How can you manage operational risk in cash management relationships?

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Cash management is a vital function for any business that handles money, whether it is collecting payments, paying suppliers, investing surplus funds, or managing foreign exchange. However, cash management also involves various operational risks, such as fraud, human error, system failure, legal or regulatory compliance, and reputational damage. These risks can result in financial losses, operational disruptions, legal penalties, or customer dissatisfaction. Therefore, it is essential to have a robust framework to identify, assess, monitor, and mitigate operational risks in cash management relationships. In this article, we will discuss some of the best practices and tools that can help you manage operational risk in cash management relationships.

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Faizan Haq

Treasurer at MTN Group I Seasoned Treasury Management Professional
Peter Matza

Views are my own. ACT Council member, MA, Hon. FCT; treasury and corporate finance specialist. Experienced conference…

1 Define your risk appetite and tolerance

One of the first steps to manage operational risk in cash management relationships is to define your risk appetite and tolerance. Risk appetite is the amount and type of risk that you are willing to accept in pursuit of your business objectives. Risk tolerance is the level of deviation from your risk appetite that you can tolerate without compromising your strategic goals, financial performance, or reputation. By defining your risk appetite and tolerance, you can establish clear boundaries and expectations for your cash management activities and partners. You can also align your risk management policies, procedures, and controls with your risk appetite and tolerance.

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Faizan Haq

Treasurer at MTN Group I Seasoned Treasury Management Professional
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Mitigating the risk through multiple banking relationships is a strategic approach to managing operational risk in cash management operations Should one banking channel fail operationally or become disrupted due to the banking partner pulling out for various reasons such as regulatory changes, geopolitical issues, or financial instability, the organization can rely on alternative banking relationships to maintain its operations smoothly. This ensures continuity in critical financial transactions such as payments processing, receivables, and liquidity management.

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2 Choose your cash management partners carefully

Another important step to manage operational risk in cash management relationships is to choose your cash management partners carefully. Cash management partners include banks, payment service providers, cash transporters, currency exchange providers, and other third parties that facilitate your cash management activities. You should conduct due diligence on your potential and existing partners to assess their financial stability, operational capability, security measures, compliance standards, and reputation. You should also negotiate clear and comprehensive contracts and service level agreements that define the roles, responsibilities, rights, and obligations of each party. Additionally, you should monitor and review your partners' performance and risk exposure regularly and address any issues or concerns promptly.

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Faizan Haq

Treasurer at MTN Group I Seasoned Treasury Management Professional
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Working closely with reputable banks and financial institutions ensures access to high-quality cash management services. It's important to assess the bank's security measures, service reliability, and contingency plans. Regular communication and relationship building with bank representatives can provide early warnings of potential issues and ensure a quicker response to any problems that may arise.

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3 Implement effective controls and safeguards

A third crucial step to manage operational risk in cash management relationships is to implement effective controls and safeguards. These are measures taken to prevent, detect, or correct operational risks in cash management activities and processes. Segregation of duties, authentication and authorization, encryption and backup, and audit and compliance are some common controls and safeguards. Segregation of duties means that different people or teams are responsible for different aspects of cash management. Authentication and authorization ensures only authorized and verified users can access and perform cash management functions. Encryption and backup protect cash management data and systems from unauthorized access, modification, or loss. Audit and compliance verifies that cash management activities and processes comply with relevant laws, regulations, standards, and best practices. These controls and safeguards reduce the risk of fraud, error, or collusion; unauthorized or fraudulent transactions; cyberattacks; data breaches; or system failures.

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4 Train and educate your staff and customers

A fourth essential step to manage operational risk in cash management relationships is to train and educate your staff and customers. These stakeholders need to have the appropriate knowledge, skills, and awareness to perform their roles and responsibilities effectively and securely. Regular and relevant training and education should be provided on topics such as cash management policies, procedures, controls, risks, mitigation strategies, best practices, tips, tools, technologies, incidents, and lessons learned. This will not only enhance their competence, confidence, and compliance but also foster a culture of risk awareness and responsibility.

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5 Learn and improve continuously

A fifth and final step to manage operational risk in cash management relationships is to learn and improve continuously . This is not a one-time or static process, but rather a dynamic and ongoing one that requires constant monitoring, evaluation, and improvement. To this end, you should collect and analyze data and feedback from your cash management activities and processes, such as key performance indicators and metrics, risk indicators and events, customer satisfaction and feedback, partner performance and feedback, audit and compliance findings and recommendations. By doing so, you can measure your operational risk management performance and effectiveness while identifying opportunities for improvement. Additionally, you can anticipate and adapt to changing business needs, customer expectations, partner capabilities, and regulatory requirements.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Faizan Haq

Treasurer at MTN Group I Seasoned Treasury Management Professional
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Preparing for unexpected disruptions is crucial for managing operational risk. This involves creating comprehensive business continuity plans that detail how to maintain cash management operations during various crisis scenarios, such as cyberattacks, natural disasters, or significant market disruptions. Regular testing and updating of these plans are necessary to ensure they are effective when needed.

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Peter Matza

Views are my own. ACT Council member, MA, Hon. FCT; treasury and corporate finance specialist. Experienced conference chair and presenter
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I would see this in two parts. One, what are the short-term risks that you face? These might be glitches in bank or treasury software affecting payments or receipts, staff illnesses and the like. Real day-to-day problems. These are distinct from broader business disruptive problems such as wholesale system failures, larger scale emergency events such as fire or floods, hostile acts in major markets such as threats of expropriation, sanctions and the like. In both cases planning and preparation are key but they demand different scales of response.

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How can you manage operational risk in cash management relationships?

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1 Define your risk appetite and tolerance

2 Choose your cash management partners carefully

3 Implement effective controls and safeguards

4 Train and educate your staff and customers

5 Learn and improve continuously

6 Here’s what else to consider

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