Pcard Market set to explode in Public Sector – Consequences of Basel III and Liquidity Ratio

Basel 3 will impact how the Public Sector compensates banks for services. Up until Basel III implementation, the public sector compensated banks with cash balances to get all kind of services and credits for those balances.

What Basel 3 does is it no longer gives the same amount of credit for cash balances at banks. Now states and municipalities will have to pay hard bank fees. Ouch! We all know how expensive the big banks are for products and services as they look for revenue. For a public entity that hasn’t put this expense in the budget, it will be painful
This will happen January 1, 2015 when Basel III is implemented in the USA.

Why this will happen?

To understand why banks need to charge for balances, readers need to understand what the Liquidity and Net Stable funding ratios are.

The Liquidity Coverage Ratio (LCR) is part of Basel III and is designed to ensure that financial institutions have the necessary assets on hand to ride out short-term liquidity disruptions. Banks much hold an amount of highly-liquid assets, such as cash or Treasury bonds, equal to offset net cash outflows over a 30 day period (with the full 100% minimum coverage in force from 2015). This impacts every bank business, but especially hits business like Correspondent Banking, Trade Finance, and businesses that traditionally used balances to offset fees. The Net Stable Funding Ratio (NSFR) is designed to ensure that banks maintain a stable funding profile in relation to the characteristics of their on- and off-balance sheet activities.

Implications and why the time may be ripe for pcards

Municipal governments will be ripe for pcard and other products as they look to extend terms with their suppliers to offset the significant fees they will need to pay. Already, governments aren’t the best payers in the world. The State of Illinois implemented a Vendor assistance program because they are notorious late payers - see Supply Chain Finance programs find unlikely Anchors– State Governments

More and more spend will be on pcards, which bypasses the balance issue and shifts the burden of the costs to the supplier in the form of discount and presents a revenue opportunity for public entities.

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