Treasury Practice

Question Answered: In-house banking

Published: Jul 2023

“When is the right time to set up an in-house bank?”

Sélim Ul Hasan

Head of International Treasury, Finance

Solvay set up an in-house bank (IHB) to optimise cash management and liquidity availability, reduce operating costs – both internal and external – and improve risk management across FX, counterparty risk and compliance.

Our current IHB landscape is the result of several iterations over the past four decades. Today it is characterised by a centralised and comprehensive system that covers cash pooling POBO/COBO (payments-on-behalf/collections-on-behalf,) intercompany funding, FX hedging, and centralised treasury information and reporting.

Our journey began in 1984 when the company began factoring accounts receivables limited to cross border flows, centralised FX hedging and main affiliates financing. Between 1984 and 2000 we gradually expanded our factoring activity. This included factoring domestic Belgian accounts receivable (AR) followed by factoring domestic AR for the main European countries and POBO for accounts payable (AP). Next, we created Solvay Finance North America.

In 2000, we changed our system to SAP FI. This involved creating automated interfaces with affiliates ERP systems and setting up internal bank accounts. We expanded POBO processing, leading to restricted usage of local accounts. This in turn led to affiliates accounts cash pooling and generalisation of the affiliates financing. We implemented Swiftnet in 2010 which involved a simplified and secure H2H connectivity. At this time, we also expanded COBO/POBO to additional countries. In 2013 we created a shared service centre, optimising the end-to-end POBO/COBO process. Our evolution in APAC includes Chinese currency cash pooling, centralised FX hedging and rolling out Swiftnet for local accounts. We implemented a full factoring process in 2016.

Between 2018-2022 we have embarked on further bank accounts rationalisation programmes, decreasing banks relationships and bank accounts from around 1200 to about 600 and we have also introduced a TMS.

By introducing an IHB we have solved a variety of challenges like resolving the problem of “trapped” cash in subsidiaries, and the complexity and effort of accessing this cash – or even knowing it’s there. We have improved cash management, ending inefficiencies and reduced our borrowing costs. We have also reduced treasury operating costs and end-to-end processing costs and improved risk management.

Setting up an IHB requires close coordination. Internally, this manifests between customer collection and credit teams, purchasing teams and HR to minimise disruptions to routine cash operations. IT divisions also rely on the setup of specific systems and tools and the interfaces between them. Externally, treasury teams need to coordinate with banks and customers.

There are clear hard savings like bank account management fees, but also savings that are more difficult to measure. Such as the optimisation of the usage of available cash, and the ability to use the best source of funding, regardless of where the ultimate cash need is.

Overall, we have reached a stage where our IHB is part of our ecosystem. Since every iteration relies to some extent on the previous layers, it’s very difficult to estimate actual payback of the whole setup today. Still, our IHB has bought substantial cash and non-cash benefits to the group.

The company is currently exploring how to separate into two independent and publicly traded companies. This would require us to split the in-house bank, so each new group is fully equipped.

Bas Duynisveld

Head of Business Treasury

AkzoNobel set up an IHB in 2010, around the same time as I joined the company as a Senior Treasury Analyst. The company was seeking an economy of scale and more centralised approach, replacing a fragmented landscape where different parts of the businesses had their own banking relationships. Setting up an IHB involved changing the company’s banking partners at the time, many of which were local banks.

We switched to a global group of banking partners, all of which had supported and committed to our revolving credit facility. These banks were given the first rights on pitching for new business, and we issued new mandates to banks around the world.

Our IHB is split into two models – an open economy model and a closed economy model. The open model comprises Europe, North America, and some Asian and Middle Eastern economies where it is easier to get cash in and out, and it is relatively easy to centralise funds on a day-to-day basis. With this model we have sweeping in place so that every day we zero balance the accounts of local participants, sweeping and centralising cash into our Amsterdam-based pool.

In our closed economy structure, we don’t centralise funds every day. However, we do process all the daily fund flows in and out of various countries from a trading perspective so that from a treasury angle we centrally manage all the flows, processing balances and making sure we can provide all the financial services to all corners of the business. In this way cash flows are managed but are not actually “on our books.”

One of the most important elements of an IHB is ensuring a solid legal framework. Legal issues define the agreements with our internal parties, and we have built a framework for transacting with our internal parties using service-level agreements that we review on a timely basis. Because we centralise not just in euros, our main currency, but in many other currencies too, this involves a high level of risk management, making sure we manage the right FX risk at the right time.

Operating an IHB requires a strong team, plus the capacity for scope and volume. We are a decent sized company, and a centralised operation makes sense. It has bought significant benefits from a corporate finance perspective. Daily centralisation of our cash position allows us to keep all our money in one pocket and make borrowing and investment decisions from one location.

Operationally we have a central point for processing payments run by our IHB that is homogenous across the company. For example, a payment coming from India will go through the exact same process from entry to approval and being sent to the bank, as a payment from France. There is a value in having standardisation that really supports our IT systems because we don’t have to develop new systems all the time.

We have centralised a lot of our payments volume via our payments factory, but we still need to integrate new projects and acquisitions into this structure. We started by integrating our payment factory processes in countries where we have our biggest payments volume, but we are now extending this out and adding smaller countries. This is very much how we see the IHB developing.

Iris Rousselière

Global head treasury transformation – Treasury Advisory
Redbridge Debt & Treasury Advisory

The vast majority – 90% – of our clients don’t start directly with setting up an IHB. Instead, they begin by setting up a pool, eventually move to a payment factory, or, in a best-case scenario, add virtual accounts. Only after taking these steps do they transition to an IHB by adding a collection factory.

Given how much easier it is to set up an IHB from the start, why do clients go down this route? Most corporations are created by external growth or are the sum of multiple legal entities. When creating a legal entity, clients start by setting up the legal and financial documentation – not with cash management.

Additionally, the negative rates of recent years have worked against companies setting up an IHB. Many clients sought to avoid the cost of their liquidity on the main currencies by trying to spread their cash across the business, rather than centralise it.

The heart of in-house bank concept is the centralisation of all external bank relationship in one legal entity which also ensure payments and collections on behalf of all group’s legal entities.

What are the limiting factors companies should consider setting up an IHB?

  1. Tax administration: some countries refuse to proceed with tax refunds if the bank account is not held by the legal entity entitled to it.
  2. Technology: virtual accounts can be powerful because they help to automate the cash reconciliation, key to the IHB concept with a lower cost and they also track the transfer pricing respect. However, the fact that the virtual IBAN root is tied to the country of the physical account issuing it, limits the implementation of virtual accounts.
  3. Change management: there are several ERP configurations that must be completed to implement an IHB, and from time to time this can slow down or discourage the change within the organisation.

What is the potential benefit of this set up?

The savings realised from an IHB implementation can be quite significant. For example, working with a client that had an annual revenue of US$5bn we were able to save up to half a million dollars per year on EU bank charges. In another example, we estimate savings will reach more than US$7m in FX, bank fees, and yield per year for another client, a worldwide group with US$28bn annual revenue. The first project includes virtual accounts in the limits allowed by transfer pricing and tax regulations, while the second project is only based on physical accounts. Because of this, we could further increase the ROI of the second project for our client.

Setting up an IHB involves five key steps. Design a structure, organise a review of the structure with your Tax, TP and audit partners. Present that structure to IT and accounting to obtain their input and sign-off to the project. Next select you bank partner(s) and finally create a dedicated project team and begin.

Next question:

“How is the way we pay changing and how is the payments ecosystem evolving?”
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