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Cash & Working Capital

In-House Banks Can Boost Efficiency, Support Growth

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January 22, 2019

But establishing the bank is a huge project with many considerations

Money Ball Lg 209X119One way to increase its efficiency in treasury activities and support a fast business-growth trajectory is to implement an in-house bank or IHB. Many companies in NeuGroup’s universe of peer groups are developing or augmenting their IHB strategies.

And here are a few reasons why:  

  • US MNCs, in the wake of tax reform, are reviewing global legal entity and global liquidity structures, in which IHBs often play an important role.
  • MNCs with IHBs in Europe, especially those based in the UK, may relocate them due to Brexit or EU tax rulings. 
  • Banks are making progress in offering virtual accounts and services, creating new opportunities for MNCs to refine IHB interfaces with external banks.
  • Europe’s second Payment Services Directive (PSD2) is creating opportunities for nonbanks to offer innovative new services, especially in payments, that can connect to an IHB platform.
  • Digitalization and new technology are making the general service model more customer-focused, changing the way IHBs serve internal and external customers and resulting in greater ease and efficiency.

So, because of these developments at home, abroad and in technology, more and more US-based multinational corporations are tweaking existing IHBs or creating new ones. One issue a member of NeuGroup’s European Treasurers’ Peer Group (EuroTPG) who was implementing an IHB described meeting the challenges of a business-model changes. This entailed switching from centralized, single-entity billing to local billing involving multiple legal entities and invoicing currencies in the EMEA region. The conclusion treasury reached was that an IHB structure could achieve 100% cash concentration and centralized FX exposure to rationalize FX hedging and minimize its bank footprint.

Among NeuGroup members, the Netherlands is a popular location for IHBs. EuroTPG pre-meeting survey results reveal that around 25% of respondents have IHBs located in the Netherlands, which has favorable tax regs for finance companies. Another common choice is Switzerland, though tax reform may limit its attractiveness going forward. Other favorite European locations for IHBs include the UK and Ireland.

But caveat emptor: IHBs may face scrutiny from tax authorities wherever they’re used. One EuroTPG member shared related how tax authorities had challenged his company’s intercompany funding transfer pricing practices, which created tax audit hassles. Now, after advice from the company’s tax team, it is setting cash levels in subsidiaries sufficient to meet business working capital requirements, so the subs don’t need to lend to or borrow from the IHB. Because tax authorities in some places may question the substance of the IHB, some companies move the entire treasury team to the IHB’s tax jurisdiction. Others plan management activities like quarterly board meetings in the tax jurisdiction to prove to authorities that there is more substance to their being there.

Also, intercompany lending, cash pooling and cash concentration can used to enable intercompany financing and aggregate any excess cash for active investment management. But excess cash earning a negative yield in Europe can create problems for treasury centers using existing transfer pricing practices to charge fees for services and may invite queries and audits from tax authorities.

Implementing an IHB structure can bring significant efficiency in treasury activities with the benefits of centralization, automation and smooth liquidity management. But establishing the bank is a huge project with many considerations, including tax jurisdiction, banking services, banking partners, location of the treasury team, reworking process flows and having IT systems to support the set-up. Don’t underestimate the effort involved and make sure to secure adequate project resources for a successful implementation.

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