In part one of the series, we looked at the rise of instant payments across Europe and the impact this will have on treasury teams – and whether treasurers are ready to change their approach to liquidity to accommodate.
Now we’re going to dive deeper into how instant payments through SEPA will impact PSPs’ liquidity management, namely in underfunding and overfunding accounts. Underfunding accounts might stop customer payments from going through, while overfunding accounts inefficiently leaves money lying idle without optimising interest.
Instant payment accounts are reaching tipping point
We previously looked at how the TARGET Instant Payment Settlement System (TIPS) joins RT1 as a key part of the instant payments infrastructure in Europe. As instant payments adoption grows, treasurers will feel the pressure to manage liquidity in their TIPS and RT1 accounts more carefully.
Instant payment accounts require careful pre-funding and liquidity management. And this funding comes from liquidity held in the central bank and is moved via T2. However, T2 closes in the evenings and at weekends, which isn’t compatible with 24/7 instant payments. To complicate matters further, money left in the instant payment accounts might not earn interest or contribute to the minimum reserves the bank needs to hold.
Every treasurer knows there are smarter ways to utilise surplus funds, and optimising funds should be a key measure of success. Treasurers are in a prime position to act and have a positive impact on the broader business.
To demonstrate the overfunding problem, in the UK a review into intraday liquidity usage and utilisation of funding revealed that participating PSPs were overfunding their accounts 99% of the time. Even when adding room for contingencies, that’s an excess of liquidity that can exceed £1bn for the larger PSPs. This scenario applies to mature instant payment markets and will equally stand in Europe as instant payments gain traction. Imagine the impact across Europe if PSPs don’t respond smartly to their liquidity management in the era of instant payments.
Even if the economics don’t persuade a treasurer to ration the funding held in the instant payment schemes, a ‘run on the bank’ scenario can become terminal if the PSP simply parks its liquidity in the scheme for the weekend. With instant payments, there is no physical brake on customers pulling their money from a PSP, and the firm might see its liquidity disappear before it has time to react.
There have been examples in the Eurozone where attractive retail offers, such as high-interest government bonds, have been put on the market and generated significant customer interest. If this results in vast numbers of people moving large sums from their accounts at the same time, it will quickly drain any liquidity the PSP has placed in the instant payment scheme. Such a scenario can have potentially deadly consequences if it occurs over a weekend, when moving liquidity is impossible before reopening on the Monday.
The problem of underfunding the instant payment scheme is simpler to understand. If the PSP misjudges how much its customers want to pay, its liquidity may be drained, and customers will be unable to make payments, significantly damaging the firm’s reputation as a result.
Treasury teams need to think differently
The old ways are being turned upside down. Liquidity management is no longer feasible by relying on assumptions of what has happened in the past. Instant payments are, by nature, harder to predict. They are changing the payments landscape at pace, impacting the whole treasury process. Treasurers need to re-evaluate. In many respects, the traditional approach hasn’t particularly evolved; it follows a ‘same as last year’ mentality and isn’t data-driven.
Some PSPs can get away with the status quo. As discussed in part one, liquidity is currently quite plentiful across Europe, but PSPs are missing a trick by sticking to the old ways. Taking a data-driven approach helps treasurers make more informed decisions, from forecasting to allocating liquidity all while generating value.
There are technology solutions on the market that PSPs can use right now. We’ll unpack what treasurers need from technology in the final instalment of our series. And, of course, this will include the ole of AI. Stay tuned…
