Treasury Management: Advantages of an In-House Bank

In-house banks certainly are not for everyone but they can be useful for following the money. 

In the wake of the financial crisis companies are zeroing in on their sizable – and growing – cash holdings.

The major issue is that sometimes the more cash you have salted away around the world, the less visibility you have as to where that cash is. In one recent NeuGroup FX managers’ survey, 57 percent of respondents said they had between 101 and 500 bank accounts worldwide, and just over 28.6 percent had 500-1000 bank accounts. Managing them can be a challenge, particularly for 80 percent of the group that doesn’t have an electronic bank account management (eBAM) set-up.

But one way companies can get a handle on that cash is through the creation of an in-house bank (IHB). An IHB brings together the commercial and financial cash flows of the organization and allows it to perform bank-like activities as well as help reconcile internal “statements,” perform cash pooling, disbursement and record-keeping work. In this way, the IHB becomes the main provider of banking services to subsidiaries, including FX transactions, borrowing and investment.

In a recent pre-meeting survey of the NeuGroup’s Engineering and Construction Treasurers’ Peer Group (E&CTPG), it was revealed that just under half of members have an IHB while just about all others in the group said they either need one or are in some stage of planning to implement one.

One E&CTPG member whose company has an IHB walked the rest of the group through some of the advantages he found in having one. For his company, the IHB:

1. Streamlines and minimizes bank accounts. Because the legal entities within the IHB have their collections and disbursement executed by the IHB entity on their behalf, there is no need for the entity to have a bank account. When you form a new entity for every sub or new business unit, it can dramatically reduce the effectiveness of the company’s bank account administration. There is also the further benefit of lower bank fees from having few accounts and transaction volume.
2. Higher quality transactions. By running collections and payments through a centralized process on behalf of the entities, the rate of errors and “redos” drops significantly.
3. Allows for efficient pooling and investment of cash. Managing the accounting component of intercompany transactions within the ERP supplants the need for actual cash movements allowing for centralized cash pools and more optimal investment options.
4. Reduces FX exposure and volatility. Having all of the entity positions accounted for daily within the ERP allows for real-time views of FX exposures and risk mitigation.

However, IHB’s are not for everyone and nor do they work for everything. For instance, there may be certain jurisdictions that require actual bank accounts and cash balances to comply with local regulations. There also might be tax issues in certain locales. Still, an IHB can be an effective tool for most companies to enhance their operations. Greater visibility to cash and risks combined with more efficient cash investing and transaction processing – along with lower bank fees – is a winning combination. A close alliance with tax and legal is the prerequisite, however. If that doesn’t exist currently it is the best first step in setting up the IHB.