In-House Banks: The Secret to a Speedy Corporate Recovery?
By Eleanor Hill, Editor
As treasurers look to improve their departments’ resilience to help withstand future crises, in-house banks (IHBs) are back in the spotlight. TMI speaks to four industry experts to understand how IHBs can help restore profitability and reduce risks. We also examine trends such as in-house banking-as-a-Service (IHBaaS) and outline how IHB structures are evolving.
After months of Covid-19 ‘firefighting’, organisations are focusing once again on restoring profitability. Treasury departments are therefore recalibrating their roadmaps and exploring optimal set-ups for the emerging business landscape. As a result, IHBs are garnering greater attention.
François Masquelier, CEO, SimplyTREASURY, explains: “The silver lining to every financial crisis is the opportunity to change the organisation, revamp processes, and become more resilient. One of the treasury-related responses to this health and economic crisis is the need for further centralisation of financial operations and enhanced visibility. Therefore, the Covid crisis can be viewed as a catalyst for establishing an in-house bank. After all, the objective of such a central financing arm is to reduce costs, increase efficiency, reinforce internal controls and improve visibility on operations.”
In fact, Masquelier believes that “those multinational corporations not currently operating an IHB will inevitably consider it over the months ahead and address the question of how to implement one.” Christof Hofmann, Global Head of Payments and Collection Products, Deutsche Bank, agrees: “Of course, the crisis is not the sole driver of IHBs, but the benefits of such a set-up will likely increase interest levels in IHBs going forward. Those benefits include the ability to have a central view of your exposures 24/7/365, which in turn leads to vastly improved forecasting, and the flexibility to deploy liquidity across the group – without it being stranded locally.”
WHAT IS AN IHB?
Hugh Davies, Director, Zanders Treasury and Finance Solutions, explains: “In simple terms, an IHB is a centralised treasury function acting as a bank for an organisation’s subsidiaries. The IHB provides financial services such as settlements, funding, intercompany lending, liquidity management and FX management on an arm’s-length basis.”
Improved liquidity and risk management
Most treasury departments have, naturally, focused on the liquidity angle since the pandemic began. Tim Morris, Manager, Zanders Treasury and Finance Solutions, comments: “Liquidity management and funding have been major concerns throughout the crisis, making visibility and mobility of cash across the organisation essential for day-to-day operations. Centralised reporting through a group treasury team allows for a quick and conclusive analysis of liquidity positions. This enables a company to move funds quickly and react according to operational demand during uncertain times. Automated cash pooling in an IHB structure improves visibility and mobility of cash and will remove uncertainty and reliance on manual interventions.”
The ability to easily undertake intercompany loans via the IHB also helps to ensure adequate liquidity is where it’s needed for all participating subsidiaries across the company. However, Hugh Davies, Director, Zanders Treasury and Finance Solutions, says that it’s not been entirely plain sailing for IHBs in recent months, as unfortunately, the crisis has brought about credit-rating downgrades for many multinational groups. Davies comments: “Rating downgrades will influence arm’s-length transfer pricing calculations, something already under th=e scrutiny of the Organisation for Economic Co-operation and Development (OECD). This will need to be properly and transparently accounted for with intercompany loans and within cash pooling structures. Intercompany lending terms may also need to be reviewed to grant flexibility to subsidiaries.”
Benefits of an IHB
Nevertheless, the business case for establishing an IHB remains compelling. Take the management of FX risk , for example. Morris notes: “Economic uncertainty and the possibility of recession have created FX volatility in the markets, with emerging market currencies seeing the greatest impact. Adverse market conditions have increased the cost of hedging due to wider spread forward points and reduced the ability to hedge with market restrictions and banned products. The ability to net positions and manage global exposures, not just local exposures, is a decisive benefit of an IHB. A reduction in financial transactions will aid treasurers to efficiently and cost-effectively manage FX exposures.”
There are further hidden benefits to IHBs, says Hofmann. “Centralised management through an IHB enables treasury functions to be much more agile, making it easier for them to implement new solutions and technologies such as SWIFT gpi. Moreover, cybersecurity and fraud risks can be significantly reduced through IHBs, given that external bank accounts are reduced to a minimum so that cash flow of affiliated group companies can be consolidated and points of entry are streamlined. Since many treasury teams are currently working from home, this benefit should not be overlooked.”
Morris picks up on this theme, explaining that not all organisations were adequately prepared for remote working at the start of the crisis. “Even now, many employees are using their home computers to access company portals, financial software and banking websites, which causes security headaches.”
Reduced security levels and changes to digitise treasury processes have opened the door for cybercriminals. “They seek out weaknesses in controls and attempt to infiltrate companies fraudulently; they also use phishing techniques to gain sensitive data, such as personally identifiable information, banking and credit card details, and passwords. As Christof mentioned, under an IHB structure, subsidiaries interact internally and only the group treasury units are required to connect with banking partners. This limits the number of users required to access the full range of financial systems and banking portals, thereby reducing the security exposure. In combination with eliminating manual processes, the opportunity for cybercrime can be significantly restricted through an IHB structure,” Morris believes.