Transaction Limits Management

Payments: Just-in-time

Corporate Account Structures, Intra-Day Liquidity Management and Payments Transaction Limits Management

 

The Problem:

The Usain-Bolt-like manufacturing supply chain and logistics supply chain are fast, real- time and just-in-time.  Meanwhile, the financial supply chain lumbers behind them working on T+n.

Need it be like this?

The world of manufacturing has seen JIT (Just-In-Time) for a long time now.  Machine tool operators do not need to keep large inventories of raw material next to their machines. This has improved cash and working capital and ultimately profitability for manufacturing companies.

However, the same is not entirely true in the corporate transaction banking space. Corporates treasurers often have to maintain high balances at BOD. They also have to request their banks for large intra-day overdrafts and EOD overdraft facilities as the nature of their business is such that payments (debits) go out throughout the day while inward payments (credits) are applied only at the end of the day.  This could happen because core banking platforms may apply the debit for the outgoing payment immediately, while they apply the credit of the incoming payment only at EOD or sometimes on a T+1 or T+2 basis. This could also happen because a cross border fund transfer from one international subsidiary to another may itself take 2 days to settle over a snail-paced correspondent banking network.

The lack of real time cross border payments, lack of instant credits into corporate accounts due to  mainframe / batch core DDA systems, the lack of real time intra- day sweeps and the lack of real time balance and transaction reporting forces corporate treasurers to maintain high balances (inventory) at BOD.

Thus, while the manufacturing supply chain and the logistics supply chain are real time / just-in-time, the financial supply chain is still operating on a T+n basis.

The Cost:

For the Corporate, all this comes at a huge cost. To maintain a high BOD balance, corporate treasurers may end up with short term borrowing. To maintain multiple accounts – some in debit balances and some in credit balances – will make the corporate incur higher interest cost. There is also the cost of the intra-day OD facilities and EOD OD facilities. There is also the cost of not being able to clear those high value payments because the account has used up its balance, and for a corporate treasurer, this can get frustrating as he may actually have a large credit balance in another account with the same bank.

“I was once speaking to a Transaction Banking Head at a large bank, who said, ‘listen Tapan, I really don’t want to reject high value payments of these large corporates. They were maintaining very high overdrafts at each account level, and this came at a huge cost to our bank since we had to maintain provisions under Basel 3 for these facilities and it impacted our bottom-line’.”

The Solution:

A world of Just-in-time payments beckons!

The solution that global transaction banks need to consider is to offer real-time balance netting across a group of accounts.

By consolidating 100’s of thousands of accounts of a corporate and its subsidiaries into a CAS (Composite and Complex Account Structure) and specifying net and gross limits at each account, account group, subsidiary and parent level, the bank will be able to save:

  • the bank will be able to save on its Basel 3 LCR (Liquidity Coverage Ratio) requirements
  • and the corporate will be saved of maintaining a high BOD Balance or for requesting high daylight exposure limits.

It’s a win-win for both the client and the bank.


A sophisticated, stand-alone system…ta da!
Which aggregates and computes limits and balances instantaneously, is the need of the hour…

A transaction limits management system could help banks:

  1. Check balances in real time across multiple core DDA platforms, or
  2. Account management systems and check the associated net and gross limits and give a payment decision back to the payment engine.

If funds are insufficient, a system such as this could place the transaction in a referral queue and do an automatic re-try just before cut off or even throughout the day.

Some global transaction banks have built regional balance control systems (RBCS) such as these, while those that have not struggle with even a real time balance view and incur high payment operations cost and end up having larger teams to manage the larger volume of payments in funds-check retry queues.

As banks across the world are modernizing their payments infrastructure for ISO20022, Open Banking, PSD2, Instant Payments Support etc., the need to implement a Transaction Limits Management system become more relevant.

Today, in the case of real- time payments, some countries have removed the upper threshold for instant payments, while some have significantly raised the upper cap.

Example:

  • For instance, UK faster payments has a limit of £ 250,000 with plans to increase it to £ 1,000,000
  • There is no upper limit for intra-bank instant payments within Netherlands

It’s a safe bet to say that corporate treasurers will want their banks to offer them:

  • Real-time Visibility
  • Real-time Balances
  • Real-time Intraday Liquidity Sweeps
  • and Balance Netting

All so that they don’t have to maintain high BOD Balances in multiple banks / accounts. After all, inventory, whether it is in manufacturing or in finance, represents cost.

It is high time that corporate transaction banks started thinking of procuring a centralized payment transaction limits management system that can track exposure and authorize payments by checking limits and balances at various levels such as customer, customer group, legal entity account group, account etc.

This will benefit the bank to process payments with less risk and less cost and the clients benefits from payments that execute immediately!

 

About the author

TapanTapan Agarwal, Senior Vice President, Payments Product Management
Tapan is a banking technology and domain expert, who now leads the payments product management function for iGTB. He has over 2 decades of experience in banking technology, having worked at Oracle OFSS (i-flex), Wipro, MindTree and Deutsche Software. He has worked in roles that range from development, design, consultancy to strategy and operational roles including managing large teams, top line targets and bottom-line responsibilities. He has implemented banking technology in multiple banks and consulted with CTOs and CIOs at banks on technology driven business and operational efficiency improvement.