Cross-border payments: the necessary management of banks' liquidity
Against a backdrop of positive interest rates and expectations for rapid and instantaneous payments, control of treasury flows within banks has become a real additional challenge.
Since the end of 2021, the return of inflation has changed the economic and financial landscape. To control this, central banks have begun to normalise their monetary policy at a pace rarely seen before. The European Central Bank (ECB) hiked its key interest rates by 425 basis points between July 2022 and July 2023! This contrasts with the previous decade, when interest rates were historically low or even negative in the euro zone, and liquidity was abundant. At a time when instant domestic and international payment systems are developing, this paradigm shift has implications for banks in terms of managing liquidity, which has (again) become a scarce resource.
Whether domestic or cross-border, payment is seen as a convenience that meets the same expectations, even though the realisation of a cross-border payment is far more complex than a domestic payment. These days, the trend is for speed and immediacy. On cross-border payments, banks have made enormous progress since 2017, thanks to the standardised developments of the interbank cooperative SWIFT, which has more than 11,000 members worldwide. Via Swift gpi, 40% of cross-border payments are realised in less than five minutes and two-thirds in less than an hour, not far from the G20 target of 75% by 2027.
One way of improving the efficiency of processing times and the fluidity of international payments would be to open central banks’ real-time gross settlement (RTGS) systems 24/7/365. Moves are afoot to extend their opening hours, as has happened with the TARGET 2 system for the euro, supervised by the ECB, which has been open from 02:30 (previously 07:00) to 18:00 since March 2023. The Bank of England is also currently looking at extending its working hours. The aim is to have as many of the world’s interconnected settlement systems in operation at the same time to facilitate real-time trading (the global settlement window concept). Another solution put forward is to improve instant payment locally by enabling cross-border payments to be settled instantly. This improves processing in the final stages of the transaction, where there is greater operational friction (more controls, filters, delays in crediting the final beneficiary).
Perfectionism can be counter-productive
But opening 24/7/365 and instantaneously would dilute liquidity, the banks’ main commodity. There is also a social constraint. Following the sun requires substantial human and technical resources outside its domestic market to carry out continuous operations. Above all, the demand for such a service does not yet exist. Expectations are therefore more reasoned, with the solution undoubtedly to be found in improving what already exists. The next step could be to open RTGS 22 hours a day, five days a week, generally Monday to Friday. Deploying “liquidity bridges” between central banks, following the example of the ECB and the Bank of England, could help make trading more fluid. Banks can exchange euros for pounds sterling when business peaks. Punctual liquidity injections are increasingly necessary if we are to move towards 24/7/365.
Instant payment is set to expand, but remains a challenge. It means operating in a secure environment. As such, the bank plays an essential role as a trusted third party. It is one of the main vectors in the fight against money laundering and fraud, ensuring that funds are available at the time of settlement, verifying the identity of the parties on whose behalf it is executing the transaction, carrying out regulatory controls, etc. Thus it plays an active and responsible role in ensuring the soundness of the financial system.
There is also the question of cash management, particularly in a context of rising interest rates. Their return to positive territory is making certain products, such as money market funds, even more attractive. The cash placed by treasurers is less available, which can complicate the settlement processing chain. To make an instant cross-border payment, you need to be able to access the funds. It is precisely on this point that banks’ cash flow considerations are even more closely aligned with payment concerns. On the banks’ side, there is a desire not to fragment the liquidity pool, whereas the emergence of multiple new local and regional payment solutions is, on the contrary, leading to greater fragmentation of financial resources. A management challenge for the bank in relation to structural changes in payment systems. In correspondent banking, for example, the collection and custody aspects are more important than in the past. For several months now, bank treasurers have been keeping a close eye on the cash collected from clients and the funding of accounts for payments. The increase in the volume of capital exchanged in real time, fuelled by the growth in international trade and new consumption patterns, means that the level of cash available in banks must be constantly monitored to ensure that payments can be honoured at all times. This monitoring of accounts is in addition to the day-to-day business of correspondence banking and implies a change in the culture of the teams. In an increasingly fast-paced and interconnected payments world, banks are continuing to reinvent themselves to meet their clients’ deadlines. The new technologies that they are gradually integrating into their systems, such as predictive models based on Artificial Intelligence and Machine Learning, will enable them to respond to the new challenges of liquidity, providing renewed opportunities to differentiate themselves and build client loyalty.