Optimum liquidity and working-capital management is crucial to the long and short-term success of any commercial enterprise. However, it is dependent on businesses being prepared for all eventualities. MICHAEL BURKIE discusses why corporates must plan for even the most unlikely market disruption scenarios, as well as how local and regional banks can help their corporate clients to be prepared
Funding has been at the top of the corporate agenda since the global crisis of 2008. With easy access to bank-supplied credit lines a thing of the past, the majority of corporates are concentrating on increasing internal efficiencies by re-shaping operational models to ensure that cashflow is directed to the heart of their businesses.
While this focus on generating internal efficiencies is admirable, it does not go far enough. The sustainability of business cycles depends on companies being prepared for all eventualities, regardless of how unlikely they may seem. The worst-case scenario always merits consideration and subsequent planning, as the ongoing supply chain and market disruption caused by recent environmental disasters and political uprisings demonstrates.
As they look to the future, companies need to ask themselves a series of important questions with regards to liquidity management. Could they keep the cogs turning if their bank(s) were to suffer a liquidity crisis? In the event their payments platform were to crash, is there a back-up plan? Could they manage interruptions to international settlement transactions, or be able to access cash reserves quickly enough to plug funding gaps to see them through tough times?
In most cases, the answer to these questions will be a resounding “no”, and no amount of internal efficiency gains can alone overcome the challenges that any one of these scenarios would cause.
The importance of foresight
Yet methods of dealing with such situations can be put in place. The ability to navigate cashflow crises depends on two things. First, sophisticated and diverse liquidity and working-capital management solutions are required in order to spread risk and maximise returns. And this may mean looking beyond traditional bank deposits. Second is the need for data management and reporting capabilities that allow for the accurate assessment of funding, liquidity and counterparty risk so that potential pain points can be identified before they can cause real damage.
Indeed data, or more specifically the timely and holistic presentation of information , is crucial for the long-term success of any commercial enterprise. This concept continues to gather momentum throughout the corporate world as companies increasingly recognise that this is necessary for greater insight into external market drivers, as well as flagging-up concerns that may have adverse fiscal effects – such as threats to physical supply-chains or counterparties not being as financially sound as they seem.
Increasing burdens on banks
However, this growing need for advanced liquidity and data management capabilities, which ties in to a broader requirement for the increased diversification of risk, largely remains unmet. It is only natural that a company’s house bank should be its first port-of-call, but many local banks – given the myriad of pressures they are under – are in no position to offer such sophisticated solutions.
Regulation is the first of these pressures – and is a particular concern with respect to cash management and payments processing. As companies increasingly conduct their business internationally, banks need to be (fully-compliant) capable as multi-currency, cross-border transaction processors. Yet with regulatory initiatives pushing transaction banking costs up and driving revenues down, investment in the technology that this would require is impossible for many.
Technology spend is also a concern for data management and reporting. Increasingly complex international commercial networks call for strategic and in-depth risk-assessment and credit analysis systems and processes, which most local banks do not possess and cannot afford, thanks to escalating compliance costs and regulatory capital requirements, such as Basel III.
Potential solutions
The prohibitive start-up and maintenance costs of such systems and platforms rule out in-house development for all but the largest banks – making partnering with a specialist global provider of working-capital, liquidity and data management solutions the obvious alternative.
Yet this option can have its drawbacks. The more conventional modes of partnership, such as outsourcing, can pose as many problems as they solve. For example, the traditional outsourcing model creates inherent competitor conflict, which makes some smaller institutions understandably wary. Regardless of the contractual arrangement between the insourcing and outsourcing banks, loss of business to the larger provider is always a possibility, causing many local banks to think twice.
In addition to this, most outsourcing arrangements provide local banks with inflexible, “one-size-fits-all” products, which makes it impossible for them to offer bespoke client solutions. As a result, they are left in the position of trying to keep up, rather than competing with the global players operating in their domestic market. For this reason, outsourcing rarely delivers a real exchange of value up and down the supply-chain, so end-users are frequently “short changed” in terms of service delivery.
The manufacturer-distributor model
With this in mind, a potential solution for banks wishing to meet the evolving needs of the corporate clients – and, therefore, maintain and expand their commercial relationships, is what BNY Mellon calls the “manufacturer-distributor” model.
This more collaborative form of local-global bank partnership is based on the concept of local financial institutions – or “distributors” – leveraging the cross-border transaction, risk-assessment and data collation capabilities of specialist “manufacturer” organisations in line with the needs of their domestic markets. Such an approach, in combining local touch and global reach and capability, results in an end-client offering that benefits from the best of both worlds.
Certainly, a corporate’s fundamental needs – liquidity and cashflow management (including accounts payable/receivable), risk-mitigation and data management – need to be treated as integrated processes. The “manufacturer-distributor” model, by making the most of the individual strengths of the local and global bank partners, can meet this need.
Yet a true collaborative partnership philosophy such as this goes beyond a tailored high-level service offering. It should build on the individual strengths of specialist global providers and local institutions to form lasting, mutually-beneficial relationships that have the end-client’s best interests at heart.
Organisations that can see the long-term value in this client-centric approach to collaboration, and are prepared to be broad-minded in terms of their client servicing and ongoing business development, will be the successes of the future.
Michael Burkie is market development manager for BNY Mellon Treasury Services EMEA. Material contained in this article is not intended to be a comprehensive study of the subject matter, and the views expressed are those of the author only and may not reflect those of BNY Mellon.