Financial Innovation Strengthens Corporate Liquidity Risk Management


As Financial Technology (FinTech) becomes more innovative and sophisticated, non-bank FinTech companies have introduced competition to the cash management business of banks. Gavin Wang, Head of Payments and Cash Management, Societe Generale China, shares his views on how banks can enhance their core strengths and provide liquidity management for enterprises more effectively through financial innovation.

FinTech accelerates the transformation of banking services

At present, the main differences among banks’ cash management business – liquidity management in particular – are their client bases, and the investments they put into liquidity management in areas such as manpower, systems, technological research and local network. 

Owing to its digital nature, FinTech is not bound by borders. This closes the gap in competitiveness and creates latecomer advantages, for example, by reducing the heavy or long-term costs that were previously needed. This is the reason why FinTech and digitalisation can smooth out the fluctuations in market competition.

Traditional banks in China, especially those with relatively smaller scale, are able to constantly provide new products with comparative advantage through digitalisation and FinTech. One example is the digitalisation of the back-end risk control with the help of big data and system integration. Digitalised risk control capability is extended to frontline sales teams, who are equipped with mobile terminals. As frontline staff collect background information directly from customers and conduct due diligence on them, they enter the information into the system. With these information and a preset risk management model, the customer’s risk assessment results can be quickly determined for credit approval.This is a significant edge for banks in issuing microlending products. Frontline staff will only need to pick the relevant preset risk control questions in the system. Taking also data captured in the back-end (such as the client’s tax declaration), the risk management model can automatically calculate the customer’s credit rating and determine the credit limit. Such practices are highly information-based and timely, with a very low non-performing asset ratio.

When it comes to corporate liquidity management, cash flow to an enterprise is like blood circulation to the human body. Its health can be judged by two key indicators: permeability of the pipeline and the speed of the flow (compared to how fast blood is transported throughout the whole body). Stringent regulatory measures around the world and legacy systems are bringing an impact on the liquidity of enterprises. Liquidity risk of an enterprise can lead to operational risks, credit risk and the risk of capital chain rupture. These risks are getting even complicated in global enterprises involving multiple time zones and regions, as well as different regulatory frameworks across jurisdictions. FinTech can benefit from digitalisation to tackle these cross-border barriers in a more efficient manner, by building flexible and strong liquidity management platforms and enabling quicker and smooth conversion between assets and capitals. 

Global banks can address liquidity challenges faced by Chinese clients in their overseas investments

Clients are clear about what they need for liquidity management: timely capital support against the backdrop of globalisation. This is in fact a key capability that many Chinese enterprises are still building. As a global bank, Societe Generale is able to provide clients with comprehensive advisory and recommendations, drawing on its domestic and global experience. Apart from the global network, global banks’ track record in liquiditiy management and relevant solution offerings are even bigger consdierations of the client – the ability to provide them with tailored products and valuable advisory.

Under the scheme of “Going Out”, the main challenges facing bank clients are immature market regulatory practices, unstable legal frameworks and numerous restrictions in developing countries. The experience and expertise that  global banks have to offer is especially valuable. It is because of the weaker digital capability in developing countries, global banks have the opportunity to export FinTech capability to meet clients’ local business demands.

Moreover, these clients cannot rely on just one bank for all of their liquidity management needs in these countries, and often have to deal with the connectivity among several banks – this is one of the areas where global banks excel. 

Key challenges in global liquidity management faced by banks 

If enterprises have to manage the liquidity of its global subsidiaries, their key challenges will involve working with different regulatory restrictions across geographies, especially in anti-money laundering, anti-terrorism and legal framework. Existing framework can only satisfy basic business needs. Faced with the numerous restrictions in a strict regulatory environment, clients need to be supported by an agile information technology (IT) architecture. Some important concepts are:

  • First, data - completeness, level of standardisation and timeliness of data. This includes banks’ internal and external data: internal data refer to the level of connectivity and standardisation of data among departments, and the standardised external interface that meets the requirement of data system integration; while external data include data from central banks, regulatory reports, international clearing paths, etc.

  • Second, modularity or agility of the system. Modularisation is built with a solid underlying IT architecture as the foundation, with various agile modules added to it. For instance, while the underlying infrastructure of a bank is stable and cannot be changed easily, yet by adopting application programme interface (API) or Open Banking, more banking functions can be achieved by building modules on top of it. 

  • Third, maturity of external infrastructures, such as the degree of sophistication of the banking clearing system, including connection to domestic or cross-border clearing systems, SWIFT and exchanges. The maturity of telecommunication technologies (4G/5G), and the degree of digitisation as well as openness of external infrastructures also have an important impact on the scalability and development of an enterprise’s global liquidity management. 

Banks should gradually improve core competitiveness through FinTech

The essence of finance is price discovery and value transfer across locations and time zones. Taking this as the starting point, in the future, banks may not be the only providers of financial services. In particular, when digital informatisation is well developed, there can be various forms of financial services around customer demand, scenarios and other elements. 

With the deepening and development of FinTech, the financial eco-system will become more diverse, and its usability, compliance and security will gradually strengthen – even to a level close to that of banks. As FinTech develops to a certain level, these non-bank financial services providers will become highly applicable, such as third-party digital management platform, digital currencies, and some decentralised modules driven by blockchain and smart contract. 

It is important for us to ponder what banks’ core competitiveness may be in the future. With a broad scope of business, banks can use their core competencies to empower various modules operating in a society. For instance, a multinational bank with operating licences in a number of countries would have strong ability to integrate and allocate transnational resources. It can therefore become a universal financial institution that operates across regions, time zones, assets and markets, and effectively exports these capabilities to society.

If a bank is to continue providing clients and markets with excellent services, it must possess an innovative mindset so as to understand the core competitiveness of future banking.