Cash & Liquidity Management

In-house banks

Published: Apr 2014

Portrait of Hans-Peter Rupprecht
Hans-Peter Rupprecht, Corporate Treasurer, Siemens AG:

An in-house bank can offer treasurers the ability to improve vital processes which have increased in importance since the global financial crisis. However, before establishing an in-house bank, a number of decisions need to be made by the company to provide guidelines for the project. Within Siemens, for example, we wanted to run the financial streams of the company on a centralised basis and invest liquidity from one central department. We also decided that it would benefit the group if we could control all of our financial risk management processes centrally. Finally, we wanted 24 hour coverage over our global operations, so we looked to establish an in-house bank based in three different locations.

The main initial benefit which the in-house bank offered was the ability to centralise and concentrate our cash in one location. To achieve added benefits, however, we integrated the in-house bank with our company clearing systems which are used by the inter-company accounts on a worldwide basis. Following this integration, the inter-company accounts could be used for virtually all aspects of treasury – such as cash management, payment services and the settlement of FX business. The main financial benefit we gained from this was a reduction in banking fees and administrative costs as we were able to consolidate our bank accounts and conduct all inter-company payments internally. In doing so, we were able to avoid group balance sheet inconsistencies and discrepancies.

At Siemens AG we also wanted the treasury department to become a strategic business partner for the company and begin to place more focus on risk advisory within the company. The non-financial benefits offered by an in-house bank have helped us to achieve this by offering a greater oversight of our accounts across the group. We now have better transparency over our account balances, liquidity status, cash movements and payments transactions and have been able to standardise and automate our treasury processes worldwide, giving the treasury global control. We now also manage and control our risk centrally and can limit our counterparty risk.

Although the requirements and processes when establishing an in-house bank vary from company to company, there are some important areas which all treasurers will need to consider. The scope and level of centralisation is one of the key areas to determine. Tax and legal issues also need to be thoroughly investigated and documented, alongside regulatory reporting. There may also be agreements and arrangements which need to be made in advance around items such as transfer pricing. Finally, the project must be well-organised with responsibilities clearly defined amongst the group and guidelines should be distributed and followed to ensure the in-house bank is correctly established and functions as it should. Overall, an in-house bank is a very useful treasury tool and one which, in my opinion, is a must for any company with worldwide activities.

Portrait of Bruce Meuli
Bruce Meuli, Global Business Solutions Executive for Global Transaction Services, EMEA, Bank of America Merrill Lynch:

As the nature of business becomes more integrated, both horizontally and vertically, the centralisation of treasury operations is an increasingly valuable proposition and one which recent technological advancements have allowed to gather pace. In-house banks are a form of such centralisation which can offer corporates the ability to more effectively manage their cash than they would have previously within a decentralised structure.

The centralisation of liquidity is one of the major drivers behind the establishment of in-house banks. As the regions in which businesses operate are harmonised, the ability to centralise their liquidity becomes a more feasible business case. In doing so, corporates are able to recycle cash within the organisation more effectively as well as offer improved global oversight and yield on a risk-return basis.

Improved foreign exchange execution and risk management are other benefits which an in-house bank can offer. Many corporates (when establishing an in-house bank) look to include an ‘FX Centre of Excellence’ to oversee and manage all major FX transactions across the business. This leads to a reduction and consolidation of FX transactions, and also gives the treasurer greater ability to recycle cash within currencies.

An in-house bank can provide treasurers with better access to their financial information and data. Many other benefits can therefore be obtained, such as improved cash management and forecasting. Payment optimisation can also be improved ensuring that payments are made in the timeliest and most cost effective manner. Furthermore, working capital management becomes something which corporates can begin to assess thanks to the improved information offered by an in-house bank.

Bank relationships can also be enhanced as one business group is left responsible for the management of the relationship and account oversight. Furthermore, relationships can be developed with internal businesses units and the in-house bank can be used to offer added value to these through ensuring its processes help the business meet its overall objectives.

The implementation of an in-house bank should be seen by treasurers as a transformation project and its design should not be planned in isolation but in partnership with the overall business. Development should start at the top, with key stakeholders being considered, as treasurers will need to demonstrate to all areas of the business how the in-house bank can add value to their (specific) operations. In-house banks cannot realise their full benefit when this process is not conducted in enough depth and breadth in the initial phases.

The location of the in-house bank should also be carefully considered. Ideally, the bank should be located somewhere where it can provide the most value to the business for the bank to achieve its maximum benefit. However, a number of areas such as the wider business operating model, its memorandum and articles of association, current operational locations, tax and regulation must be carefully considered in the selection process. Countries which are included in the in-house banking structure also need to be considered and while many can be added there may be some which need bespoke requirements. For countries such as these it is advisable that corporates create bespoke models which sit outside the main in-house banking structure but within its function. In doing so, oversight and control can still be centrally maintained.

Finally, treasurers should seek to bring in partners as early as possible when looking to establish an in-house bank including core banking partners who should be challenged to provide both the banking infrastructure and consultancy expertise. Other tools and resources should also be used to ensure that the in-house bank is correctly designed and implemented and can respond to changing regulatory pressures to achieve its maximum benefit.

Portrait of Joerg Wiemer
Joerg Wiemer, CEO, Treasury Intelligence Solutions:

Treasury teams are under increasing pressure to drive down internal operational costs and to increase visibility and control. To achieve this, treasury teams need to standardise and automate their payment processes allowing them to make SMART (standardised, multibank-enabled, automated, ERP-integrated, transparent) payments and better decisions. An in-house bank has the ability to achieve 20% of this, with the other 80% coming from the replacement of multi-bank proprietary payment tools with standardised connectivity across all banks.

The financial benefits that an in-house bank can offer are reduced operating costs and banking fees. This is because payment traffic can be maintained within the organisation to allow companies to make payments in-house, which is cheaper than using the external banking infrastructure. This also has the benefit of making payments faster for companies. In achieving this, companies can avoid float allowing them to make the most of their cash and gain higher interest income.

In-house banks by themselves cannot give treasurers full control and visibility over their payment processes. However, this can be achieved when established in conjunction with the cleaning up of external payment processes, through streamlining payment processes, shutting down bank-specific payment tools and electronic payment stations, making sure you have straight through processing established and cleaning master data and bank account management. In doing this, treasurers can gain more visibility and control over their payments which will allow them to become a thought leader and business partner, providing information to allow the Board to make better decisions.

Although in-house banks can offer the opportunity to consolidate the amount of banking partners a company has, we have found with our clients there is often little consolidation because these banks are still used to diversifying risk. An in-house bank therefore should be considered as another banking option and one which can complement your existing banking landscape.

In my experience, when looking to establish an in-house bank it is best to set up a project team which incorporates many areas of the business. It is vital that you include your tax team in the business as they will ensure that transfer pricing is adequate and help to find the best location regarding tax implications. Furthermore the accounting team, shared service team and human resources team should also be included in the project as these functions run payment process, which would benefit by being automated and streamlined.

When setting out on in-house bank projects a lot of treasury professionals focus primarily on their own project with the ambition just to clean up treasury payment processes. This only makes up a small portion of the payments a company makes. To achieve maximum benefit I therefore suggest that treasurers team up with their colleagues and streamline and standardise company-wide.

Overall, my recommendation would be to start with the standardisation and automation of payment processes and then establish an in-house bank to achieve the added value from this.

The next question:

“What are the main issues preventing companies from reducing their pension deficits? Also, what practical steps can corporates take to begin to tackle these deficits and what should treasurers be doing in this respect?”

Please send your comments and responses to qa@treasurytoday.com

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