Should Your Company Implement an In-House Bank? Questions to Ask
A morning session on the final day of the Association for Financial Professionals’ (AFP) annual conference 2014 in Washington DC examined the questions that treasurers should ask to see if an IHB could be a good fit for their organisation.
IHBs can provide a variety of different services to an organisation. Drew Arnold, head of trade and cash solutions for the Americas with Deutsche Bank, explained how an IHB could be useful in areas such as funding, risk management, investments, liquidity management, payments and collections, and also reporting.
For Debra Hinds, director of global cash management at the multinational aerospace and transportation company Bombardier, implementation of an IHB meant that treasury was able to consolidate the organisation’s bank accounts in a very efficient manner. Rather than a business entity opening up multiple currency accounts, they instead have one reference account in their preferred currency, while also having access to any other currency they may need through the IHB.
All subsidiaries closed down their external bank accounts, which meant there was a real physical consolidation of banks between the various business entities. Hinds said that this meant netting became very simple. The IHB owns the cash pool, and does all of the reporting and accounting on this, just like an external bank would.
Arnold echoed the point that IHBs can increase efficiency, particularly in terms of processing and standardisation of operations. Other potential benefits that were outlined included:
Step by step
The implementation of an IHB is always a progression, according to Arnold. The project should start by putting in the foundations for debt and intercompany lending. Then treasury can add the FX and investments piece. The netting and pooling structures follow this. When all this is in place, payments on behalf of (POBO) and collections on behalf of (COBO) can be added to the IHB structure.
Hinds said that as the IHB structure is built up, treasurers need to be prepared for the number of IHB transactions to increase accordingly, commenting that her organisation’s IHB can process thousands of different transactions in a day. It was noted that, in Europe, the single euro payments area (SEPA) has provided a boost to POBO and COBO, as the standard includes an IHB field, allowing the recipient to easily indentify who is paying them.
When implementing an IHB, Hinds said that it is critical for treasury to work closely with departments such as tax and legal. These departments can provide the information as to what you are allowed and not allowed to do in specific jurisdictions. Regulations and market practices are constantly evolving, and Hinds advised that it is vital to constantly review your IHB practices to ensure that your due diligence remains robust. Implementing an IHB is just the beginning of an ongoing process.
The session also looked at the potential drawbacks of an IHB. As just mentioned, 100% coverage of an organisation’s activities by an IHB may not be possible, depending on the jurisdictions it is operating in. They can also be very complex to manage. Arnold also noted that with the concentration inherent to an IHB, there are new risks to consider, particularly around contingency planning and disaster recovery.
If an organisation chooses that an IHB is not a good fit for its operations there are other things it can do to gain some of the advantages an IHB offers. Policies and systems can be standardised, through a shared service centre (SSC) model, for example. Banking relationships and accounts can be rationalised. Solutions such as multi-bank reporting, netting and pooling can be implemented. However, Arnold was keen to make the point that implementing an IHB effectively ‘supersizes’ these benefits.