Maximising transaction banking liquidity

How a new approach to B2B cross-border payments frees up trapped liquidity

These are unprecedented times and it is difficult to predict what lies ahead for the global economy. However, one thing is certain; demand for greater business efficiency and the need to find new and effective ways of creating liquidity is more important than ever.

The great majority of financial institutions today process business-to-business (B2B) cross-border payments using correspondent banks, a process rife with challenges - making it difficult to effectively manage liquidity while at the same time driving up the cost of delivering payments. According to Frances Coppola, writing for Forbes magazine in February 2019¹, “It is processes within correspondent banks that take the time and raise the cost. Partly, this is due to regulatory requirements such as Know-Your-Customer/Asset and Liability Management checks and time zone differences. But it is also because correspondent banks themselves are clunky and inefficient.” While a provocative statement, I would argue that the issues are not necessarily bank-driven, but paradigm and process-driven. A linear process with three to five banks exchanging information and value can only be improved to a certain point.

It is processes within correspondent banks that take the time and raise the costs¹.

    - Forbes Magazine

As part of the correspondent banking process, funds tied up in nostro accounts can be a significant component of cross-border payment costs. A recent study found the average cost of maintaining nostro accounts for surveyed banks amounted to $1.5 million annually². These nostro account funds amount to trapped liquidity, which banks could certainly put to better use.

Clearly, a new approach to B2B cross-border payments is needed, allowing banks to free up trapped liquidity and better serve their corporate customers.

The need for greater payment transparency and FX predictability

Payments sent through correspondent networks present a number of shortcomings. Executing cross-border payments using the traditional bilateral correspondent process lacks transparency because both the originating bank and the beneficiary bank remain unaware where the funds of a transaction are at any given moment. Since the transaction is routed across multiple correspondent banks, knowing when payments will arrive or what costs will be incurred is essentially impossible to determine.

To address this shortcoming, SWIFT has introduced its Global Payments Initiative (GPI), which provides much needed transparency into where payments are in the correspondent banking process. However, there still remains a lack of payment predictability. Without upfront predictability, it is challenging to know what foreign exchange (FX) fees will be. Additionally, in the current scheme, originating banks must maintain relationships with numerous correspondent banks in order to fulfil the many currencies in the countries that their customers transact, creating further inefficiencies.

Without upfront predictability, it is challenging to know what FX fees will be.

Emerging payment approaches maximise liquidity

New digital technology innovations are entering the marketplace, offering the promise of improved liquidity for banks. Emerging networks are tapping into next-generation technologies, such as distributed ledger infrastructures that can facilitate financial transactions on a private, permissioned, and highly-secure network. Such end-to-end payment networks reduce the complexity of the cross-border payments process, while helping to unlock trapped liquidity. By employing a multilateral versus a bilateral settlement approach, the originating bank no longer has to have relationships with multiple correspondents to fulfil payments in different currencies and countries. Through a single relationship, originating banks can deliver payments directly to beneficiary banks in the payment network. Visa’s B2B Connect is one example of a new rail with net settlement, multilateral clearing and simple rules that provide a faster and more straight through approach reducing stops, friction, and defects; guaranteeing full value delivery of payments.

The benefits of access to network liquidity can extend beyond just the originating bank. When a bank sends a payment instruction, and covers their obligation with the network, those funds are available to the beneficiary bank almost instantly.

A compelling new approach for banks

This new cross-border payment approach has far-reaching liquidity benefits across the transactional chain. Banks within the network can conveniently manage all of their FX payments, while benefiting from enhanced liquidity. Originating banks can also more easily free up the trapped liquidity held in nostro accounts with correspondent banks. By eliminating the need for multiple nostros, they can further reduce costs associated with transaction fees.

Enabling efficient cross-border payments through a multilateral relationship structure that overcomes the restrictions of the traditional bilateral correspondent network approach, delivers compelling liquidity benefits that are hard to ignore. Bringing the network proposition to high-value cross-border payments holds the promise of transforming the way banks can manage their liquidity positions.

This rapidly evolving and elegant way of executing B2B cross-border payments is one that banks should find intriguing and worthy of a closer look.