Corporate treasuries have a number of models to consider when it comes to centralising activities, streamlining processes and reducing costs. One of the more ambitious of these is the IHB – a structure that is used to provide subsidiaries with services that would otherwise be provided by external banks. Often this includes models such as payments on behalf of (POBO) and receivables on behalf of (ROBO), whereby the IHB makes and receives payments on behalf of subsidiaries.
While the concept of the IHB has been around for decades, Asia’s diverse regulatory landscape means that the region presents particular challenges for companies seeking to put this type of structure in place. But these challenges are not insurmountable – and many companies in Asia have taken advantage of this approach to gain major benefits.
With that in mind, what can companies achieve by adopting an IHB, what challenges may they need to overcome – and how can companies leverage technology and best practice to take an existing IHB to the next level?
What is an IHB?
“IHBs follow a clear strategy of treasury transformation and are often the foundation of further centralisation such as payments factories, central FX trading and funding,” explains François-Dominique Doll, Executive Director, Global Treasury Advisory Services at Deloitte Southeast Asia. He adds, “The ultimate goal of leveraging an IHB account is to keep external bank accounts to the bare minimum and only at the group level.”
Byron Gardiner, Executive Director of Treasury Solutions, Transaction Banking at Standard Chartered, says that the term ‘IHB’ describes “a sophisticated treasury structure used to provide financial services such as cash management, risk management (FX, interest rate, and commodity hedging), core funding and working capital to business units or affiliates within an organisation.”
Gardiner explains that in the classical treasury model, treasury arranges banking facilities on behalf of affiliates. “Banks subsequently contract directly with the affiliates even though treasury may negotiate the facility agreements and manage activities such as loan draw downs and FX trades on behalf of the affiliates,” he notes. Under the in-house banking model, in contrast, “the IHB contracts directly with affiliates to provide them with loans, FX, cash management, and other services. In turn the IHB buys these services from external banks where necessary but tries to internalise as many transactions as possible.”
From cost savings to controls
In this way, an IHB can deliver a variety of benefits, including operational efficiencies, better treasury controls and cost savings. Indeed, Gardiner says that IHBs “typically deliver multi-million dollar savings by consolidating various financial activities.” Other potential benefits include the ability to rationalise the company’s bank account structure and reduce external borrowing, as well as the opportunity to standardise and automate processes.
As Gardiner notes, companies may also be able to achieve significantly lower FX costs “by internalising FX trades and other hedging activities which permits the netting of these exposures.” He adds, “The IHB subsequently only covers its net position with the market rather than the gross FX needs of the underlying business units.”
Latifah Yusof, Group Treasurer at Malaysian satellite television provider Astro, explains that setting up an IHB in February 2019 has enabled the treasury to consolidate and streamline its banking and cash management operations, greatly reducing the company’s reliance on multiple external banks. The new structure provides business units with services including POBO, ROBO and foreign exchange deals. External banking services to effect the POBO and ROBO are provided by the mandated IHB partner, Standard Chartered Bank Malaysia, with the support of SAP’s In-House Cash module.
As a result, Astro group companies participating in the IHB have seen a reduction in banking fees, finance charges and account maintenance fees. Other benefits include process standardisation and better visibility over the group’s cash position. While Yusof notes that “change is not easy,” she says that support from Astro’s senior management, financial reporting, tax, corporate assurance and IT teams – as well as from external auditors – has made the implementation a success.
No time like the present
The concept of the IHB has been around for some time. As Doll explains, “in-house banking is not a new concept and has been well-established in some corporations for more than 20 years now.”
Nevertheless, there are several reasons why this type of model may have particular value in today’s market conditions. Gardiner cites the drive for efficiency, noting that “the philosophy of doing more with less and generating higher degrees of operational and strategic value from the treasury department is a common theme amongst clients we are speaking to today.” He also says that the increasing globalisation of Asian MNCs means there is more need for treasury to transform itself to “more effectively manage the geographically diverse and complex business needs of a global organisation.”
In addition, Gardiner notes that improvements in systems connectivity are enabling greater levels of integration between treasury and other finance units, alongside “the availability of advanced treasury management systems (TMS) incorporating ‘IHB ready’ functionality that can be deployed relatively quickly in support of the sophisticated needs of these structures.”
Gardiner explains that these improvements in technology and connectivity enable companies to build a more compelling business case for an IHB model – not least because the initial investment and the integration and implementation of the necessary technology “have become less arduous and available at a quantifiably lower all-in cost.”