Treasury is often set up as and considered to be a service centre, so the idea of an in-house bank (IHB) is not far-fetched. It can offer services comparable to banks and can add great value to the organisation. The move towards in-house banking is generally seen as positive, but this, of course, depends on the individual corporate’s situation and setup. There are qualitative and quantitative benefits that need to be assessed according to the entity’s circumstances. The commonly-understood benefits are highlighted below.
Qualitative advantages of an IHB:
- Transparency over cash flows – visibility of cash flows, improved working capital management, identification and hedging of risks, active support in liquidity planning.
- Security and control – transparency through digital processes, eliminating fraud by reduced manual work and digital controls, improved internal control system, consolidated know-how.
- Regulation and compliance – use of standardised formats such as eXtensible markup language (XML), digital signatures, central responsibility for bank reporting, (embargo) controls against money laundering, blacklisting.
- Reporting – data available in real-time, online data sourcing, customised ad-hoc reporting.
- Efficiency – high degree of automation and standardisation, little involvement of local staff, less consolidation effort, economies of scale, clear responsibilities, possibility to outsource selected treasury activities into a shared services centre (SSC).
Quantitative advantages of an IHB:
- Lower bank fees – fewer bank accounts and hence account fees and maintenance costs.
- Transaction fees – fewer transactions, lower foreign exchange (FX) volume.
- Lower interest cost – better conditions for loans and deposits.
- Reduction of full-time equivalent (FTE) – less manual work due to standardisation and automation of processes.
- Declining costs for errors and fraud – fewer errors through the implementation of internal controls and error detection processes.
- Lower system costs – replacing the individual solutions at local entities.
Whether there is a good business case for implementing an IHB for a corporate depends on the presence and level of the following factors, among others:
- Number of countries/currencies involved with outgoing payments.
- Number of transactions (internal and external).
- FX volume and extent of hedging activities.
- Total amount of bank fees.
- Revenue of the group, depending on industry.
- Group structure and geographical distribution.
- Approach to centralised treasury management.
- Corporate IT structure (e.g. one vs multiple entrprise resource planning (ERP) systems, interfaces, electronic banking system (EBS)).
- Treasury know-how on group level
Once the business case is agreed, what functions does the IHB need to have in order to fully realise the advantages? Consider:
- Internal payments.
- Cash pooling (centralising the groups liquidity) and intercompany financing.
- Payment factory (optimisation of external payments)
1) Internal payments
Fees can be saved and value date based losses can be avoided if internal receivables and payables of the group entities are settled via the IHB. Due to the structure of the IHB, closing processes can be carried out more efficiently as it acts as the central unit which holds receivables and liabilities towards group entities and thus should eliminate all other intragroup receivables and liabilities at the closing date. Therefore a central interest calculation can also be carried out.
Moreover, FX positions are collected and hedged by central treasury. The central collection of these positions reduces the total volume of hedging transactions with external parties, which reduces the total risk. Also, the number of relationships with external banks and entities can be reduced. Surpluses and deficits are settled at group level, which can bring further cost savings.
2) Cash pooling and intercompany financing
The IHB often acts as cash pool arranger and thus provides a key instrument for liquidity management and financing for group entities. Instead of financing themselves at external banks at high prices, and at the same time deposit surpluses at low interest, entities could do both with the IHB and under more favourable terms than at external banks – of course always considering transfer pricing requirements. The IHB performs the daily disposition by consolidating the internal cash position and concluding external financing.
3) Payment factory
The payment factory function within the IHB aims to standardise external payments and achieve efficiency. When it executes payments on behalf of the group entities, it can do so using its own accounts or by using the local accounts in the specific countries. However, in-house banking solutions are highly specific to each corporate because the culture, structure and business model of a company have to be taken into account.
This being said, the following three steps briefly outline the way to ‘payment excellence’:
When the IHB takes on the role of a payment factory, the external payment process can be standardised at group level. The idea is that the accounts of the IHB are used for all outgoing payments of the group entities. In doing this, many local accounts can be dispensed with, which enables the corporate to focus on a few core banks. There is additional potential if the various entity-specific EBSs are substituted by a single, standardised system.
Intercompany accounts have to be set up at the in-house bank for the settlement of internal receivables and payables of the group entities. Furthermore, the external settlement accounts have to be set up in order to execute external payments on behalf of the local entities.
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