When is the right time for your company to set up an in-house bank?

Setting up an in-house bank offers significant benefits for multinational companies, but is often perceived as complex and expensive to set up. Asking the right questions is a great start, says Nikolai Diekert

​As companies grow, whether organically or by acquisition, the need to make the best possible use of corporate cash grows with them. Having one subsidiary overdrawn and paying interest while another is sitting on a cash surplus makes little sense.
​
To tackle this problem, many companies look at ways of optimising their cash management. A first step is often to set up an intercompany funding structure, allowing one subsidiary to lend to another. Intercompany accounts are maintained to track that debt, and interest is applied to them.

Apply for your place at our Treasury Dragons Virtual Round Table on in-house banking

REGISTER YOUR INTEREST

The logical progression is to a cash pool, where surplus cash is automatically centralised so that it can be put to best use. 

It’s at this stage that the number of intercompany flows - and associated banking costs - can start to rise. Netting helps to reduce those flows, which can be settled on intercompany accounts rather than bank accounts.

By now, the treasury structure is starting to look a lot like an in-house bank, but there’s one more stage before it ‘earns’ that title: FX management can be centralised, either by aggregated hedging (leveraging natural hedges) or back-to-back dealing (for better margins), with the resulting internal deals settled, once again, on intercompany accounts.
​
With that, our multinational has a robust platform on which to build, and can start adding new elements such as Payments on Behalf Of (POBO) and Receivables on Behalf Of (ROBO). With these in place, the need for bank accounts at the subsidiary level almost disappears. 

Even before we get to those extra benefits, the in-house bank can deliver cost savings by:

• Applying natural funding & hedging to FX
• Leveraging the better margins and negotiation power of one big entity rather than many small subsidiaries
• Maintaining fewer bank accounts

That isn’t all: central management of issues such as fraud and counterparty risk, and the corporate financing strategy, will lead to greater efficiency and control.​

With all these benefits, progress towards an in-house bank might seem inevitable. But for every corporate treasurer in a growing business, the decision to devote time and resources to going down this path is never an easy one.

Among the questions any treasurer should be aware of are:

• How will you convince local entities to use the services of the In-House Bank in a decentralised organisation?
• Tax, Legal and Accounting ramifications: what needs to be clarified, what limitations exist (such as netting restrictions or restricted currencies)
• Will the In-House Bank be a cost, service or profit centre?
• Is an In-House Bank really more efficient? You’ll need to compare the internal administration and maintenance cost against the cost of external banking providers.​

​One treasurer who has been through this process is Jeremy Hamon, now head of group finance at London-based Primetals Technologies. Back in 2015, he was the sole member of a treasury team with the ambitious target of setting up a new cash management structure based on the Coupa Treasury platform.

Case Study: Primetals Technologies
Industry: Engineering 
Geography: Headquartered in Europe, global operations
 
Challenges

• Establish a global and centralised treasury function with minimal staffing
• Introduce group-wide centraliszed cash management
• Optimise intercompany clearing, financing and FX trading
• Improve agility and returns via a payment factory

 
Solution

• Coupa Treasury

 
Results

• Complete visibility of cash, intercompany concentration and FX activity for greater agility as well as clarity in liquidity planning
• Payment factory setup resulting in seven-figure interest gains
• AI-powered fraud prevention for more than 200,000 payments per year​​

Improving risk management was a key objective of the project and, as Hamon himself says, ‘You can’t have good risk management without good cash management.’

​Today, the Primetals Technologies Treasury team is made up of 10 professionals within a company with more than 60 locations with 40 entities in 20 countries. It has achieved greater independence from ERP systems as well as increased its independence from banks (see box), and is poised to go further by adding what Hamon calls a ‘trade finance warehouse’ into the solution.
​
For companies who want to follow in the footsteps of Primetals, asking the right questions is an essential starting point.

Jeremy Hamon of Primetals will be one of the guests at a Treasury Dragons Virtual Round Table on 1st July, convened to discuss this topic and supported by Coupa. Corporate treasurers can request a guest place here.