Real-Time Payments Driving Real-Time Liquidity: Deutsche Bank

Corporate finance executives seem to be readying for real-time payments, preparing to adopt faster payment capabilities and bracing for changes to their cash flow management strategies as a result. A new report from Deutsche Bank said this industry path is guiding banks and corporates to a new destination: real-time treasury.

Driven by a range of factors (including changes to intraday reporting requirements, open banking initiatives, longer clearing windows for real-time gross settlement (RTGS) and ACH transactions, faster cross-border payments and instant payment capabilities), treasurers are headed toward an ecosystem in which not only payments are done in real time, but data analytics and liquidity for financial institutions (FIs) as well.

In its latest report, “Preparing for real-time liquidity,” Deutsche Bank acknowledged that the value caps on schemes like Faster Payments and Same Day ACH limit the applicability of these trends for corporate payers. Yet, as these caps rise across the globe, treasurers are likely to see disruption.

The FI pointed to the introduction of Single Euro Payments Area (SEPA) credit transfers, which found “lukewarm” interest among corporate payers at first, but eventually saw the strongest adoption among high-value payments. This adoption curve is likely to repeat itself in a real-time payments environment, the report predicted.

What does that mean for liquidity? Not much — yet.

“One of the difficulties currently is that motivation amongst some industry participants [to adopt real-time liquidity] is relatively limited,” Deutsche Bank noted. “After all, high levels of market liquidity, and relatively limited use of real-time payments so far, may suggest that shifting intraday liquidity and collateral management requirements [do] not need to be a major issue for banks.”

However, experts have warned that current high levels of market liquidity are not likely to remain the “new market norm,” and further proliferation of faster and real-time payments is likely to force changes in how institutions manage their liquidity from day to day. The bank cited EBA CLEARING Chief Executive Officer Hays Littlejohn in its report, who emphasized the importance of FIs’ preparations.

“As the use of real-time payment schemes expands, providing appropriate management and forecasting tools at an infrastructure level will become more and more important, since liquidity needs will become greater and more complex, including during real-time gross settlement system closing hours when active liquidity management will not be possible,” he said. “While there might still be less use of liquidity at night and over the weekend, payment service providers will not want to set all their available liquidity aside for real-time payment services.”

Banks and corporates will be challenged to accurately forecast their liquidity management needs as real-time transacting spreads. The report also predicted further changes in banks’ intraday liquidity reporting requirements, highlighting the need for industry standardization.

For corporates specifically, key challenges emerge for treasurers struggling to manage liquidity in a real-time payments environment. The fact that many firms hold liquidity in more than one bank account or currency — as well as the continued use of investment and borrowing solutions based on daily, not intraday — will limit treasurers’ ability to gain the benefits of real-time liquidity: reduced working capital buffers and borrowing requirements, and access to new investment opportunities, according to Deutsche Bank.

Yet, for several years, treasurers have been moving toward centralized treasury management solutions and processes, largely in an effort to boost payment efficiency. Further centralization of their infrastructures, as well as streamlined bank and account structures, are key milestones in the shift toward real-time liquidity, said Deutsche Bank.

In a statement announcing the report, Vanessa Manning, Deutsche Bank’s head of liquidity and investment for global transaction banking, said there must be industry-level progress for real-time liquidity to become a reality.

“The first step to achieving real-time liquidity capabilities will be industry-wide conversation, be it through forums, advocacy or continued dialogue with regulatory bodies,” she said. “Only then will the industry be able to collectively define the standards and best practices that will shape the next generation of liquidity and collateral management.”