OK, for most of us this sounds crazy: Cash management is a commodity.
All the big banks do it. All the small banks offer it, even if they have to outsource it. Companies need it but there’s nothing new under the sun. Right? Wrong!
Business banking is going to change. Today banks are primarily used as ways to carry out financial transactions. But in the future, banks will be primarily considered as trusted advisors. Of course they are to a degree already. They provide advice on risk management in particular. They do this through hedging products, investment advice and the like.
Here’s a more detailed look at the key role cash management plays in financial services.
What is cash management today?
Cash management today is heavily transaction-oriented: Most obviously it includes basic account management (deposits, savings, CDs, etc.) and payments. Bigger banks offer services in the areas of receivables management. This may include services such enhanced automated clearing house receipt (ACH) and image lockbox. They also often offer payables automation services. Examples include bulk mixed payments and invoice presentment.
Some banks also offer credit services overtly; most cash management products actually carry some form of credit risk. These are typically forms of working capital financing. Working capital finance bridges the gap between the expense of providing a product or service, and receipt of payment.
Why will it change?
Over time independent, less-regulated companies will be able to take over mundane transactional activities. What’s more, they will do so with greater speed and lower cost. Banks may lose significant non-interest income, which they can’t afford to do. So they will need to find new ways of generating revenue.
Change will become possible because of emerging technologies. These will enable services that cash management banks have only dreamed of before.
It’s all about KYCB – Knowing your customer’s business
Banks possess a ton of data about the customer’s business, whether or not they realize it. For businesses that have only one bank, all payments and receipts flow through them (other than cash). But today, most of this data is only a historical record of transactions. What if banks could effectively use all the data available to them?
Your business customer has a core competency. It may lie in providing particular products or services. It may center on consulting or marketing. It may be manufacturing or publishing. But it is most likely not (unless they’re an accounting firm) financial management: They do cash management because they have to. They try to manage financial risk because they don’t want to get burned. But most companies lack the skill to make optimal financial decisions. Cash management activities such as short-term lending and borrowing are difficult. So are optimization of payments timing, discounts for early payment offered and so on.
They don’t have time to compare their financial management with their peers. They can’t model the impact of various potential economic scenarios on their bottom line. But: What if they could depend on the experts – banks – to make and act on recommendations for them? And: What if decisions could be based on detailed analysis of their transaction flows, payables, receivables, and financial assets and liabilities?
What couldn’t banks do if they had access to this data plus advanced analytics, business intelligence and AI capabilities? This is how banks will differentiate themselves down the road.
Technology game-changers for cash management
I see three major game-changing emerging/developing technologies that will impact cash management.
Blockchain. Everyone is talking about blockchain and without a doubt in the long term, it will impact cash management; in particular payments infrastructure will transform. Blockchain will allow for greater efficiency, security and convenience. Specifically, cross-border, low-value payments will become easier for banks to offer.
Trade finance may at last become a predominantly electronic business, as blockchain pervades the international supply chain. Other examples will occur to the reader.
But generally these are operational efficiencies that will simplify operations and make them more efficient. They will not, however, revolutionize the role banks play with their business customers in the cash management realm.
Advanced analytics. For a long time, banks have sought to help businesses with management of payables, receivables and working capital. But the approach has been largely transactional in nature. With advanced analytics—given enough of the right data—banks can use their industry expertise to analyze, model and predict implications of changing strategies for early and late payment. It includes offering discounts to certain customer groups for early payment. It covers inventory and receivables finance, and short-term investments.
Artificial intelligence. Several aspects of AI will contribute to banks’ role in their business customers’ cash management. This will include machine learning as banks continually improve on the quality of advice. Natural Language Processing will come into play as banks offer real-time, chatbot-assisted solutions and answers. Neural networks will enhance the advanced analytics as banks look to create advice not just with the customer’s own data, but industry and global economic data as well.
Some of these capabilities already exist; some are in development. IBM’s Watson is a commonly-cited example of an existing, very powerful tool set. It is difficult to deploy, but some of the results have already proven quite stunning.
The future of cash management
So in a nutshell, what will characterize cash management in the future? If banks serve more as advisors than transactors, what should the average corporate treasurer expect from their banks?
Day-to-day advisory services in which banks propose things such as:
which bills should be paid when
which customers should be offered discounts
how much should be borrowed and from what source to bridge a cash shortfall
how excess funds should be invested
Longer-term advisory services covering such areas as:
Financial balance sheet management
Risk reduction and hedging strategies
Modeling of bottom line impacts from changes to payment terms
On-demand, AI-assisted answers, advice and transaction initiation through chatbots. This includes referral to human assistants as indicated by complexity or customer preference.
Seamless flow from acceptance of advice to execution of transactions
Ability to model the financial impact of advice, allowing for value-based pricing
The bottom line These are just ideas—indications of what might come to pass. But for certain, banks need to consider their core competencies to extend beyond transaction execution. They are well-placed to emerge as trusted advisors, understanding and assisting with the financial challenges of their business customers. In that sense, that timeless financial maxim might be amended thus: Cash management is king.
Graham Seel, a 30 year banking veteran, runs BankTech Consulting. An expert in commercial banking who provides strategic insight and innovation consulting, Seel works as a fractional Customer Success Executive to FinTech firms, facilitating their partnership with banks. Listen to Graham discuss Millennials and community banking on the BAI Banking Strategies podcast.
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