Liquidity Management – a Real Time Payments Challenge

Solid liquidity management helps ensures the availability of funds to meet all cash outflow commitments for day-to-day operations and deploys cash in an optimal manner. It implies managing cash on a global level for the purpose of minimizing idle cash, reducing external debt, and optimizing returns on excess cash by grasping better investment opportunities.

Having worldwide operations throws open myriad challenges in the form of timing the flow of funds, handling multiple currencies, regulations, and the difference in liquidity management strategies being followed, etc. The core premise of liquidity management is to have a centralized global view of the cash and a global liquidity management structure.

The processing of payments through legacy batch-based system has enabled banks to have predictable liquidity flows, aiding liquidity management. With real-time payments, cash inflows and outflows become more unpredictable as they can occur at any time of day or night.

The continued roll-out of domestic, regional, and cross border 7/24/365 real-time payment schemes adds a new dimension to a financial institution’s liquidity management challenges. The sheer number of moving parts makes calculating current and forecast liquidity extremely challenging making it more difficult for these institutions to be able to predict future liquidity positions and needs.

For larger, multinational, and older institutions, decades-old infrastructures and siloed systems make it extremely difficult to aggregate data on cash positions in real-time. The processing of payments through these legacy batch-based systems has enabled banks to have predictable liquidity flows, aiding liquidity management. With real-time payments, cash inflows and outflows become more unpredictable as they can occur at any time of day and as money moves faster…it becomes more important than ever to obtain that critical liquidity data on-demand.

Adding to this unpredictability dilemma is the reality that real-time payments is the first new payments rail in over 40 years in the United States. That means there are no trends or recognizable patterns to forecast liquidity needs and requirements—most probably resulting in the need to over fund some positions to allow for the successful payment(not only intraday, but also on nights, weekends and bank holidays). Another factor in this complex equation is the raising of allowable transaction limits for the various global real-time schemes—putting additional pressures on the ability to monitor, manage and maintain adequate liquidity positions.

In a recent webinar and subsequent press release (1), the Federal Reserve Bank announced the support of an intraday liquidity tool as part of their rollout of the FedNow Service stating, “The FedNow Service will provide a liquidity management tool to support instant payment services. The tool will enable participants in the FedNow Service to transfer funds to one another to support liquidity needs related to payment activity in the FedNow Service. The tool will also support participants in a private-sector instant payment service backed by a joint account at a Reserve Bank by enabling transfers between the master accounts of participants and a joint account.”

Driven by the changes to intraday reporting requirements, open banking initiatives, longer clearing windows for real-time settlement for cross-border payments, and other instant payment required capabilities, financial institutions need to implement an ecosystem in which not only payments are done in real-time, but with data analytics and liquidity management as well.

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