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Cash & Working Capital

In-House Banks: Connections and Decisions

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February 11, 2015

Evaluating IHBs in context of alternative pooling, netting and intercompany lending structures.

financial system softwareIn-house banks can sound like an attractive way to take back control of payments structures and other financial functions. But companies should spend time on the due diligence when it comes to making the decision.

One of the key takeaways from The NeuGroup’s European Treasurers’ Peer Group (EUROTPG) meeting last November was that treasuries that combine Pay on behalf of/Receive on behalf of (POBO/ROBO) with an in-house bank (IHB) may find that they no longer require external bank pooling structures—or at least to the same degree. On the other hand, if a firm has a robust bank pooling structure, complemented by an effective netting and intercompany lending program to shift liquidity, the business case for a fully-evolved in-house bank may be diminished. Since reporting this takeaway, we have been asked by several iTreasurer readers to shed more light on the discussion that led to it.

The discussion came up in the context of a presentation by a member company looking to add POBO/ROBO (POBO first) to their IHB. The member sought input from her peers on whether and how best to pursue it. The company already has some POBO implemented for its intercompany settlements, but it would like to extend it to third-party payments via the IHB. The envisioned end-state is to continue to reduce bank accounts to one payables account, starting with the euro pool. Adding receivables, ROBO, the ideal would then be to have one account for both centralized payables and receivables, if practical. The natural concern is that it will prove difficult to reconcile payments and receipts and automate accounting if everything rolls up into a single account.

The input from other companies in the room included the following:

  • Examine virtual account structures carefully. One member reported testing a centralized receivables solution employing virtual accounts with a bank in select European countries. While it basically works on the receivables side, it had difficulty processing the payment side, which creates reconciliation and cash reporting concerns for doing both POBO and ROBO together, at least at this juncture. 
  • Consider additional reference number roll out. Most POBO/ROBO structures, whether using virtual accounts of not, rely on reference numbers; for example, an extended set of 7 digits tacked on to the IBAN reference. Considering a repeat of the process to get suppliers and customers to reference IBANs in the gear up to SEPA, by adding the additional reference digits for POBO/ROBO, may not be worthwhile for some firms, members noted.
  • How much independence do you want from banks? Another company that values independence from banks was already fully committed to bringing its current ROBO structure into its IHB with true internal accounts, where affiliates can place cash on deposit and take out loans. Rather than integrating the IHB with cross-border bank pooling to centralize its cash, the company is looking to use ROBO to bring the cash to the center and POBO to disburse it. 
  • Maximum flexibility to lead and lag. Eliminating cross-border bank pooling structures may or may not reduce flexibility to lead and lag, e.g., speed up payments priced in currencies that are appreciating and lagging those in falling currencies or the opposite with collections. Similarly, if there is a jurisdiction that has restrictions on getting cash out, treasury will generally not rush to pay more cash in. Treasury should determine in conjunction with tax and legal what sort of external accounts are needed to maximize their options. 

In the end, members agreed that an IHB with POBO/ROBO would offer substantial potential benefits. However, before committing to that as their end state, they would look closely at their current mechanisms to transfer intercompany liquidity under central treasury control, as well as pay and collect centrally, to determine how far they currently are from the ideal and what could be realistically gained before going to tax and legal with a change proposal.

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