October 2018

Virtual account solutions don’t just provide more convenient access to cash, but also access to data in real time. Helen Sanders describes some of the next generation liquidity and investment management solutions for treasurers

Most corporate treasuries have had a relatively stable operating structure over recent years, and many have mature liquidity management strategies in place, such as physical and notional cash pooling. Today, however, a unique convergence of regulatory, market and technology factors is inspiring a new generation of liquidity and investment management solutions that are transforming both treasurers’ expectations and banks’ responses.

Inspiration through regulation

Regulatory compliance is often associated with a heavy administration burden and more closely defined constraints. However, some of the regulatory changes that are now being implemented are creating new opportunities for innovation in liquidity management. For example, the second payment services directive (PSD2) and the introduction of Open Banking offers unprecedented access to bank information through open application programming interfaces (APIs). This is encouraging ground-breaking collaboration between different market participants, such as banks and financial technology (fintech) companies, to develop new value-added services. Not only do open APIs make it possible to design custom solutions and seamless integration to meet treasurers’ needs very precisely, but they can be developed far more quickly than many legacy solutions. Although Open Banking is focused on payments, increasingly, these solutions cover a range of related services such as risk, analytics, reporting dashboards and identity services.

The second key development is the development of faster and real-time payments 1.  Early schemes, such as Faster Payments in the UK, have had low (but increasing) value thresholds, so they have typically been more suited to peer-to-peer and consumer-to-business payments than corporate payments. These schemes are now proliferating worldwide, including SCTInst in Europe. As real-time payment schemes become more prevalent, and clearing and settlement infrastructures modified to support 24/7 processing and visibility, they are now well-understood at a corporate and institutional level, including the potential to simplify cash management through improved cost efficiency, accelerated supply chains, enhanced liquidity and greater standardisation.

Virtual solutions for tangible benefit

In an environment of challenge, change and opportunity, treasurers remain focused on efficiency, cost-efficiency and scalability in both their treasury operations and liquidity strategy. This includes supporting day-to-day operations but equally, creating the capacity and flexibility to integrate new entities in the future. Rationalising and simplifying bank accounts is a valuable way of achieving this. Many larger companies have already implemented sophisticated in-house banking structures, often including ‘on behalf of’ (POBO and arrangements, either/both payments and/or collections (COBO). Under these arrangements, one entity pays or collects on behalf of group companies, so group entities should no longer have to hold physical accounts. First, cost, risk and administration are reduced. Second, liquidity is easier to manage as it is held in fewer accounts. Third, it is easier to integrate new entities, as opposed to opening new accounts, with the associated know your customer (KYC), connectivity and integration burden, and connecting these into a cash pooling structure.

However, corporations of all sizes, whether they have implemented an in-house bank or not, are now keen to take their cash and liquidity management to the next level of efficiency in both operational and liquidity terms. Rather than setting up new physical structures, such as accounts and cash pooling, these are increasingly becoming virtual. Virtual accounts, for example, typically complement COBO solutions. They resemble real accounts but are effectively shadow or ledger fields linked to a single physical account. Treasurers can set up as many virtual accounts as required, such as by entity, business line or even individual customers. Customers make payments to the virtual account, but remittances are automatically routed to a single bank account, usually, but not necessarily, by currency. The virtual account number is used as a reference field for automatic reconciliation, reporting and account allocation purposes.

While the initial driver of virtual account solutions is often to improve straight-through reconciliation (STR) and automatic account posting rates, the liquidity advantages are equally, if not more, compelling. Cash is automatically centralised into a single account (rather than multiple accounts), with cash available as soon as remittances are credited to the account. This will become increasingly significant as adoption of real-time payment schemes increases. In contrast, under today’s cash pooling arrangements, sweeps typically take place at the end of each business day, so liquidity is not available in the header account until the following business day.

Developing the concept of virtual cash management further, corporates are now also exploring the feasibility of virtual ledger management (VLM). This involves developing an in-house bank model that allows treasurers to manage payments and collections on behalf of group companies through a series of virtual account hierarchies. Like virtual accounts, a VLM model reduces treasurers’ reliance on external bank accounts, and is also suited to treasuries that work with multiple cash management banks. New VLM platforms will increasingly enable treasurers to leverage one VLM platform across multiple banks, taking the concept of dynamic cash concentration to the next level.

“We are still in the nascent stages of realising the combined potential of real-time liquidity”


Unlocking the value of data

The value of virtual account solutions is not only access to cash, but also access to data in real time. With this data, treasurers can provide rich analytics and insights on liquidity and risk, and detailed intercompany reporting. For example, group entities can access virtual account statements and integrate data directly into their own systems for reporting and accounting. Treasury and finance teams can monitor customers’ payment behaviour to build sophisticated predictive analytics and enhanced cash flow forecasting.

In addition to data held in treasurers’ own systems, the use of open APIs unlocks a wealth of data held by their banks, presaging a variety of new liquidity solutions. As cash and liquidity management is increasingly conducted in real-time, APIs will enable treasurers to move cash to where it is required, including between banks, rather than relying on end-of-day cash sweeps. Consequently, ‘just-in-time’ liquidity management becomes possible for the first time, eliminating the need for large cash buffers and creating additional investment opportunities. Furthermore, using APIs to connect data sources (including bank, internal and market data) and leveraging advanced analytics, treasurers can identify the best use of cash, such as debt paydowns, discount windows or the optimal investment maturity.

Next generation investment policy and compliance

The ability for treasurers to gain greater visibility and control over liquidity and make investment decisions with more confidence is particularly important in the current investment landscape. Slowly increasing interest rates in USD and GBP and continuing negative rates in EUR add complexity to corporate and institutional treasurers’ investment decisions. Money market fund reforms are due to be implemented in both the United States and Europe in 2020, and banks need to comply with the liquidity requirements of Basel III, which has clear guidelines around the value of customers’ operating balances. Treasurers are therefore aiming to offset yield without losing access to operating balances, while also investing cash surpluses with favourable rates.

The result is that many treasurers are reviewing their investment policies and processes, but the nature and conclusions of this review are quite different from the past given the advent of real-time liquidity and the opportunities created by technologies such as open APIs. For example, negative yield in EUR is prompting many treasurers to seek alternative solutions such as time deposits (which are more feasible as cash flow forecasting confidence grows through enhanced analytics), one day FX swaps to convert overnight investments into positive-yielding currencies and simple cross-border interest optimisation solutions. The aim of these discussions is not simply to establish a flexible policy that reflects the current and new world, but to automate adherence with the policy. For example, using open APIs, banks can automate execution in accordance with a policy, and provide immediate visibility through dashboard and compliance reporting. Similarly, FX APIs can automate FX swap execution or allow embedded FX services into customer tools to reduce FX risk and optimise liquidity.

“Corporations of all sizes… are now keen to take their cash and liquidity management to the next level of efficiency in both operational and liquidity terms”


Ready for change

We are still in the nascent stages of realising the combined potential of real-time liquidity, open APIs and sophisticated analytics using robotic process automation (RPA) and artificial intelligence (AI), but treasurers are quickly leveraging these opportunities to meet their operational and liquidity objectives. Whether doing so today or in one or two years, treasurers need to work with their banks and technology vendors, such as treasury management systems (TMS) enterprise resource planning (ERP) and ancillary fintechs to understand the implications:

  • These systems need to be able to support open APIs, which may require an upgrade to a more recent version.
  • The era of batch and end-of-day processing is coming to an end as clearing and settlement systems are upgraded to support real-time settlement, which has process, connectivity, decision-making and reporting implications.

Corporates and institutions alike therefore need to review and re-engineer their processes and procedures to reflect the new world, and position themselves to take advantage of new opportunities that richer data, analytics and APIs are creating.

The combination of regulatory, market and technology factors that are transforming cash and liquidity management provides treasurers with unprecedented flexibility and choice in the solutions available to manage their efficiency, cost and scalability objectives.

Furthermore, the move to real-time cash and data, together with intelligent automation and the use of AI and RPA, heralds a major shift in treasurers’ role. Rather than focusing on day-to-day adherence with treasury policy, many of today’s familiar tasks can be automated, enabling treasurers to focus only on exception management and enable the organisation to leverage their specialist skills in a more strategic way to add value to the enterprise.

Helen Sanders is a specialist treasury writer and consultant and was formerly Editor of Treasury Management International. She was previously Director of Education at the Association of Corporate Treasurers and Director of Sales & Marketing at SunGard (now FIS), following roles in corporate treasury and tax in the oil and technology sectors


1See ‘Real-time realities’ in flow H1 2018 at
https://bit.ly/2MtScaS at db.com/flow

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