So You’re Thinking of Building an In-House Bank?
Typically, an IHB is deployed by multinational organisations with significant transaction volumes and businesses that span many countries, currencies, and regulations. Yet even regional treasuries operating in dynamic market environments are considering building in-house banking structures. These companies will have to take big steps to move from rather simple cash and risk management approaches to very sophisticated models, in order to keep pace with the ambitious growth strategies of their businesses. In either case, companies looking to build an IHB will first need to start with a good business case.
Building a Business Case for the IHB
Even after the 2008-09 global financial crisis, companies have struggled to build strong business cases for investment in treasury. Often this is because the business case is centred around cost savings based on unattainable staff reductions and lack of clear business benefits. By contrast, a business case developed around the benefits of an IHB is very compelling. The clearly-articulated savings in interest, transaction fees, and centralising bank account management produces an attractive return on investment (ROI).
The best business cases frontload those activities that provide the most tangible ROI investment and are also most easily understood by stakeholders outside of treasury. For example, the building block of a business case for an IHB starts with enabling cash visibility across all bank accounts. Some of the immediate benefits can be obvious, such as enabling companies to:
To offer an example – one global provider of modern logistics facilities was able to unlock an additional US$250m in working capital through this initiative alone.
Other key components to a business case around building an IHB include:
There will be hard dollar savings around the reduced cost of funds, bank fees and enhanced investment yields. Consider also the more qualitative benefits, such as:
Defining Scope and Phasing Rollout
The term ‘in-house bank’ can mean different things to different people. In Europe, especially, the concept of IHB is really very mature and has evolved over many years, following a similar path as the adoption of sophisticated pooling and cash concentration structures. In Asia, where the concept is relatively new and less developed, in-house banking is used as an umbrella term to cover many capabilities, including inter-company transactions, multilateral netting and payments-on-behalf-of (POBO). In essence, whenever a corporation’s treasury team replaces a function typically provided by its banker, then it is operating in some form as an IHB.
It is critical to define the scope that best suits the needs for your organisation. If most of your risk and inefficiency lies in business units all hedging disparate currency risks, perhaps cashflow forecasting combined with centralised foreign exchange (FX) risk management is enough to satisfy most goals.
Other organisations, such as those in the logistics industries, have significant levels of intercompany transactions across multiple subsidiaries. In this case, multilateral netting and internal bank account structures provide the cornerstone of their IHB. More complex organisations look to transition to a complete solution in which external bank accounts are minimised and all funding and payments are centralised via treasury across the organisation. In this case, the business units know no other bank than the IHB services provided by treasury.
A phased rollout of the various components of an IHB provides the greatest chance of success for the overall project. Global cash visibility is key and should be included in phase one of any IHB project, if not already in place. Some elements are contingent upon others – for example, you cannot easily enable intercompany lending without transparency over cashflow forecasts across entities. Others can be more standalone, such as multilateral netting and payment factory.
As mentioned in the business case above, the key is building a roll-out that will deliver tangible benefits early in the project, which will help build momentum and support across stakeholders during the project ahead.
Selecting the Right Technology
Technology is often referred to as an enabler, but in the case of IHBs it is more than that – it is the entire underlying foundation. Companies in which in-house banking is more readily adopted are typically global organisations with a diversity of operations, typically:
Spreadsheets are not well-suited to the task of in-house banking. An IHB cannot be sustained without advanced automation. A treasury and risk management (TRM) solution to support IHB should provide:
In conclusion, affordable and simpler bank connectivity and enhanced treasury technology platforms are making IHBs more feasible for growing companies. Those treasurers who prepare their stakeholders with a strong business case, and a sensible roll-out plan will be well-positioned for successful project approval and completion. The transition to IHB will require best practice technology support that brings other benefits around operational risk and reporting – which treasurers have always prized, but have often struggled to get budget for.