Corporate TreasuryCentralisationIn-house Banking – The Value-add for Treasury?

In-house Banking - The Value-add for Treasury?

Treasuries have finally managed to weather the storm of downsizing and reductions that were endemic throughout the early part of the decade and even more of a relief is the initial passing of the first wave of compliance and regulation. But as treasuries move forward two critical weights will be added to the already complicated daily tasks of running large global financial operations. The first will involve how to replace outdated and non-compliant treasury systems with newer technology and the second will be a push to either justify the current level of treasury resources or identify how treasury can add more value to the organization. Surprisingly there is a relatively easy solution to both these problems.

The Drive for Value

There are a wide variety of techniques for treasury to add value. Reductions in the daily task loads of treasury staff through greater automation allows the current resources to perform more analytical and higher value functions. An example is the use of highly automated reconciliation processes to reduce the amount of time spent on matching actual bank records to transaction instructions. The reconciliation staff can then turn their focus to analytics, improving controls, research, evaluation, bank management, covenant review, strategy or any of a wide variety of internal treasury improvements that can add value. But more and more treasuries are starting to follow the lead of the largest global organizations by increasing the internal financial services they provide to the rest of the organization and even to external clients and vendors. The benefits can be very significant to these organizations resulting in the addition of millions of dollars to the value of the net worth through new revenue streams, improved net operating revenue and correlation opportunities.

Organizations such as GE, GM, Toyota and most of the world’s top global organizations have some level of internal banking to manage intercompany transactions between internal operating groups and subsidiaries. Some organizations, however, are beginning to accelerate and expand the delivery of these simple financial services both within and outside the organization to offer trading, exposure management, securitizations, funding, investment and a variety of other services. Imagine the revenue stream that could be generated by a giant such as Wal-Mart if they were to provide inventory financial services to their vendors that currently fund the massive production growth that arises from a single Wal-Mart contract. The benefits of this type of vertical financial expansion can be significant to the organization offering the services as noted by the fact that four of the top 10 global organizations are banks.

Other organizations are using the in-house bank to provide commodity and financial trading services to widely dispersed global entities, customers and vendors. The reductions in costs such as FX and interest rate spreads, are so significant that they dwarf any gains made through traditional treasury value added tasks such as bank fee analysis and reductions in float. Correlation across a global organization and across the boarders of an organization into a community of value such as a vendor pool or trading group can even more significantly reduce expenses and costs of trading for partners and add revenue to the managing organization.

Steps Towards Becoming an In-house Bank

One of the first operations that can be made significantly more effective through the implementation of an in-house bank strategy is intercompany liability management. The efficient trading of financial flows within the organization between internal entities begins with the efficient and distributed capture of intercompany transactions, both receipts and payment. This is often accomplished through the establishment of an internal bank and the ability for subsidiaries and departments to hold internal virtual accounts with that bank. In this way, these internal organizations can create external payments that clear through internal accounts. At some point the transaction can then be bulk netted and settled in one periodic external transaction significantly reducing the cost of external banking.

Unlike simple journal entries, the execution of these transactions can provide an actual shift in the internal liability for regulatory purposes, depending on the regulatory environment, by causing an actual movement of the liability through an independently managed third party (the in-house bank). These banks can also hold external accounts in various countries to make cross border payments on behalf of internal entities and take advantage of local currency floats.

The next expansion of the in-house bank usually occurs in the trading operations through the provision of interest and FX instruments. Rather than having the individual subsidiaries pay for costly FX and interest rate transactions, corporate treasuries can easily aggregate borrowings and investments within the organization’s structure. This ability to consolidate the trading at the corporate level and yet efficiently and easily disperse the instruments and liability or receivables back down the organization structure can significantly improve access to funding at significantly reduced rates.

Correlation is also attainable at the treasury level by measuring consolidated FX exposure and consolidated requirements for net borrowing and investment. Balancing the positions on consolidation can reduce the number of individual external FX balancing transactions and individual borrowings that occur throughout the global reach of the organization. In essence by matching FX short with FX long positions for a given foreign currency across the organization can reduce the need for small independent subsidiary FX deals.

In-house Bank Software

In order to effectively take advantage of the benefits that can accrue from building an internal bank, organizations must have capable software. There are a number of components to look for in any treasury software to ensure that it has the capacity to let your organization take advantage of becoming an in-house bank now and into the future.

  • The ability to open in-house banks and have subsidiaries and departments hold internal account with those banks.
  • Fast and efficient intercompany transactions capture mechanisms that allow for balances to be built on the internal accounts.
  • The ability to efficiently and automatically net intercompany liabilities and trigger automatic settlement via external bank accounts.
  • The ability to define rules to route intercompany transactions to virtual internal accounts.
  • The ability to produce intercompany trades through a variety of instruments.
  • Functionality to consolidate internal accounts and liabilities and report on such.
  • The ability to produce bank statements on internal accounts.
  • Electronic messaging to participating parties on the status of transactions and events.

Moving into the realm of banks for most organizations is not a small undertaking. However, by starting with simple services, such as trades and intercompany transactions, treasuries can easily grow their offering of financial services to provide significant value to global and even national organizations. The key is using effective software that is backed with highly effective and knowledgeable resources and appropriate funding levels. The value added to the corporation net worth from a move to in-house banking will be significant.

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