by Bruce Meuli, Global Business Solutions executive, and Jonathon Traer-Clark, Head of Strategy, Global Transaction Services, Bank of America Merrill Lynch
JTC According to the McKinsey Global Institute, global flows could almost triple by 2025. This would contribute around $450bn of growth annually to world GDP. More important is the continuing development of the global marketplace, which is changing the nature of commerce as supply chains and financial flows adapt accordingly. For the treasury function, financial flows across multiple borders and subsidiaries present not just opportunities, but potential headaches.
BM And those headaches soon become a migraine when you consider the increasing demands for greater efficiencies, savings and multiple transaction processing requirements! This is where the in-house bank comes into its own and, structured correctly, can create multiple benefits. Many corporates, however, struggle to fully understand what an in-house bank is, how it is set up and the full scope of services it can provide. Although an accounting construct at its core, an in-house bank essentially allows the corporate to replicate many of the financial services typically provided by a commercial bank, and supply them to their internal subsidiaries. The result is that flows, processes and policies can be managed in one place across a multi-entity, multi-currency and multi-functional company.
JTC Indeed, and the benefits extend beyond transactional flows, given the role of an in-house bank in taking deposits, managing intercompany loans, netting and hedging FX exposures at a group level, and providing liquidity management services. It’s important to note that although an in-house bank isn’t a product per se, the company’s financial provider can still provide advice and support to clients who are considering or implementing such a strategic facility. Given the cross-border, multi-entity set-up required, location and substance considerations, tax, legal and financial advice is a must before implementation.
BM At first glance, the idea of raising and potentially increasing organisational complexity in setting up an in-house bank appears counter-intuitive. However, centralising and leveraging shared resources to manage treasury and finance operations can relieve subsidiaries of significant administrative and accounting burdens. With an in-house bank, you can implement one set of business rules and standardise accounting principles across the group. Furthermore, it can act as the back office for POBO and ROBO (payments/receivables on behalf of) – indeed it’s a fundamental requirement. This is when a corporate starts to look and act like an actual bank.
JTC Well, similar to the evolution of the treasurer’s role and responsibilities, the corporate-bank treasury relationship is changing too. This is not to say that an in-house bank is appropriate or efficient for every corporation. Maturity and size, combined with the sophistication of internal expertise and technology must contribute towards a treasurer’s business case for introducing the concept. Here, a tipping point is reached: the in-house bank is a manifestation of a treasurer taking more control. In some respects, it remains one of the ultimate indicators of treasury and financial sophistication. And remember that you can have more than one in-house bank – indeed many corporates have regional ones, usually but not necessarily to complement the shared service centre.[[[PAGE]]]
BM Sure, but the in-house bank is not a financial company in itself. The external bank still provides facilities, financing and advisory services at the group level, plus payments processing and execution functions for the in-house bank. Corporates can centralise the reporting line for the external bank to then transact and oversee regulated duties, meaning that relationship management becomes more important as financial services management is centralised and focused.
JTC Absolutely right! The external environment – economic, regulatory, tax treaties and banking services – are fundamental considerations associated with the in-house bank location. Tax too becomes particularly important when one considers withholding tax, dividend liabilities and so forth. The business case will need to weigh up these factors appropriately, and consider the potential changes to this operating environment over time. It’s becoming more common for treasurers to decide to move their in-house bank for a number of reasons, so portability is key.
BM When you consider the enhanced liquidity, improved visibility, more effective cash concentration and better controls, for the treasurer, the in-house bank is a great step forward. Enhanced cash forecasting comes next, with greater compliance and policy enforcement complementing this move. We haven’t even touched on the hedging and hedge management, funding and facility benefits, to name but a few.
JTC I’m surprised you didn’t mention working capital as well! I think we both agree an in-house bank can bring significant benefits, but it’s not for everyone. In my opinion, they're best considered when you have large volumes of cross-border flows and intercompany transactions, where the gains from the structure can be considerable. But my strong advice to corporates is to take your time, and seek external opinion and advice before executing.
The TMI Verdict - by Helen Sanders, Editor
In-house banking is not a new concept: indeed, many larger companies with a mature treasury function have operated an in-house bank for more than a decade. There are a number of factors however, that are making the concept of an in-house bank more desirable, and more achievable, for a wider spectrum of companies. Globalisation, increased and more diverse competition, and a better appreciation of the need to manage liquidity and risk at a group level are amongst the key drivers. Furthermore, both ERP treasury modules and specialist treasury technology make in-house banking more readily accessible to treasurers.
As M&A transactions return to pre-crisis levels, in-house banks can be a valuable way of integrating new entities quickly and avoid fragmentation of liquidity, risk and operational processes.
In Europe, SEPA has been a trigger for centralisation and consequently in-house banking, particularly as more companies are considering techniques such as POBO and ROBO to help rationalise bank accounts and liquidity management structures, improve internal controls and reduce payment costs.
