What’s fuelling the rise of In-House Banks?
Although In-House Banks (IHBs) are nothing new for treasurers, many multinational corporations have increasingly considered in-house banking solutions as a cost-effective and efficiency tool for global cash management over the past decade. Against a backdrop of an increasing need for efficient access to liquidity, this trend which is attributed to huge improvements in technology, a growing fintech market and Asia opening up is not expected to change.
An IHB is a form of financing that uses its own resources by internalising many of the services offered by a traditional, external bank where possible. These services can include loans, foreign exchange (FX) and cash management — which are brought in-house within the multinational to increase efficiency and reduce costs.
The interest in an IHB solution is primarily driven by the potential for significant efficiency gains. As there is a single, central entity that engages with a bank instead of a plethora of subsidiaries working with different banks, costs are lowered through standardisation and automation. IHBs allow for intercompany lending which in turn reduces external borrowing costs. And FX costs decrease by netting exposures which in effect, create internal currency pools to cover FX trades.
IHBs, however, are notoriously difficult to set up. There are various regulatory obstacles that corporates must overcome, particularly in Asia, while the technology required to implement an IHB can potentially be costly and complex.
Despite these challenges, there are signs that corporates are increasingly ready to take the IHB plunge. According to Farhad Subjally, Head of Americas, Trade at Standard Chartered and Shantanu Vijaykumar Bhosale, Head of Americas, Cash Product at Standard Chartered, that’s down to three main factors: Technology improvements, fintechs and the opening-up of Asian markets.
In recent years, there has been a “huge” improvement in technological capability in the corporate treasury space, meaning that what was once a prohibitively complex set-up process can be done quicker and more smoothly than ever before.
“Technology enables you to centralise, it enables you to communicate, and it enables you to digitise your processes,” Subjally says.
“In addition to seeing how technology has improved the way IHBs can connect with banks, software advancements such as Virtual Account Management for Collections and Payments for Managing Receivables and Payments On Behalf Of are great enablers for IHB implementation.” Bhosale says
The rise of automation has made standardisation easier, while efficiency gains have also been improved by advances in technology.
In turn, the improvements in technology have seen a rise in fintechs offering IHB solutions.
The growth of fintechs in the corporate treasury space such as Kyriba have removed a significant barrier to integrating IHB solutions.
“Instead of the corporate setting up the system and developing a system to do this or that, they simply plug into the fintech and use the fintech as a way of exchanging data and communicating with their banks,” says Subjally.
Fintechs are increasingly working in tandem with banks to offer In-House Banking solutions, but that wasn’t always the case, says Bhosale.
The market for banking and financial solutions is highly regulated which brings yet another obstacle, necessitating the need for collaboration between fintechs and banks.
Bhosale added that banks as well as fintechs are unlikely to offer an end-to-end solution on their own, and so it would often be best to partner rather than compete alone. As noted by Subjally, the funding capability of the banks meant that it was easier for all parties if fintechs and banks worked together, not against one another.
“Most trade finance deals transacted on fintech platforms require funding to either the buyer or the seller. Providing this liquidity is a core strength of banks against fintechs, hence the imperative for fintechs to cooperate with banks,” Subjally says.
Standard Chartered works with fintechs to provide liquidity solutions and offers a large client base for fintechs to tap into.
“We bring the liquidity and the risk mitigation banking services. But we also have a large and sophisticated client base that can be offered to fintechs, making it easy for the fintech to onboard new clients,” Subjally says.
In addition to new Fintechs entering the medium sized corporate space with less sophisticated Treasury Systems, Treasury Systems Providers are expanding their capabilities in the area of In House Banking and competing with the traditional ERP based solutions from SAP. The variety of systems offer a different options to support growing companies in Asia and Middle East as well as mature corporations in of US and Europe.
As Asia, the Middle-East and Africa begin to open up their own regional trade centres, more corporates are looking to set up IHBs.
“There are markets in Asia like Singapore and Hong Kong that have actively courted corporates to set-up In-House Bank structures by further improving incentive schemes, providing concessional taxes on IHB activities and expanding double tax treaties,” Bhosale says.
Subjally believes the rise of the Asian markets is helping boost the desire for In-House Banks amongst corporates.
“Asia’s market potential today is a much more important part of a large US corporate than it was 10 or 15 years ago. Demand in those markets, and regional activity in those markets is driving the need for In-House Banks,” he says.
Standard Chartered helps make setting up IHBs in markets like Hong-Kong and Singapore as efficient as possible.
“We work with the corporate on the treasury advisory side to ensure that when the In-House Banking setups are done, they are done properly. We also work with clients on what is needed for the markets” said Bhosale.
“If there are regulatory needs we help corporates become aware of them and ensure that they can operate in compliance,” he says.
Interest in IHBs is rising fast. What was once seen as too costly and complex is now a valuable efficiency driver. This is thanks to improvements in technology, which in turn has given rise to innovative fintechs offering end-to-end solutions in partnership with banks like Standard Chartered. Simultaneously, Asian markets are beginning to open up and relax some of the regulations that made implementing IHBs difficult.
With ready access to liquidity expected to remain a key consideration, IHBs are expected to become commonplace in the corporate treasury space sooner rather than later.