Extending the Value of BAT’s In-house Bank 

By Philip Stewart, Head of Cash & Banking, British American Tobacco plc

 
British American Tobacco (BAT) has been engaged in a multi-year, multi-disciplinary project to create a target operating model across the organisation. As part of this, we have undertaken a comprehensive global treasury centralisation and in-house banking project in partnership with Deutsche Bank to maximise visibility and control over liquidity and risk positions, and optimise the operational efficiency of our transaction flows. Key to the success of this initiative has been the use of on behalf of (OBO) techniques and Deutsche Bank virtual account and virtual IBAN solutions, as this article outlines. 

Project background

A key strategic initiative over recent years has been project ‘TaO’, underpinning BAT’s global strategy and supporting strategic pillars of productivity and growth. TaO introduced a new target operating model enabled by one instance of SAP across all markets within the group. 

In the past, we had a decentralised treasury model with fragmented systems and disparate processes, resulting in a lack of visibility and control over cash. Through this project, however, we were able to: centralise treasury activities more fully, migrate all transactional activity to our finance shared service centre (FSSC) in Bucharest; introduce an in-house bank for intercompany flows; improve visibility and control over cash /FX exposures; adopt a consistent set of treasury key performance indicators (KPIs), and enhance cash flow forecasting. We also reviewed and refined our banking panel and rationalised our bank accounts, standardised payment formatting, payment processes and bank statement processing. 

Extending the value

Having established the foundations of a centralised treasury and in-house bank, the logical next step was to extend the reach of the in-house bank into third party payments and collections. This involved adopting payments on behalf of (POBO) and collections on behalf of (COBO) techniques (described in Box 1), with a central treasury vehicle (BAT International Finance plc) acting as agent. We selected Deutsche Bank as our partner based on our trusted relationship and the bank’s high quality solutions and footprint, but also specifically due to the bank’s proven virtual account/IBAN solutions, with large volumes of transactions already passing through virtual accounts. In addition, we found that not all banks were able to provide MT940 reporting on virtual accounts which was essential for us in minimising disruption to the SAP template while integrating data for automatic reconciliation.

The project spans Asia and Europe with a different structure in each region to reflect different distribution models. In both regions, we have replaced physical bank accounts with virtual accounts/IBANs (see box 1) with comprehensive visibility and integration of bank account information via MT940 reporting into SAP for reconciliation and account posting.

In Asia, BAT International Finance operates on behalf of structures for group entities in Hong Kong, Singapore, Australia and New Zealand. In Singapore and Hong Kong, we have virtual accounts on a hierarchical basis in the name of both participating entities and individual customers. Each customer has a unique virtual bank account number. This is very helpful in identifying incoming flows more precisely and reconciling and posting these payments promptly. 

In Europe, POBO and COBO techniques have been rolled out across 20 countries. We sell to a small number of distributors in each country, so we have a virtual IBAN per entity with the flexibility to introduce additional layers to customer level as required.

 

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POBO and COBO   POBO Under a POBO arrangement, the SSC (or other centralised function) makes payments ‘on behalf of’ group entities through a single account (usually per currency). Payments are then booked on the originating entity’s intercompany account. The entity on whose behalf a payment is made is identified in the remittance information, so the beneficiary can identify and reconcile the payment. POBO extends the value of an in-house bank as follows: Transaction fees can be significantly lower as payments can be routed domestically rather than cross-border; The total number of external bank accounts can be reduced; By reducing the number of accounts, less administrative effort is required for bank account management, costs may be lower through economies of scale, and the company achieves better control and visibility over cash; With fewer accounts, liquidity management is easier, avoiding the need for complex pooling structures or interbank transfers. COBO Under a COBO arrangement, the SSC (or other centralised function) receives incoming payments ‘on behalf of’ group entities through a single account (usually per currency). These are reconciled centrally and booked on the beneficiary entity’s intercompany account. COBO extends the value of an in-house bank as follows:   The number of external bank accounts can be reduced, offering the benefits outlined above; The value of COBO can be extended by introducing virtual accounts. This allows the company to provide local account details to a customer that resembles an external account but remittances are then routed automatically to the central collections account. This provides customers with the reassurance and convenience of paying to a local entity, whilst providing the company with the advantages of a central account; Virtual account numbers (which can be defined at an entity level right through to individual customer level) can then be used to reconcile the account and post incoming flows to the relevant intercompany account and update the customer credit account automatically; By reconciling and posting flows promptly and automatically, customer credit is released quickly, allowing more business to be done.

Project outcomes

With Deutsche Bank’s help, we implemented our POBO and COBO project very quickly. For example, our implementation in Asia began in early 2016 and we completed it in August. In Europe, we started in March 2016 and went live in November. The project has been a major driver in enabling us to reduce our number of banks, and number of bank accounts. Previously, we had relationships with 20-30 banks in both Europe and Asia. Today, we have one core bank in Western Europe, and 2-3 in Asia. As a result, we have been able to consolidate and strengthen our relationships with these primary banking partners such as Deutsche Bank, which is our sole bank in Western Europe and one of our partners in Asia.

We have achieved high levels of straight-through processing for outgoing payments and straight-through reconciliation of incoming flows, delivering substantial additional efficiency to our business. Furthermore, by creating an adaptable OBO model that already encompasses diversity across markets, we have the flexibility to expand the reach of our in-house bank to new markets in the future, whilst also accommodating changes to the tax and legal environment in each location.

Based on our initial calculation, we have generated in excess of £2m per annum in external cost savings alone, including transaction and bank account maintenance costs, in addition to significant internal efficiencies.

Overcoming challenges

BAT was one of the first corporations to introduce OBO techniques in some markets in which we operate, particularly for COBO. In addition, it represented a major change for our business which we needed to handle carefully:

Communication. While extending the in-house bank to operate on an OBO basis is a technology project in some respects, the human aspects of the project are just as important. In particular, it was essential to communicate effectively across the business to ensure cross functional alignment and gain FSSC /participating entities’ buy-in.

Tax and legal. Although OBO is not about tax optimisation but process efficiency, the tax and legal implications need to be fully assessed on a market by market basis. In Australia, New Zealand, Singapore and Hong Kong, for example, we had conducted our due diligence and first implemented the in-house bank for intercompany payments and then extended this to third party payments. We adopted similar approach in Western Europe and are now exploring additional markets to roll out the solution with approval now finalised to extend to Malaysia.

 

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Bank and market diversity. Although POBO is relatively well-known and well-established in many markets, COBO is less familiar so the challenges are greater. We were surprised at the differing levels of awareness and capability amongst banks, with some only now starting to put COBO /virtual account solutions in place, and inconsistencies across markets including SEPA zone (Single Euro Payments Area). Using virtual accounts with MT 940 reporting was crucial, and as such, our relationship with Deutsche Bank, that excels in these solutions, was a major factor in our project success.

Project scope. It is also important to set out the scope and objectives clearly upfront, e.g., countries, banks, currencies, payment methods, virtual account structure, regulatory impact. This is important in maintaining focus and defining project tasks clearly.

 

“BAT is a key strategic customer for Deutsche Bank and this project has been a significant initiative at the bank. A major factor in BAT’s project success, and the significant financial benefits that have resulted, is Deutsche Bank’s well established, proven virtual account and virtual IBAN solution. This includes virtual account reporting integrated into BAT’s SAP platform for automatic reconciliation. It has been a privilege to work with Phil and the rest of the team on this project, and we look forward to building on our partnership to deliver further value to the organisation and reinforce BAT’s position as a leading treasury function globally.” Paul Greenhalgh, Director, Cash Management, Deutsche Bank

Sharing experiences

BAT has been one of the early adopters of POBO and particularly COBO in many of the 25 markets we have implemented so far. This took a ‘leap of faith’ in many respects, but the value of Deutsche Bank’s support in terms of advice and expertise, the quality of the bank’s solutions, integration and STP capabilities, and footprint across our key markets cannot be overestimated. In this situation, it is important not to be scared of change and complexity. Indeed, by implementing a solution that was arguably more complex than it could have been, we have been able to extend the value of our in-house bank operating on an OBO basis to a wider range of markets. In addition, we now have the flexibility to extend and adapt to changing business needs, market developments and regulatory requirements in the future. It was a credit to both the internal team, and our external partners, that we were awarded the TMI Corporate Recognition Award 2016 for this project. 

 

Philip Stewart Head of Cash and Banking, British American Tobacco plc Phil Stewart is Head of Cash and Banking at British American Tobacco, joining in 2013. He is based in London and is responsible for developing and delivering the group’s cash and banking strategy, taking the treasury lead on working capital optimisation initiatives as well as managing the Treasury Settlements, In House Cash and Bank Account Management teams that form part of Global Treasury Operations based in Bucharest. Before joining BAT Phil held a number of Assistant Treasurer roles most recently at EasyJet.