Creating an in-house bank can bring a new level of efficiency to the way a company manages its finances and treasury as well as bringing attractive cost savings to the business. It can cut the number of bank accounts it operates, allow for inter-company lending, and reduce FX risk and costs. In some cases, the savings made by introducing n-house banking can be enough to cover the operating cost of the whole treasury function.
Yet, creating such a system can be complex and demands significant investment. Treasurers need to ask the right questions and be as prepared as they can be before embarking on an in-house bank project.
Treasury Dragons In-House Banking roundtable, held online on 1 July, aimed to help those considering whether to set up an in-house bank by bringing together a range of treasurers with varying expertise and experience to share their stories, leaving participants better informed of both the benefits and pitfalls of embarking on such a project.
In-house bank benefits
Jeremy Hamon, head of group finance, at Primetals Technology kickstarted the roundtable with his story of the implementation of an in-house bank. Having an in-house bank means the centralisation of all external banking activities to one internal entity that acts like a bank to the company’s various affiliates, he explained.
Primetals’ in-house bank has successfully reduced transaction costs by centralising and concentrating operations to core banks within the mother country of each currency rather than having multiple accounts for each different foreign subsidiary.
It has also reduced administrative costs by cutting the number of bank accounts being run by the company. Hamon’s team cut the number of credit lines the company usually has in place, and foreign exchange management was centralised.
Allowing for intercompany payments means “we don’t waste time fighting internally for invoices to be paid,” Hamon said.
The cost and efficiency savings achieved by the in-house bank have helped cover the cost of running of Hamon’s treasury team, he remarked. “I’m the only central function in the group acting as a profit centre now,” he said.
Yet, all these benefits need to be weighed against the potential costs and other concerns raised by the roundtable participants of setting up and maintaining an in-house bank.
Ensuring smooth Implementation
Questions around in-house banking usually revolve around regulatory, administrative, and management issues rather than the technological systems being used, said one attendee.
“It is important that a system takes the administrative burden away from you,” they said.
“What you need to make sure is that for your subsidiaries, it doesn’t make a difference if they act with an in-house bank or an external bank in terms of processes and flows.”
The platform must be easily rolled out to all global locations too, they added.
Another roundtable participant warned treasurers about the length of implementation. “The company buying the system always has to do more implementation themselves than they thought they would. So be prepared for that. The old excuse given is that ‘we are letting you implement it – so you get to know the system’, but it always takes more time than you think it will,” the attendee said.
Opting for consultancy support
One of the questions raised by roundtable attendees was whether it was worth hiring consultancy firms ahead of starting an in-house bank project.
“If you don’t have any experience, consultants can be useful to suggest systems that suit your needs and the size of your company,” one attendee suggested. External consultants would be able to suggest whether a “dashboard” cash management system where you have clear and immediate visibility over your FX exposures or debt, for example, would be more suitable to your company than other types of systems. Consultants can help identify your specific needs and what solutions would best suit the company.
The benefit of consultants can also come down to the personality of the treasurer. “If you are a creative or ideas person, you might need someone to bring structure to your thoughts,” said one participant, whereas a more organised, practical person might not need that level of support.
Selecting the right banking partners is key, noted another treasurer, explaining the importance of working with a truly global bank.
Many banks say they are global, but only work in certain regions via partner banks, they explained. In these circumstances, corporates then must sign different cash management agreements with the regional banks as well, which can increase a treasurer’s administrative burden.
Another challenge for the treasurer is getting a handle on the costs of setting up an in-house bank. Attendees spoke candidly about the set-up and maintenance costs. Most argued that making a big investment rather than going for the cheapest option was the more cost-effective choice in the long term.
Attendees agreed that basic treasury and cash management software could be bought for around $250,000, but for bigger projects for a larger company, you could be looking at an investment of half a million dollars – particularly if you consider ERP [enterprise resource planning] implementation costs and related banking costs.
“The cheapest package out there is not going to do enough for your expanding group,” one attendee said. “Where will it be in 10 years’ time? If you spend half a million, you know it will still be suitable in 10 years’ time.”
An in-house bank needs to be able to expand as a company grows, either through organic growth or acquisitions. It needs to be able to handle vast and increasing amounts of data, the participant explained.
“An in-house bank depends on the data you can get out of it. For example, you may not know that a certain subsidiary has cash that it could lend to another. An in-house bank could provide that data,” the attendee said.
Other cost considerations include the price of on-going support for your new in-house bank. Are you going to need to pay for additional IT staff to run it? Do you need to pay consultants for additional assistance – for example when you acquire a new company and need to absorb new bank accounts?
“If you pay $200-300,000, but you need one or two full-time IT guys to manage it…. it gets kind of staff intensive. That’s the main risk,” an attendee said.
Regional tax laws and regulations could also push up costs of running an in-house bank, said some attendees. “Tax and regulatory burdens could outweigh the advantages in some cases,” warned one.
Yet, despite the potential costs, the benefits remain appealing. As one attendee said: “applying natural hedging can save you a lot” when using an in-house bank structure, as too can the ability to move funds between subsidiaries. And there are some companies that have been able “to make a lot of profit” from their in-house bank, the attendee added.
That ability to generate profit will always be a tempting prospect for many treasurers so used to being labeled a cost centre by their board of directors.