In-House Banking No Longer Too Expensive or Complicated
By Rudolph Janse van Rensburg, Director and Head of Treasury Technology, TreasuryOne
Traditionally, the operation of an in-house bank was regarded by most finance executives to be the preserve of the largest corporations. Despite the many benefits of in-house banking, these structures were thought to be too expensive and complicated to add cost effective value for most companies. It will surprise some to learn that this is no longer the case: value-adding in-house bank solutions are now in the budgetary range of many medium-sized organisations. This is because of today’s availability of the necessary technology infrastructure and outsourced treasury services: these can be readily scaled and tailored to fulfil the core in-house banking needs of multiple varieties of the corporate finance department and treasury operation.
The key factor is scalability. This means that the required set of specific financial services such as centralised cash or FX risk management are delivered. Similarly, the technology infrastructure for communications and processing is centralised efficiently. Effective scalability means that corporate clients simply pay a licence fee for the provision of the functionality and services that they need, delivering economies of scale that are reflected in the low-cost delivery of demonstrably cost-effective solutions.
An in-house bank may be simply defined as an internal organisation which assumes some of the functions traditionally performed by external commercial banks, to provide enhanced performance, transparency and control. There is no clearly defined lower size limit for companies which can benefit from in-house banking; rather it’s a case of establishing a compelling cost/benefit analysis to justify the necessary effort and investment, to solve specific business problems. The driving financial factors include high levels of exposure of profits and earnings to operational and market risk, sustained liquidity concerns, escalating operational and administrative volumes and costs, and a range of financial control issues. As more and more efficient solutions become available, the threshold barriers for justifying in-house bank adoption have been steadily lowered, and positive cost/benefit analyses are becoming more and more common.
This article will explain some of the treasury and finance applications which frequently benefit from concentration in an in-house bank, and it will describe how various benefits are achieved in practice. It will outline how the key issue of establishing and resourcing a new in-house bank can be addressed - without over-stressing the organisation’s operational and financial resources.
Activities and potential benefits
There are many different financial operations where an in-house bank can add value. These naturally vary from organisation to organisation, depending on the nature of the underlying core business, the actual transaction volumes, the scale of the risk exposures versus revenue potential, and the incidence, nature and impact of operational and process inefficiencies. The following examples outline some contrasting in-house bank justifications which have been successfully used in different business situations.
This is often the primary focus for improvement. An in-house bank provides central visibility and control of cash resources. It delivers a complete and up-to-date cash position through the automated and standardised collection of current balance and transaction statements from a diverse network of domestic and foreign bank accounts. It validates the cash position using automated, rules-based account reconciliation. It provides the means to research and repair errors and omissions, so that the treasury or finance team can work confidently based on fully dependable information. This empowers the team to move cash accurately to where it is needed: this means that the business can be financed at lowest cost, borrowings can be minimised, and surplus cash concentrated for investment at the best available rates, in bank deposits and money market funds as authorised by finance policy. In-house bank automation eliminates much of the inefficient, error prone manual effort traditionally associated with cash management, and frees finance team members to concentrate on value-adding professional duties.