

Bank Business Case

Liquidity management is at the forefront of Treasurers' minds and they are looking for their banks to provide this functionality. But why are liquidity solutions important from a revenue and relationship standpoint for banks?

Offering liquidity management services to clients provides three clear benefits to banks:

  • It provides an opportunity to become the primary liquidity bank, which includes the payment and information wallet   and additional spread revenue from FX transactions.
  • With more traffic going through the platform, it also is an opportunity to increase fee-based income on investments and custody (versus spread income). 
  • Lastly, banks can increase customer "stickiness;" as corporations increase use of bank liquidity solutions, they are less likely to move business due to the deep process, data and decision integration present in these solutions.

Banks that are able to become the concentration bank, or primary liquidity provider, gather a higher rate of fees and deposits from clients and maintain longer relationships than those simply managing transactional requirements.

Bank Decision: Buy versus Build

When evaluating adding a liquidity platform or a liquidity module to a web platform, banks must decide whether to build the functionality with internal IT resources or look outside the bank and buy a solution from an outside vendor.

Today, banks face many cost pressures and are seeking to focus on their core competencies. Banks also face intense pressure to bring liquidity solutions to market quickly and internal development typically takes far longer than buying an existing solution. Therefore, banks tend to outsource new IT projects instead of developing new functionality in-house. This is due to the increasing pressure from a variety of market challenges for banks that include increasing client sophistication, globalizing business, and technological developments.

Clients are demanding integrated solutions, and the historical development of platforms is no longer sustainable for banks. In the past, business units developed web platforms to support clients but failed to integrate these solutions across the bank. Bank IT departments face significant maintenance and integration challenges, which decreases the likelihood that they can resource new product development. Additionally, treasury departments are being centralized in order for corporations to achieve efficiencies in their global business. Banks are challenged to build a global solution on their own.

Furthermore, many banks operate small Product Management staffs and may find it difficult to conduct sufficient market research to document and prioritize market needs effectively. In contrast, a vendor can fund such research by acting as a provider for multiple banks — thus providing a quasi-Product Management role to its banking partners.

Lastly, banks must keep up with evolving technological developments. Today there are a range of electronic channels and file formats that banks must support. In addition, SWIFT corporate connectivity is critical and non-bank competition is increasing.

As the industry looks to the future, the emergence of SaaS, or software as a service, from vendors becomes increasingly important. The software is accessed as a web browser and it allows for a more efficient implementation and update process for banks. There is no need for physical deployment or testing on individual computers and information is stored securely using cloud technology. Such a solution can not only lower all-in operating costs, but can speed time to market — a major focus of SaaS solutions is not just the outsourcing of relevant costs, but also an emphasis on improving ease of integration.

As a bank considers different vendors, it should consider several key factors:

  • Practicality: A solution that closes current functional gaps.
  • Cost: A cost comparison between different vendors (in conjunction with other factors) is important, but it's important to look at all-in costs, including support and ongoing development and maintenance.
  • Single sign-on: A single, scalable platform that can support a diverse customer base of high-end commercial clients as well as retail and small business clients.
  • Platform architecture: Architecture aligns with the future state of the web platform. Banks may want the vendor to provide the portal architecture or, at minimum, may want the vendor to effectively integrate into the bank's target portal architecture.
  • User interface: A cutting-edge delivery and dynamic user interface positions banks on the forefront of online banking technology and conveys to clients that the bank is investing in its solution set.
  • Innovation: Next-generation web functionality includes intuitive user-driven customization and mobile/other channel integration.
  • Viability: A vendor should have the financial strength to remain strong so that it can support ongoing development of solution architecture and functionality.

Conclusion

In a world where there is increased emphasis on visibility and risk, it is clear that liquidity is critical to corporations. Responsibility for visibility and risk falls to the Treasurer and his or her team. These groups necessarily rely on their banking providers to provide real-time information and tools that allow clients to gain a transparent view into balances and risk. Banks can better serve their clients by delivering liquidity capabilities, generating revenue and retention benefits as a result. With this in mind, banks must take steps to develop this functionality. At a high level these steps include:

• Identify Scope of Liquidity Solution:

  • Define what the liquidity solution will encompass and prioritize functional capabilities
  • Define points of integration

• Assess Key Functional Areas to Improve/Grow:

  • Compare current capabilities to target state to define scope and identify areas that need development

• Prioritize Investment and Sequence Build-Out:

  • Prioritize necessary development and contract third party if decision is to "buy"

• Develop the Business Case for Investment

  • Document key drivers that will increase revenue and retention with the liquidity solution or deliver other benefits (e.g., cost reduction)

• Gather Executive and Organizational Support

• Drive Go-To-Market Strategy

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