Banking » Keeping cash at the ready

Cash remains king, but with interest rates at historic lows, keeping cash in business current accounts provides little benefit other than the ready availability of liquid assets. At the same time, given the level of uncertainty over the global economy, many businesses are reluctant to make long term investments.

“What we’ve noticed through our existing clients and new enquiries is that due to the uncertainty resulting from the pandemic, businesses are looking to get better positioning and protection for their cash in the short term,” says Eylem Yangin, chief marketing officer at Flagstone. “They’re preserving their liquidity and trying to absorb any second wave or market shock; most take a wait and see approach.”

Flagstone, a cash deposit platform has seen an uptick in the number of enquiries during the lockdown period as Companies look for better interest rates and protection for their liquid assets.

Yangin says that shorter-term deposits are the most popular as most businesses look to keep their cash safe but also available if needed. She also notes that some Companies are looking more long term though they remain a minority.

“Six-month term deposits were really popular, especially during lockdown. Some Companies are happy to put a deposit in for 12 months, where the rates are much better, if they can afford to wait. It really depends on the business and what their longer-term objectives are for their investments, business plans and liquidity requirements.”

In the UK, short term bond yields are flat. Maturities of between one month to one year offer less than one-tenth of a percentage point in returns. In the eurozone, the rates for bonds are in the negative, with short term bonds depreciating by more than half a percentage point.

Flagstone itself is not a depository but acts more like a marketplace. As a cash deposit platform, its business operates as an intermediary between banks and depositors. Clients use the Flagstone platform to deposit cash with the 45 banks and building societies on the platform, but without having to complete an application for each new account.

Account opening due diligences and checks are completed on behalf of the banks by Flagstone, in compliance with the FCA regulations. Yangin says this provides benefits to both banks and business clients.

“The advantage for the bank is that we open accounts with the clients and do the regulatory checks on behalf of the bank, without any costs to them. Because we act as an aggregator, collecting and consolidating significant deposit volumes, and thanks to our relationships with banks, we are able to negotiate exclusive rates for our clients”.

Deposit protection

While UK banks passed the Bank of England’s most recent round of stress tests back in December of 2019, the overall banking sector is neutral or pessimistic. More than half of Europe’s top 100 banks have a ‘stable’ outlook according to a report by S&P Global but more than 40 percent hold a ‘negative’ outlook.

Yangin says that diversification of cash is a key consideration for Companies as many look for more protection of their cash reserves.

Under the Financial Services Compensation Scheme (FSCS), the FCA protects deposits up to £85,000 per depositor, per authorised bank. But that protection can be increased through diversification by depositing with several banks says Yangin.

“Companies can put deposits into dozens of banks, they can spread out their cash so that most of it is protected by the FSCS.”

“Our UK banks offer FSCS protection. Corporate clients can decide how much coverage they want and can see their FSCS protection ratio. Companies don’t have to put all their eggs in one basket, they can easily diversify.”

Traditionally, if a corporate wanted to spread out its cash reserves over a number of banks it would have to open and manage several different banking relationships. With a cash deposit platform, Companies have the ability to increase their protected cash coverage without that administrative hassle.

“This is where a cash deposit platform simplifies things, the finance department doesn’t have to open several accounts, one single Flagstone account is enough. They don’t need to spend time managing 15 different accounts with 15 different institutions for example.”

Overall, the advice Yangin gives to Companies before moving their money is to identify what their overarching objective is for their cash.

“If they have enough liquidity during this period of uncertainty, they could benefit from getting the highest interest rate possible with longer term deposit durations, whilst enhancing the FSCS protection of their cash.”

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