Managing bank liquidity in a real-time “always on” world

If you’re working for a bank or a non-bank payment service provider (PSP), you may have liquidity challenges on your mind. Banks need liquidity (cash) to fund outgoing real-time payments from their customers’ accounts—the rest can be placed on deposit with the central bank, where it earns interest.

As we know, banks miss out on potential interest revenue for every cent not used for liquidity and deposited with the central bank. It’s always been important, therefore, to calculate how much liquidity is needed to fund outgoing payments, as retaining too much or too little will result in either failed payments or revenue loss.

In the past, when payments took several days to process (and RTGS payments were only made during business hours), the liquidity calculation was well understood and easier to manage. More recently, however, the exponential growth of immediate payments has put bank liquidity under pressure, 24/7, as never before, and it’s more difficult to calculate how much liquidity to retain for outgoing payments.

So, what’s changed, and what are the challenges?

Two things have changed, and they’re related. First, the commercial world has evolved into a primarily digital world, where it’s normal to transact pretty much any time of the day or night. As a result, payments are no longer made only during banking hours, and individuals and businesses now expect to be able to move money immediately and whenever they wish.

Second, this commercial evolution has been supported—and in many regions accelerated—by regulatory initiatives designed to promote real-time payments and remove structural barriers such as transaction caps. In the euro area, SEPA Instant Credit transfers currently support transactions up to €100,000, with discussions underway to raise the limit to €1 million. In the U.S., faster payment rails now support transactions up to $10 million, while the UK Faster Payments scheme allows transactions up to £1 million, further expanding use cases and enabling higher-value instant payments.

In practice, this means a corporate banking client could initiate transactions totalling several billion euros, dollars or pounds overnight—on a weekend or extended bank holiday—requiring its bank to have sufficient liquidity available to settle those payments immediately. Because central banks are closed outside business hours, the bank would need to pre-fund its position before the close of business on Friday to ensure it can meet these real-time settlement obligations.

The bank must get this right. If liquidity is miscalculated, payments may fail, impacting customers, causing reputational and regulatory risks, or, at a minimum, leading to overdrawn accounts. This makes precision in liquidity forecasting more difficult in a real-time world, but critical because it directly impacts the bank's customers and/or profitability. While underfunding is a problem, overfunding payment liquidity is also undesirable because it results in non-interest-earning funds for no reason.

How are banks handling this?

Banks have already adjusted their operational processes to manage these new challenges. The most obvious approach is to set value limits at the bank level on individual payments that retail and corporate customers can send. Alternatively, a bank may choose to throttle outgoing payments until liquidity to cover these is received from incoming payments.

Another approach is to implement pricing that puts an extra premium on making real-time, high-value payments outside business hours. Some banks are already adopting some or all these approaches, and, while these help mitigate the liquidity issue, they don’t, of course, resolve it (and may create other issues such as timed-out real-time payments resulting from payment pauses).

A more systems-based and preventative approach is building tools that track intraday positions in real time across accounts and systems and forecast expected flows, automatically alerting treasury teams when liquidity balances approach critical thresholds. However, this can be complex because it depends on the availability of relevant, real-time, and complete data.

A competitive edge for some

It’s clear that managing liquidity efficiently can be a real source of competitive advantage. In an ideal world, it wouldn’t be necessary to limit real-time payments due to liquidity concerns, and the bank would always maintain optimal liquidity with the central bank.

Several liquidity management papers published over the past year reference artificial intelligence as a potential enabler of significantly improved forecasting accuracy. On the surface, this promise is compelling. However, AI should be a later-stage optimization—not the starting point. Any liquidity management solution is only as strong as the quality, structure and completeness of the data that underpins it.

Before investing in advanced predictive models, banks must ask more fundamental questions: Is the data consistent, timely, and properly governed? Is it structured in a way that supports reliable forecasting? And, does the variability and complexity of liquidity demand justify the investment in AI-driven capabilities? Without strong data foundations and sufficient volatility to model, even the most sophisticated algorithms will underdeliver.

In any case, the key question is whether to invest in a bespoke solution or to focus on selecting the right product platform for the job.

Investing in a liquidity manager solution

We believe a payments platform with a built-in liquidity manager module that tracks liquidity across each clearing and settlement mechanism or bilateral arrangement is perhaps the most desirable solution. The liquidity manager monitors liquidity in real time in accordance with the defined business rules. Inside each modular component are agentic AI capabilities that can be accessed directly by API for payments and other banking needs.

We have many years of experience in implementing new payment rails worldwide in-house and through managed services, as well as in developing innovative, value-added payment services. We would be delighted to pick this conversation up at your convenience, either over the phone or over coffee. Reach out to me below.