The in-house bank (IHB) is a powerful model, enabling companies to achieve major cost savings and efficiency gains. How can treasurers decide whether an IHB is right for their organisations – and for companies with an IHB already in place, how can the structure be taken to the next level?

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.”

Caveats and challenges

Nevertheless, it’s important to note that an IHB isn’t the right structure for every company.

Anton Abraham, Head of International Advisory at Bank of America, says that the typical profile of companies looking to implement IHBs include large corporations with multiple business units and operating across multiple countries and regions. “They are also comfortable with high volumes of intercompany transactions – and are likely to be seeking much more standardisation and integration in terms of what they do with the treasury function,” he adds.

In addition, companies in Asia will have to navigate certain region-specific challenges when setting up an IHB. Doll points out that in contrast to the Eurozone, currency exchange is a consideration in Asia – which “may result in the combination of multiple pool levels across different countries. The balances of these pools can then be converted onshore or offshore in the pool header currency, which is usually in one of the G5 currencies.”

“In Asia, the primary area of concern lies in restrictions over FX and intercompany loans, which effectively limit the use of traditional POBO/ROBO structures,” adds Gardiner. “In many parts of the region, the use of local currencies for cross-border transactions is restricted to specific situations such as import/export trade settlement, capital injections and dividend payments.”

Gardiner also cites regulations on cross-border intercompany loans in many of these jurisdictions, noting however that there is often more flexibility with foreign currency denominated loans. “Furthermore, the types of transactions that can be processed through non-resident accounts by the IHB are often restricted,” Gardiner says. “The combination of these factors means IHBs are unable to use an account held in their own name to process POBO/ROBO transactions.”

In addition, Gardiner says there are a number of practical issues that can affect the operation and success of IHBs in Asia, such as:

• Management fees – some countries may place limits on the fees that can be paid to an IHB for services rendered, meaning independent legal and tax advice is important.
• Data restrictions – some markets have strict regulations which may require the IHB to replicate systems, hold data local or exclude the country from the IHB structure.
• Limited clearing information – some clearing systems cannot carry information about the underlying paying party, which “creates potential issues in recognising receipt of payment or raising issues of ‘payment masking’, leading to a block on these types of payments.”
• Central bank reporting – some central banks require additional information about the purpose of payment transactions.
• Special payments – some payments, such as payroll, taxes, customs and duties, may require access to special clearing systems or offline lodgement processes, meaning process customisation may be needed.

Setting up an IHB

When it comes to setting up an IHB, Doll emphasises the importance of a strong banking partner that can support the set-up with appropriate liquidity management products, such as cash pool sweeping, notional pooling or virtual accounts.

“A policy review is also necessary to define what will be the service cost undertaken by the treasury centre to provide IHB services,” says Doll. “This can be done by defining more competitive rates than banks or charging a flat fee.”

In addition, Doll says that changes in cash accounting may be required to reflect the intercompany flows in the general ledger. “The value of technological solutions such as TMS is reinforced as they have inherent capabilities to provide automation and reporting on IHB balances,” he adds. “On the other hand, banks are closing the technology gap, by providing reports and data which are also available in a TMS.”

Taking it to the next level

While companies have been using IHBs for a number of years, that’s not to say the model cannot be enhanced – and for companies with existing structures in place, it may be worth considering how best practice can be harnessed to take in-house banking to the next level.

Deloitte’s Doll notes that a leading practice is to “keep treasury operations lean and simple: minimal external flows, minimal bank accounts.” He adds that while the first stage of an IHB is to replicate the pooling structure, “companies can use the core setup to handle intercompany payables and receivables with multi-lateral netting, settle treasury transactions such as FX internally, and aim to process all external payments on behalf of subsidiaries through treasury or payment factory accounts.” However, Doll points out that the latter can still be challenging in a number of Asian countries linked to non-resident accounts.

Standard Chartered’s Gardiner notes that IHBs can deploy different variations of the POBO/ROBO model in order to overcome the challenges of operating in Asia and cater for the different regulatory landscapes in markets across the region:

• For the least restricted markets, this may mean adopting a global POBO/ROBO model, with the IHB processing payments and collections through its own accounts.
• In restricted markets, companies may need to use an account in the name of a local entity for local currency payments, while using the IHB to process foreign currency payments and collections.
• In the most restricted markets, Gardiner says: “the IHB may simply operate as a processing agent, utilising the accounts held by each legal entity to process payments and collections on an In-The-Name-Of basis.” Nevertheless, the benefits of standardised processing, automation and greater control can still be considerable.

Setting up a funding desk

Beyond these models, Bank of America’s Abraham says that some companies which already have an IHB are increasingly turning their attention to the possibility of adopting a funding desk model. By establishing a single platform for all group funding activities, both internal and external, companies can reduce the total cost of group funding. As Abraham explains, this involves aggregating all group cash flows and excess balances in order to maximise funding efficiency and minimise third-party funding.

“I don’t see companies setting up funding desks unless they have pretty sophisticated technology in place,” comments Abraham. “You need to have full visibility into your funding requirements and all of your credit lines. The objective is to ensure that management has a complete understanding of all the group funding activities and all the costs associated with that funding.”

Abraham explains that implementing a funding desk may also involve hiring suitable talent – and that may mean that companies need to recruit from banks or hedge funds in order to find people with the right skills and experience. That said, the level of complexity associated with this model may vary from company to company. Abraham points out that companies which are simply trading or managing liquidity and FX flows will find it simpler to set up a funding desk than companies that may want to use more sophisticated financial instruments.

Last but not least, companies with IHBs may consider improving the efficiency of their structures by harnessing technology such as AI and robotic process automation. “I would expect that most treasuries that are looking at funding desk arrangements will also be looking at these sorts of automation opportunities,” Abraham concludes.