In today’s volatile global economy, marked by increasing global competitiveness and tightening legislation, treasury departments are continually under pressure to reduce internal operational costs and increase efficiency. The adoption of automated and standardised processes to better manage liquidity and payments has become fundamental for chief financial officers (CFOs) and treasurers in gaining global visibility and control.
In order to achieve these goals, many corporates decide to set up an in-house bank (IHB). The key financial benefits that an IHB can offer are reduced operating costs, banking fees and foreign exchange (FX) margins. This is because payment traffic can be maintained within the organisation, allowing companies to make payments ‘in house’, which is cheaper than using an external banking infrastructure. It also has the benefit of allowing payments to be made faster. In achieving this, companies can avoid float – allowing them to make the most of their cash and gain higher interest income.
Although IHBs can offer the opportunity to consolidate the number of banking partners a company has, TIS has found with its clients that often there is little consolidation – because these banks are still used to diversify risk, execute local payments and collect local cash. Using one external bank for payments and cash collections only is perfect for streamlining payment processes and reducing costs. Doing so is, however, a nightmare from a risk management perspective. In the case of a counterparty default, the company`s liquidity is lost – or at least not disposable for several days – and external payments can no longer be made. An IHB should therefore be considered as another banking option and one which can complement a corporate’s existing banking landscape.
The 20/80 Rule
While IHBs can provide a variety of benefits and different services to an organisation, they cannot by themselves give treasurers full control and visibility over their payment processes. This can only be achieved when established in conjunction with the cleaning-up of external payment methods. This is achieved through streamlining processes, shutting down bank-specific payment tools and electronic payment stations, ensuring that straight-through-processing (STP) is established and cleaning bank account management data and master data. In doing this, treasurers can gain higher visibility and control over their payments, providing information that allows the board to make better decisions.
As a rule of thumb, an IHB has the ability to achieve 20% of the benefits in cash management and payments that treasury teams are aiming for. The other 80% is derives from the optimisation of external payment processes through the replacement of multi-bank proprietary payment tools with standardised, enterprise resource planning (ERP)-integrated connectively across all banks.
When looking to establish an IHB, experience indicates that it is best to set up a project team which incorporates many areas of the business. It is vital that the tax team is included in the project as its members will ensure that transfer pricing is adequate and help find the best location for the IHB, regarding tax implications. Furthermore the accounting, shared service and human resources teams should also be included in the project, as these also run payment processes which would be benefited from automation.
In setting out on projects, many treasury professionals focus primarily on their own department with the main aims of the project to improving treasury payment processes and to reduce bank fees. This however, only makes up a small portion of the overall benefits. In order to maximise benefits, treasurers should team up with their colleagues to streamline and standardise internal and external payment and collection processes company-wide including HR, treasury and supplier payments.
Overall, my recommendation would be to start with the standardisation and automation of external payment processes and then establish an IHB to reduce costs and risk and increase transparency at the same time. Based on personal experience, I would suggest that payment infrastructure, ERP integration and bank connectivity should be provided by external experts as a service, allowing treasury departments to focus on strategic topics which help to deliver better business results.
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