How to Apply a Virtual Network Bank

When Arnold Voet took up his position in Aalberts’ treasury department, he was confronted with a group made up of a multitude of small and medium-sized companies. These units had – and were meant to have – a great deal of responsibility and entrepreneurial spirit. The main regional focus is on Europe, North America and Asia. The different companies that have now been combined are responsible for production and sales to realise leading technology/market combinations.

Core markets and organisational structures have a great impact on treasury. For example, FX risk is largely irrelevant for Aalberts, while refinancing in connection with further acquisitions has top priority. Moreover, each acquisition comes with specific banking connections. When Voet started making changes to treasury management, the group had accounts with over 130 banks. Prior to these changes, consolidation had not been on the agenda, with the treasury department mainly focused on more centralised responsibilities. Co-ordinating the co-operation between group companies was not considered a key responsibility.

When taking up office,  Voet set out to broaden the horizon and to establish a platform for all group companies – something that adds value to each company by supporting them in their daily operations. One of Aalberts’ guiding principles is fostering group companies’ responsibility and management’s ‘entrepreneurial spirit’. Group companies are clients of the head office, the latter staffed with only 25 people for the entire group – a very lean setup. In line with this principle, treasury is called to establish services that the group companies welcome and adapt accordingly. This included setting up a virtual network bank for the group in order to achieve an efficient banking structure.

What is a virtual network bank?

It is nearly impossible for a two-people treasury team at headquarters (supported by one accountant) to monitor accounts with 130 banks, and at the same time ensure maximum security and visibility.

Aalberts has to combine information from 250 locations, spread across 30 countries and 600 bank accounts. The virtual network bank approach allows the group to organise information in a way that provides central treasury with access to all accounts, while at the same time allowing them to efficiently manage accounts for local entities without taking over local payments operations. It goes without saying that taming this complexity, and the consolidation of the banking landscape that comes with this, are key elements of this project. Reducing the number of banks can potentially have the disadvantage of curtailing local services available to group entities. This might be a feasible approach in a centralised business, but it is by no means compatible with Aalberts’ philosophy. 

Against this backdrop, Voet  decided to select ten main banks that provide the best coverage and the most comprehensive local services in the relevant regions. The network approach of globally active banks, which is usually considered very important, is not one of the main selection criteria for Voet. What counts most is finding a bank that can provide a local entity with the best possible services to complement their day-to-day operations, in turn fostering acceptance with the group company in question. In this context, payment processing and cash pools in local currency are clearly important services. They are a must-have since the selected banks are all combined in one group-wide, standardised platform when it comes to submitting payment orders and receiving account statements. 

This standardised platform is where all payments group-wide are entered – either manually or imported from an ERP system. They’re then authorised and transferred to the banks via this platform. For the local entity, it is essentially irrelevant whether an account to be debited is provided by bank A or bank B. Either way, zero balancing cash pooling ensures current accounts are balanced on a daily basis. Consequently, any local bank could be replaced with any other bank at any time – provided they offer the same required services – without the group company even noticing.

What is in it for Aalberts?

Aalberts’ treasury department has combined a number of advantages in one concept, taking into account continuously falling transaction costs for account transfers between different banks.

Integrating the main banks for global payments was not achieved overnight, but the efforts were well worth it. Other projects and project stages are in the pipeline. For example, the US subsidiaries will use  Aalberts’ SWIFT connection, replacing the ever-popular cheque payments with electronic payment orders that are submitted to the banks via FileAct.

In-house bank for intercompany financing 

Following this approach has allowed Aalberts’ treasury to tame the complexity of their banking landscape on one hand, and to make group companies aware of the in-house bank that is responsible for intercompany financing on the other hand. In the past, both zero-balancing cash pooling and notional cash pooling were used, but Voet has decided to prioritise pooling cash in only one location. The main aim of notional cash pooling is the optimisation of interest, but there is no physical transfer of funds. Accounts previously integrated in notional cash pools to optimise interest are now being transferred to zero-balancing cash pools in the main currencies of EUR, USD and GBP with a total of 10 main banks. Aalberts has founded a dedicated company, Aalberts Industries Finance B.V., to manage the cash pool master accounts. Aalberts Industries Finance B.V. assumes all responsibilities of an in-house bank and provides all-around services to the group companies in connection with any banking issues.

Group companies take internal limits on in-house bank accounts into consideration, and refinancing provided by Finance B.V. from outside sources is clearly structured. Aalberts has signed bilateral loan agreements with eight out of ten main banks, in equal parts and on equal terms allowing them access to revolving credit lines worth EUR 800m. These preferably come in the form of an overdraft, in order to allow drawings to be initiated via SWIFT instead of paper drawing requests. Group Treasury ensures that all facilities are drawn at all times to a certain extent, thereby eliminating simultaneous debit and credit balances across the group.

Group-wide platform for better compliance

The whole concept of a group-wide network bank and efficient in-house banking necessitates suitable technology -  the centrepiece at the heart of all treasury activities. In line with the overall guiding principle of “How can I be the ideal business partner?”, any technology must prove that it supports headquarters and group companies alike. At the same time, Voet backs “Know your Business” and “Know your Transaction”  -  the only way for central treasury to be able to provide support exactly where it is required. He needs to have an overview of all payments and transactions and be in a position to monitor them in order to meet compliance requirements in the best possible way. There is also more and more focus on sanctions and embargoes, and satisfactory answers and suitable measures need to be found in this context.

Overwhelmingly positive feedback from the group companies, i.e., his clients, shows that Voet has hit the mark with his strategy. Initially a bit sceptical, the local entities are now very grateful that they no longer need to rely on Excel for interest computations on settlement accounts for local cash pools. Companies engaged in hedge accounting also welcome the fact that they have access to valuations and valuation units from the system at all times – based on derivatives and planned cash flows. Moreover, group companies, business segment management as well as central treasury have an online overview of all accounts, loans, leases, guarantees and outstanding FX contracts, both internal and external. Direct and reliable data is appreciated all around, not least by auditors. The number of users also reflects just how popular services via the centralised  platform are, having soared from 20 to 200. This number is estimated to double again within the next twelve months. 

Aalberts’ treasury department is not an isolated unit within the group. Voet, whose background is in controlling, describes his role as follows: “We’re part of the general financial setup of the group. We need to understand accounting; we need to understand IT; and we need to make sure that controlling understands us. Ultimately, we all need to collaborate so closely that we can each improve the performance of the overall organisation in our respective roles. Treasury cannot be looked at in isolation.” For Voet, this is an important prerequisite for the overall success of his project, treasury and the group as a whole. This attitude and his comprehensive approach have allowed him to achieve full visibility of all data required to continue his optimisation efforts.