In light of changes coming to banking services, tax planning and transfer pricing and to further develop cost-savings initiatives, this is a good year to assess the current stage of evolution you have reached toward achieving the goal of a “fully-functional” in-house bank (IHB). At this year’s spring meeting of The NeuGroup’s Treasurers’ Group of Thirty-2, several members said they had made substantial upgrades to their IHB platforms in anticipation of SEPA or in contemplation of its next-generation outgrowths for pay-on-behalf-of and receive-on-behalf-of (POBO/ROBO) arrangements.
SEPA has been a catalyst, members say, echoing what many banks have said. As expected, the rollout of SEPA has pushed further consolidation of global treasury activities. Standardization and automation are key and both SEPA and XML have helped move the needle on the centralization of payments and collections. System formats have become more standard and automation has improved, both of which have allowed many to capture improvements in various aspects of the working-capital timeline.
But this centralizing of cash can be pricey. Based on member comments, many agreed that the costs associated with centralization may be more in the first few years as systems and structures are created, but thereafter the cost savings continue to grow as processes and systems are consolidated. In addition to the synergies associated with centralization, the added benefit of increased oversight and control often adds to the argument for moving forward with the setup of an in-house bank. According to one member, “Having too many cooks in the kitchen only adds to the number of potential fraud cases. For us, it’s more about control and the added security.”
Members also said virtual accounts add even more automation and processing efficiencies. Although the initial set up of a virtual account structure takes a lot of work upfront, the benefits are long-lasting and it can become bank-agnostic, which allows for even longer-term benefits. Many new international jurisdictions are approving virtual accounts, which are expected to increase in popularity and may eventually replace the traditional cash-pooling structures used today.
Consider BEPS when choosing your location. The location and mandate of the IHB entity is very important, especially based on the early discussions regarding potential BEPS (Base Erosion Profit Shifting) impacts. It is critical to show substance of the entity to and ensure that the activities of key treasury professionals driving IHB operations belong to the legal entity that hosts the IHB and also ensure that all rates used within the IHB structure can be substantiated as arm’s-length rates in support of the transfer-pricing policy.
The creation of an IHB has always been seen as a way to centralize operations and bring an increased level of standardization to the tactical operations performed there. The level of sophistication of treasury activities being performed at these centers continues to increase as US MNCs continue to look for ways to optimize operations. With the pending BEPS regulations in sight, many treasurers are taking extra time now to review structures to ensure substance and arms-length relationships between the IHB entity and the subsidiaries served therein.