This transition toward agile, risk-mitigated, and modern cash management offerings will position financial institutions to provide better service to future corporate treasurers, who are increasingly digital-native and understand technology in new ways.

Corporate treasury teams' adaptation of these innovations must begin with an examination and understanding of the new technology offerings that can help transform cash management services today.

Virtual Account Management

Traditionally, corporate treasurers have managed their organization's cash flows, reporting, and reconciliation through demand deposit accounts (DDAs). Most large corporations utilize separate bank accounts for different legal entities, geographies, lines of business, and/or purposes.

Despite this infrastructure, managing multiple bank accounts—even within a single bank—can prove unwieldy if the treasury team relies on too many ad hoc processes and operational inefficiencies. Combined with the rapid acceleration of the transaction cycle to essentially function 24x7x365, process inefficiencies may make it difficult for corporate treasurers to meet their objectives. That's where virtual account management (VAM) comes into play.

VAM enables a corporate treasury team to create virtual accounts within an existing bank account and to manage and monitor those virtual accounts in order to use cash and working capital more effectively. Self-service capabilities within a virtual account infrastructure can increase corporate treasury's visibility into, and control of, cash positions and cash management processes, improving reporting and reconciliation services, risk management, and overall operational efficiency.

For example, a VAM structure can enable treasurers to set up pooling, consolidation, or concentration of cash in virtual accounts for specific uses, on an as-needed basis. This enables them to optimize interest earnings or reduce banking fees. A VAM platform also allows the corporate treasury team to initiate debits and credits in a way that is mirrored in the bank's deposit system, but doesn't require the company to submit transactions via the bank's existing services—whether through an online banking application, Automated Clearing House (ACH), wire transfer, or physical deposit tickets.

The benefits of the virtual accounts approach are clear when you consider the potential impacts on cash management within a multinational corporation that has a complex legal-entity structure and hundreds of physical accounts, with payables, receivables, and other transactions flowing among those accounts as well as to and from third parties. A VAM approach could consolidate these accounts on the banking side, which would simplify reporting and reconciliation, streamlining treasury's efforts to support the multinational corporation's liquidity needs across the various geographies in which it operates.

Adoption of VAM has been slow over the past several years, but momentum is starting to build. Nearly a dozen banks have solutions either up and running, or in the final stages of development. Few customers have adopted these technologies as yet. However, the banks that are currently beginning to offer VAM capabilities include some of the world's largest institutions, with the highest balances and the broadest geographic reach. Once these banks' major multinational clients begin rolling out VAM, other corporate treasuries are likely to follow, due to the benefits of concentration and consolidation.

As a result, corporate treasurers will gain greater insight into liquidity positions based on their strategic organizational objectives and liquidity needs. Corporate treasurers need to understand this new service and how they can utilize virtual accounts effectively to remain competitive.

Real-Time Payments

Launched in 2017, the Real-Time Payments (RTP) network provides near-instantaneous settlement of corporate payments, instead of the next-day settlement of standard ACH transactions. In addition to increased transaction speed, RTP payments include enhanced two-way communications, which increases the transparency and security of transactions.

For corporate treasurers, the power of RTP is twofold: increased returns on excess cash via a reduction in settlement time (or a same-day liquidity benefit) and a clearer, real-time line of sight into how to optimize liquidity structures.

Acceptance of RTP is slowly growing, with greater dispersion and increasingly widespread adoption. More than a dozen large banks now have RTP up and running, and our survey suggests the volume of transactions in The Clearing House's RTP system has doubled since last year.

Moreover, the Federal Reserve's instant payments platform, FedNow, will launch next year, enabling smaller and midsize banks, which have so far resisted the appeal of RTP, to realize the advantages of real-time payment platforms. Even the capability to participate in a limited manner—e.g., to receive or send only—will likely encourage further participation. The strength and integrity of the Federal Reserve, coupled with the platform's core interbank clearing and settlement functions, plus features such as request for payment and payment inquiry capabilities, will no doubt make the service desirable.

The world is moving toward more rapid transactions with greater liquidity availability—on even an intraday basis.

The Blockchain

Cash management presents a compelling use case for blockchain technology. A blockchain is a shared, unalterable digital ledger that comprises records, called "blocks," which record immediate, shared, and completely transparent transactions (and assets). These transactions can be accessed only by permissioned members of the associated network.

Blockchains are useful in payments, in part because they reduce transaction costs by eliminating all intermediaries in payment processing—shifting to a direct, peer-to-peer payment process. They also save processing time compared with traditional bank transfers. And, due to the immutable nature of the encrypted ledgers, they promise increased security and reduced fraud because any user within the network can provide trusted, real-time verification of each transaction.

In the future, use cases for blockchain technologies within cash management will likely include not only peer-to-peer payments, but also cross-border payments, digital identity verification, and trade finance.

Although blockchain technologies are expensive to implement, larger banks are currently evaluating them as a means of transacting. In fact, one large financial institution at the forefront of blockchain adoption has issued its own digital currency to support blockchain-enabled transactions. It is now looking to leverage this digital currency as a means for other industry providers to transact. Due to the cost, though, many providers still prefer services that exist outside of the blockchain.

Many financial technology analysts expect future corporate cash management processes to leverage blockchain technologies for use cases including security and user authentication; the enablement of automation with "smart contracts" as replacements for controlled disbursement or positive-pay processes; and other fraud prevention capabilities.

Blockchain technologies will play a larger role in banking as cryptocurrency transactions increase, non-fungible tokens (NFTs) enable purchases and value storage in the metaverse or virtual reality, and the associated custodial or safekeeping processes evolve to service this asset class across the financial services industry.

Other Emerging Technologies for Corporate Treasurers to Watch

An assortment of futuristic technologies—from the metaverse to NFTs, and from biometric-enabled payment verification to text-based payments—show promise. But it's difficult to predict, so early in their developmental lifecycle, how applicable these technologies will turn out to be for corporate treasury operations, or how likely they are to experience widespread acceptance.

Some large banks are investing significantly in establishing a metaverse/virtual reality presence. This is a continuation of ongoing efforts to create new ways to interact with corporate treasury customers—the metaverse represents a virtual space for these interactions. At the same time, the metaverse may eventually host lending and transaction banking services that are virtual alternatives to the current suite of available products. Payments in the metaverse may include the exchange of digital virtual land acquisitions, or rentals and royalty payments on digital assets, including NFTs, exchanged cross-platform (e.g., from Decentraland to The Sandbox or other metaverses). Banks may also soon offer metaverse-based liquidity and foreign exchange (FX) solutions, as well as integration with existing cash management services and payment rails.

The global digital economy will require banks to offer these types of innovations to serve future corporate and business enterprise needs. Nevertheless, the transition to using such services will prove complex for corporate treasurers.

Although the metaverse is frequently touted as a central clearinghouse for all kinds of consumer and business services in the new digital era, the benefits are accompanied by data privacy and payment fraud issues that must be addressed. Meanwhile, the market for NFTs or secure one-of-a-kind tokens that are generated and transmitted across blockchains is still developing.

Another up-and-coming innovation is biometric-enabled payment verification, which uses biometric authentication to identify the user and authorize the deduction of funds from a bank account. Coupling corporate authorizations and transaction verification with biometric enablement promises to create more compelling safeguards against the threat of payment fraud.  Because biometric solutions provide irrefutable verification of the identity of the corporate officer who is authorized to make a transaction, they substantially reduce the risk of unauthorized initiation of transactions or misdirection of payments. Still, issues surrounding privacy and the retention of payee identifiers need to be resolved.

Finally, some companies may find, in the not-too-distant future, that it makes sense to enable consumers to make payments via smartphone. To do so, a consumer must register with, and provide payment information to, a merchant. The information must then be stored in a secure system maintained by the merchant's payment solutions provider. Issues with data security and fraud are a concern in this process as well.

See also:

• The Future of Real-Time Global Payments
• Bank De-Risking: Why Corporates Should Be Paying Attention to the Blockchain
• A Crypto Primer for Corporate Treasurers
• Real-Time Payments: What to Know, and What to Do
• Blockchain: What Finance Executives Need to Know

The Law of Life

New technology offerings can help corporate treasurers gain more control over payments; better manage liquidity; and improve the accuracy, efficiency, reporting, visibility, and security of transactions while reducing costs. Banks are beginning to phase out any transactions that rely on paper, and are even taking initial steps to move away from next-day ACH transactions.

It's time for corporate treasury and finance professionals to educate themselves about how they can leverage new payment technologies to better manage and optimize cash. Those who do not adapt to utilize new technologies may be left behind. As a result, they may miss opportunities to more effectively manage treasury processes. Failure to evolve may also limit their ability to adapt to future macroeconomic changes, such as a pandemic.

There may be some truth to John F. Kennedy's words: "Change is the law of life. And those who look only to the past or present are certain to miss the future."¹

Alan Zimmerman is a managing director at Ernst & Young LLP. Zimmerman has advised corporate treasurers and banks for more than 35 years on cash management and working capital.

John Lothman is a senior manager at Ernst & Young LLP. He has advised more than 90 of the largest U.S. banks on topics related to cash management. Lothman directs the EY organization's 39^th "Cash Management Services Survey."

The views reflected in this article are the views of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

¹ Kennedy, John F, Address in the Assembly Hall at the Paulskirche in Frankfurt, June 26, 1963.