Do In-house Banks Have a Place in Modern Treasury?

Deloitte’s Treasury and Commodity Risk Advisory practice, in co-operation with gtnews, conducted a treasury strategy and operations survey in July 2012 to gain insight into top treasury goals, mandates, pain points, strategies, and technology solutions.

The survey¹ targeted corporate treasury professionals of companies of all revenue sizes and industry sectors except for financial services.

The survey respondents note that the lack of visibility over cash and financial risk exposures and inadequate systems infrastructure remain the biggest pain points in treasury. This is despite the emphasis by multinational companies on improved visibility and improved cash in response to recent economic uncertainties.

Figure 1: Top Pain Points in Treasury

Ranking in above graph is based in the level of importance, where 1 is the most important and 4 is the least important.
Source: Deloitte Treasury Strategy & Operations Survey 2012, jointly/in co-operation with gtnews

At the same time, the expectation of the treasurer has evolved to be a strategic partner responsible for making the business successful through active management of liquidity risk, counterparty credit risk and financial risk exposures.

Based on the survey results, companies may use the centre of excellence/in-house bank² (IHB) strategies to alleviate key pain points related to improvement of internal cash and management of foreign currency exposures. Centre of excellence/IHB was among the some of the most effective strategies for the management of cash and foreign exchange (FX) responsibilities. The respondents indicated that the primary advantage and strength of the IHB is centralised liquidity management.

Figure 2: IHB – Benefits

Ranking in above graph is based in the level of importance, where 1 is the most important and 4 is the least important
Source: Deloitte Treasury Strategy & Operations Survey 2012, jointly/in co-operation with gtnews

Establishment of an IHB requires an investment in technology to support the new structure. As a result, the IHB is likely to be established by the large international organisations with high external transaction volumes and annual revenues in excess of US$5bn.

IHB structures help the organisations alleviate some of the further pain points. The IHBs may drive the reduction in treasury operations costs by lowering the volume of external transactions and the associated bank account and bank fees. Centralisation through IHB typically allows organisations to focus on the value-adding treasury activities of strategic nature, while the transaction processing activities are either automated through the treasury technology or potentially performed by the shared service centres (SSCs).

Before embarking on the IHB implementation initiatives, organisations typically face barriers to implementation, which include limited readiness for change and business case development for the cost savings.

Figure 3: Top Barriers to Undertake IHB Strategic Initiative

Ranking in above graph is based in the level of importance, where 1 is the most important and 4 is the least important
Source: Deloitte Treasury Strategy & Operations Survey 2012, jointly/in co-operation with gtnews

IHB structures may help achieve multiple cost savings, which should be considered by treasury organisations to develop a business case for an IHB to lower:

• Borrowing costs due to concentration of liquidity at IHB entity, lower idle cash and improved internal funding.
• Bank fees due to lower volume of local and cross-border payments and settlements.
• Bank fees due to reduction in volume of external foreign exchange trades and higher dollar value of each trade.
• Bank fees due to reduction in bank accounts due to centralisation of payments and collections.

In addition to savings, the IHBs may help organisations to improve control through better visibility and access to international cash.

Conclusion

Leveraging of IHB strategies may help companies to address the key pain points and to transform themselves into leading class treasury organisations focusing on adding value to the business and chief financial officer (CFO), as opposed to transaction processing.

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¹ Over 310 companies responded to the survey; however the number of responses to specific questions included in the survey varied between 52 and 319 responses.

² An in-house bank (IHB) is an internal funding vehicle which can be used both for concentrating global liquidity and meeting short- and longer-term capitalisation strategies. At its most evolved form, an IHB capability can be used to collect and pay-on-behalf-of (POBO) group subsidiaries and also be the conduit for centralised foreign exchange (FX) risk management and improved hedging.

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