In an effort to minimize transaction volumes and costs, many companies lately are making the decision to move to an in-house bank. The exercise is also forcing many companies to take a hard look at liquidity structures overall.
Liquidity structures have always been an integral part of treasury organizations. And with IHBs it’s not just one set-up, it’s many. Companies are increasingly moving to multi-region IHB structures because of global expansion and increased revenue mixes overseas. Growth in multi-region IHBs can also be traced to complexities related to time zones, language, growth of regional shared services and decision execution.
This was certainly the driver behind one member of the NeuGroup’s Assistant Treasurers’ Group of Thirty (AT30) transition to an IHB, which met in April. This company’s main reason for its IHB project was growth in its international operations. But it was also driven by a recent legal reorganization coupled with increased volume in intercompany transactions between subsidiaries. The company has a presence in nearly 100 countries with well over 500 bank accounts.
As it met with failure the last time the company attempted an IHB the company put a premium on clarity around its legal structure. The team tasked with pushing the project started out with a solid game-plan, properly allocating responsibilities between treasury at headquarters, regional staff, and shared services centers. The team then reviewed the company’s cash positions globally and began to consolidate cash into pools followed by rationalizing bank accounts. This allowed for an easier transition to an ERP-based IHB implementation.
Here are a few other considerations when contemplating an IHB:
Find the right location. Considerations for establishing an IHB starts with choosing a favorable location, along with important tax considerations. Primary areas of focus should be defined prior to kicking off an IHB project, including local regulations, tax structure, and withholding effects to the businesses.
Scope of IHB defines your liquidity structures. Companies must consider trading models in conjunction with local regulatory policies before having an IHB in scope. After this step is fully vetted with legal and tax, then the scope and functionalities can be considered to help define an efficient liquidity structure.
Build out the scope from there. One member of the AT30 has expanded its IHB by including intercompany netting and pay-on-behalf-of affiliates. As activities are centralized, account structures progressively get simpler, thereby reducing the number of accounts. By dividing the responsibilities of the entities you can have one entity doing the commercial flows and another considering what the scope of the IHB should be, along with the regulatory and tax requirements for the location of the IHB. The objective is to drive an efficient bank account and bank relationship structure.
Design your IHB strategy. Creating efficient liquidity structures and organizational models can be vastly different and complex to assemble. Global treasury organizations in the regions may have a solid line into an IHB center while others may find certain functions with dotted lines from the SSC or possibly other functions. Again, it is difficult to use an IHB effectively without rationalizing the organizational structure.
The adaptability of in-house banking structures, as indicated by their ongoing evolution, is a key reason why they have become the centralization tool of choice for many multinationals. Their ability to interact with a variety of different legal entities also makes them useful to consider when new legal structures and other organizational changes are contemplated. Hopefully, creating a separate legal entity mimicking bank activity does not subject in-house banks to any of the regulatory challenges confronting real global banks touched on earlier.