The Flywheel Effect for Real-time Treasury

By Daniil Saiko
Director of Product Management, API

The Flywheel Effect, as popularized in the business literature, is an intriguing concept that highlights the power of small wins, when accumulating over time, can ultimately generate significant momentum for transformation. This concept becomes increasingly relevant in today’s treasury management, particularly with the increasing adoption of APIs in the financial landscape. The real-time nature of API connectivity offers a distinctive opportunity for CFOs and treasurers to leverage the Flywheel Effect. By harnessing the constant flow of data, organizations can capitalize on better decision-making and faster execution, ultimately driving transformative change. So the question arises: How can financial leaders seize this opportunity to unlock the Flywheel Effect in treasury management?

What Is the Flywheel Effect?

The concept of the Flywheel Effect was termed by Jim Collins in his book “Good to Great”. The idea is that any good-to-great transformations in both businesses and social enterprises never happen through a single event or breakthrough: “There is no single defining action, no grand program, no one killer innovation, no solitary lucky break, no miracle moment.” Instead, it involves the continuous effort similar to pushing a massive flywheel, gradually gaining momentum until reaching a point of breakthrough and surpassing it.

A good example is PayPal. Starting as an online payment solution for eBay, PayPal's growing user base attracted more merchants. As transaction volume increased, PayPal secured better terms, reduced fees and invested in technology. The improved experience attracted more users and merchants, thus compounding growth. The Flywheel Effect of PayPal’s success was driven by user growth, network effects and continuous innovation, transforming it from a niche solution to a global digital payments platform, bigger than most of the banks in the USA.

How to Generate Flywheel Effect in Treasury?

To harness the Flywheel Effect in treasury management, lets look under the hood of real-time treasury. It has three core components: data, decision making and execution. Individually, these elements hold power, but their synergy generates value greater than the sum of their parts.

Figure: The Flywheel Effect of Real-time Treasury

Real-time Data

The basis is intraday balance or transaction information. Traditionally, intraday data has been accessible through channels such as SWIFT MT942 or other file transfers protocols. The implementation frequency has been usually set by corporates at "a couple of times a day", balancing implementation efforts and price per file charged by the banks, and even that frequency has been considered as a “luxury”. Many companies still rely on posted balances from the previous business day to make business decisions.

APIs are a game changer in this case. With API-based intraday data, the frequency of updates dramatically increases from hours to minutes and seconds, ensuring greater availability and immediacy. Now, current balance information is readily accessible, eliminating the constraints of fixed-time schedules. This enhanced level of data accessibility empowers business leaders with real-time insights, enabling more informed and agile decision-making processes.

Real-time Decision-making

Real-time decision-making is not a marketing slogan tagged by technology, it truly represents a transformative capability for CFOs and treasurers, made possible by real-time data connectivity. The impossibility of making swift and sound decisions based on outdated information necessitates validation and assessment of current events.

When treasurers gain the capability to access up-to-the-minute cash and transaction information, they can promptly and effectively respond to many critical events, such as timely handling of significant payments, or proactively addressing expected or unexpected balance changes. More importantly, treasurers can make such critical choices with unparalleled confidence, supported by real-time insights into cash flow and transaction details. With the current market fluctuations and unforeseeable circumstances, only the CFOs and treasurers who embrace real-time decision-making can stay ahead of the curve.

Real-time Execution

Traditional batch processing does offer swift transaction initiation but the challenge lies in the delayed information feedback. Moreover, liquidity encompasses more than just payments; it extends to short-term investment and credit options too. Real-time execution enables real-time liquidity management and optimization. Organizations gain the ability to quickly respond to liquidity needs, seize short-term investment opportunities, and optimize cash utilization. Such agility empowers them to affect liquidity instantaneously, surpassing the limitations of batch processing and maximizing their financial potential.

The Power of Synergy

When these components combine, they form an unstoppable flywheel that reinforces itself. The higher frequency and richness of data fuel the decision-making process, resulting in faster and more accurate choices. This, in turn, leads to precise execution. Real-time execution generates immediate data, enriching the cycle and elevating the overall process. As each element reinforces the others, the flywheel gains momentum and becomes an invaluable asset for treasury management. When this interconnected system is utilized more frequently, its usefulness expands exponentially, delivering remarkable business outcomes.

Cash Forecasting as an Example

Let's consider an example of the Flywheel Effect in the context of cash forecasting and see how this iterative cycle enables companies to continually refine and enhance the accuracy and effectiveness of their forecasts to achieve superior cash management outcomes.

Firstly, the company utilizes real-time data feeds on cash inflows, outflows and balances. This includes real-time updates from bank accounts, payment processors and other relevant source systems, all being connected by APIs. The treasury team can then analyze the data on-demand, identify patterns, and anticipate cash flow fluctuations. This empowers them to adjust their cash forecasting strategies promptly, making forecasts that are more accurate and adaptable to changing circumstances.

As the treasury team's decision-making process becomes faster and more accurate, they can proactively optimize cash flows and working capital and make timely investment decisions. For instance, they may choose to invest excess cash in short-term instruments when they observe a temporary surplus, or adjust payment schedules to optimize liquidity based on real-time cash forecasts. The real-time execution of these strategies generates immediate data feedback into the cash forecasting process, providing even more accurate insights and enabling continuous refinement of the forecasts.

As the cycle repeats, the company's cash forecasting process becomes increasingly reliable. The synergy of real-time data, decision-making, and execution starts to create a powerful flywheel effect. The treasury team gains greater visibility and control over their cash position, allowing them to make more precise forecasts and eventually optimize enterprise-wide liquidity.

Identifying the Right Use Cases

While real-time processes and API integration offer significant advantages, it is crucial to bear in mind that batch processing remains a practical and efficient option for larger-scale, fixed-period tasks. In such cases, either file-based solutions or APIs can effectively facilitate batch processing, highlighting that API implementation itself does not guarantee real-time capabilities but serves as a means of delivery.

Therefore, implementing real-time treasury practices requires a thoughtful assessment of use cases. Each organization should clearly define their goals and rationale for adopting real-time processes and then assigning the resources accordingly. Understanding the specific needs and requirements of the organization is essential to ensure successful implementation and maximize the benefits: the Flywheel Effect of real-time treasury.

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