In-house banking: At home in your organisation
In-house banking, where a treasury centre provides banking services to its group of companies, is a well-established approach to centralising treasury and cash management amongst large multinationals. Today, its appeal is becoming more universal as medium-sized organisations expanding internationally are also seeking to gain the same degree of efficiency and economies of scale through the adoption of in-house banking.
Defining in-house banking
One of the first questions that treasurers ask is what does in-house banking (IHB) really mean, particularly as the concept has evolved since the early 1990's when it was first introduced. Originally, 'in-house banking' referred to a centralised treasury centre that acted as the trading arm for the group in the FX and money markets, and conducted intercompany borrowing and lending. Increasingly, however, regional or global treasury centres are providing a full range of banking services to its group of companies, including payments, collections, cash, liquidity and risk management. The implication of this shift is that regional treasury centres (RTCs) are now taking control over commercial flows, in addition to FX, deposits and loans. As corporations have adopted in-house banking at different times, some in-house banks still operate on a more traditional basis, while some companies have achieved considerable added value across a wider range of activities. Therefore, the answer that treasurers seek is not necessarily "what is in-house banking?"but "what could in-house banking mean for my organisation?"
Understanding the value proposition
The benefits of in-house banking vary between organisations, but these can extend across operational, strategic and governance priorities. However, for many treasurers, their barrier to in-house banking is the perception that the operating model is complicated, or its value is restricted only to large multinationals. While this may have been the case a decade or more ago, the combination of technology developments, greater expertise in in-house banking, clearer regulations, and increased adoption of the technique by expanding organisations, indicate that this is no longer the case.
Firstly, many organisations that have entities located in different countries can benefit from rationalising and centralising their activities to achieve economies of scale. However, their priorities will often differ. For example, one company may wish to implement a full in-house bank where the IHB or treasury centre is the only entity to hold external bank accounts, and it operates entirely on a pay-on-behalf-of (POBO) and receive-on-behalf-of (ROBO) model. Another company, depending on its business model, culture and local cash management requirements, may choose to provide only certain functions to the group via an in-house bank, such as FX and liquidity management.
Secondly, while making any large business transformation change requires the right combination of enablers (skills, resources, and technology), setting up and managing an in-house bank does not need to be complicated. The appropriate preparation and scope definition are critical success factors, as summarised in the following roadmap.
- Business analysis. The first step is to look at the business footprint and existing bank account structures, and analyse transaction flows across the supplier and customer base, as well as identifying which entities operate domestically or cross-borders, in their functional and non-functional currencies.
- Bank accounts blueprint. With the help of the knowledge from a banking partner, the most efficient account domiciliation structure for your company can be determined for both the end-state as well as the interim stage. This will result in an ability to accelerate and facilitate the change management process.
- Liquidity planning. Having identified transaction flows, and accounts blueprint, the next step is to review regional or group-wide liquidity requirements to create an in-house banking implementation roadmap that supports each business unit's needs, whilst increasing mobility of cash and accelerating the formation of a larger liquidity pool access at a group level.
- Technology analysis. Another key step is to review systems used across the business, such as enterprise resource planning (ERP), accounting, treasury and other finance systems, looking at where data resides, and determining the optimal way to achieve the required system integration to consolidate data into the IHB. This will enable the IHB to take over the control of processing transactional data, or receive timely information on the processing status in the event a less centralised processing model is chosen.
- Business case definition. Completion of the previous steps will facilitate the preparation of the business case for the implementation of an in-house bank operational model. The identification of decision points arising from the preparatory analysis allows for the generation of a limited set of alternative execution scenarios and associated benefits that can be objectively compared, and lead to a decision on which execution approach is the best fit for the company.
By following this roadmap, treasurers can generate a limited set of alternative execution scenarios with the associated benefits. These can be compared objectively, and lead to a decision on which execution approach is the best fit for the company, therefore resulting in a well-constructed and viable IHB business case.
Even where the business case is considered sufficiently compelling to proceed with an IHB bank project, perceived technology gaps and concerns around regulatory compliance may still prove dissuasive. However, there have been significant developments in recent years in both of these areas, so the reality may be far less daunting than some treasurers and finance managers might expect.
Technology: In the past, many corporations found it hard to justify the cost and resources required to implement and maintain a specialist treasury management system (TMS) or ERP treasury module, and payment factory solutions typically needed to be acquired separately. This has now changed. Treasurers can define their technology infrastructure very precisely in line with their scale, complexity and business model.
In addition, specialist TMS technology is now more accessible and cost-effective. This includes SaaS (software-as-a-service) and cloud-based models that enable easier access from multiple centres, a lower cost of ownership and outsourced system hosting and maintenance. The functional reach of these solutions has expanded into areas such as centralised payments and collection processing, so treasurers can achieve a more cohesive, integrated technology environment across both commercial and financial flows at a lower cost.
Alternatively, companies can choose to adopt platforms offered by their banks. Banks can often provide a diverse range of bespoke services beyond traditional payments processing and account/transaction reporting. In some cases, these services include specific functionality required by an IHB, such as 'on-behalf-of' capabilities, automated FX payment execution, intelligent payment routing, and collection management services.
Regulations: As in-house banking has matured as a concept, there is now greater certainty over market and regulatory practices, although it can be more challenging to implement in-house banking in Asia due to its diverse financial markets as compared to more cohesive regions such as Europe.
"DBS has brought together a combination of deep experience, comprehensive solutions and in-depth local market and regulatory knowledge, which can be an essential way of defining an appropriate project scope for in-house banking, and ‘de-risking’ the implementation. We advise customers on how best to implement on-behalf-of structures, with the most optimal bank account structure design, taking into account the local rules around resident/ non-resident accounts and the most efficient transaction processing channels.
With rapid market and regulatory change taking place, we enable customers to take advantage of new opportunities to operate more efficiently. For example, with the emergence of new payment practices and initiatives in both domestic and cross-border payments, including instant payments in many markets, we help customers to understand and make best use of these developments to build robust, efficient ecosystems of their own customers and suppliers."
Mario Tombazzi, Group Head of Liquidity and Liabilities Product Management, DBS
Benefits of full scope in-house banking
- Centralised competence - maintaining cash and treasury management skills in each business unit can be difficult, particularly where the scale of the operation may not justify dedicated resources.
- Improved working capital - By managing payments and collections centrally, commercial terms with both suppliers and customers can be standardised more easily, leading to better predictability of cash, and a greater ability to release financial resources or to implement supply chain financing techniques.
- Economies of scale.
- External. Lower payment costs (e.g. as a result of fewer total transactions and more domestic vs. cross-border payments; fewer bank accounts, better rates on external borrowing, investment and FX transactions, and lower technology costs (both internal systems and banking system integration).
- Internal. Better use of internal resources, less system maintenance and administration.
- Consistent processes and technology. The economic viability of acquiring, maintaining and administering specialist technology is far greater for a centralised entity, as compared managing multiple systems and users locally in each business unit. This reduces technology costs, eases the integration burden for both banking and internal systems, and ensures that processes and controls are adopted consistently.
- Cohesive group reporting. Disparate systems, processes and treasury resources can result in quite different format and content of reporting, and it can be very time-consuming to bring this together in a meaningful way. This can impair the accuracy of cash flow forecasting, as well as liquidity management and risk decision-making.
- Enhanced liquidity management. Although the specific liquidity benefits will depend on the account and liquidity structures that the company puts in place, there are typically significant benefits to be obtained by having fewer external bank accounts, better control, and centralisation and mobility of cash across a region or group.
- Better risk management.
- Market risk. By collating exposures, creating natural hedges across the business, and funding/ hedging exposures centrally, the total number of market transactions is reduced, while larger transactions offer the potential for better rates.
- Credit risk. By accelerating collections, defining standardised payment terms, employing a more uniform approach to customer credit limits and monitoring group limits more effectively, treasurers and finance managers can often reduce credit risk, accelerate collections and reduce overdues.
- Improved policy compliance. Ensuring that treasury and risk management policies are being adopted consistently across a region or group can be very difficult when cash and treasury management activities are dispersed across the organisation, so this is a major driver for centralisation and IHB projects.
- Reduce risk of fraud and cybercrime. While fraud and cybercrime are risks for every organisation, and in every finance function, it is easier to combat these risks in a centralised environment through consistent payment processes, more effective controls (including sufficient resources for appropriate segregation of duties) and staff training.
- Participation in digital ecosystems. A centralised and standardised approach to managing transactional flows with commercial partners enables a quicker adaptation to the changing landscape and the realisation of potential competitive advantages over your industry peers.
Secrets of in-house banking success
Many of the factors that contribute to the success of an in-house banking project are common to every successful major project, including: clear objectives and scope; dedicated, appropriately-skilled resources; a disciplined approach to project and change management, and senior management support. However, a particular challenge for treasurers when implementing an IHB is to manage the expectations of a wide variety of stakeholders, including business unit finance teams that may not be familiar or comfortable with a change in their financial processes and responsibilities, or their local bank relationships. Creating a compelling business case, which is endorsed and championed by senior management, and a proactive engagement and communication strategy is essential to overcome these reservations, whilst ensuring that individuals and teams are appropriately motivated to contribute to the project.
"By leveraging our expertise, solutions and local insights, customers can identify the potential value of IHB to their business, reduce project risk and maximise the benefits. Whether the business case is justified on an operational, financial or governance basis, these factors are at least as compelling to a mid-sized company expanding internationally as to a large multinational corporation. Indeed, in many situations, the value proposition is even stronger, as an in-house bank creates a robust and scalable platform to facilitate further growth, integrate merged or acquired entities quickly, and create competitive advantage."
Mario Tombazzi, Group Head of Liquidity and Liabilities Product Management, DBS
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