Published: January 01, 2000
Setting up an in-house bank is an exercise worthy of consideration for any multinational corporation with operations in multiple countries. This type of structure is one of the best cash management tools to emerge in the last five years and can help companies to more effectively concentrate cash, improve compliance and risk management, and improve efficiency and control. In-house banks are generally easier to set up than payment factories and can help companies gain better visibility over their liquidity and their funding of transactions.
In Europe and North America, in-house banking has become commonplace allowing companies to carry out a wide range of different functions using this type of structure. In Latin America, the situation is somewhat different. While some countries within the region are becoming better suited for in-house banking, there are others that are unable to support this type of model. Due to changing regulatory requirements, it’s crucial that companies pay careful consideration to those changes before embarking on such a project in the region. In-house banks have a legal and fiscal element that has to be considered.
The objective of an in-house bank is to provide a structure within the company which is able to perform some of the services that would otherwise be provided by an external bank. These could include both external and inter-company payments, foreign exchange (FX) transactions, the management of inter-company loans and liquidity management, among other things. By setting up an in-house bank, a corporation should be able to improve visibility over its cash flows, reduce the need for liquidity in intercompany transactions, reduce external bank fees, improve straight-through processing rates and increase efficiency.
An in-house bank is not the same as a shared service centre, which can carry out a range of business services for the corporation, aside from financial processes. Nor is an in-house bank the same as a payment factory, which has the sole purpose of centralising accounts payable – although an in-house bank may include a payments factory within its structure.
A company may put in place a single in-house bank, or multiple structures in different regions. An in-house bank located in Latin America can also be integrated into a standardised in-house banking structure in another region.
For a number of reasons, in-house banks in Latin America tend to look a little different to their counterparts in other regions. Due to the diverse regulatory climates within the region, cash management in Latin America is typically more fragmented and more complex than in some other regions. This has an impact on what companies can achieve when setting up an in-house bank.
In some countries, including Mexico, Panama, Uruguay, Chile and Peru, regulation is relatively open and a wide range of functions can be undertaken using an in-house bank. In other countries, such as Argentina and Venezuela, cash concentration is not permitted and the currencies are non-convertible – meaning that in-house banking is not a practical solution in these markets. Brazil and Colombia have restricted, non-convertible currencies, but are allowed to hold non-resident accounts abroad. Such accounts could potentially be integrated into cash concentration structures, either notional or physical zero balance account (ZBA).
As a result of this diversity, it is likely that an in-house bank covering the region will not be able to support 100% of the company’s transaction volumes – unlike Europe, for example, where full coverage may be possible. Nevertheless, while an in-house bank in Latin America may not be as comprehensive as equivalent structures in other regions, it can still be a very effective tool within the region.
Aside from regulation, technology is also an important consideration for companies setting up an in-house bank. One of the objectives of an in-house bank is to create efficiencies in the back office, which means that external transactions have to be cleared by the company’s in-house banking system. This can be achieved by putting in place a good system whereby bank files can be put into the enterprise resource planning (ERP) system, or treasury workstation (TWS), and processed before being sent back to the legal entities within the organisation.
Because technology, including technology used for bank communication in Latin America, is often not standardised, this is an obstacle for companies looking to establish this type of structure in the region. One solution is to use a banking system which can act as a gateway to other banks’ files and thereby facilitate integration. In general, technology within the region is improving greatly – especially through the use of treasury workstations, host-to-host banking, straight-through processing and large ERP systems. The introduction of electronic invoicing can facilitate the setting up of an in-house bank, especially in Mexico, Peru, Chile and Brazil where e-invoicing is more advanced.
A third consideration is that, at a global level, in-house banking is often undertaken with respect to a single currency – for example, in-house banking may be set up to cover US dollar transactions, or euro transactions. In Latin America, the situation is more fragmented. Many of the region’s countries have their own currencies, and a number of these currencies have significant restrictions attached. Over the past ten years we have seen the countries of Latin America move away from setting up in-house banks in a single currency, to being able to accommodate multiple currencies in the region.[[[PAGE]]]
These factors notwithstanding, the good news is that in-house banking can bring a number of benefits to companies in the region. This type of structure can still provide better visibility into a company’s activities, beyond the liquidity scope of the in-house bank.
An in-house bank can also help companies to achieve better compliance. It is usually easier for companies to undertake compliance on a centralised basis than it is to have every local treasury responsible for its own compliance, particularly because local treasuries may only have visibility over what is happening on one side of a transaction.
When it comes to Latin America, the best guideline is to first aim for the low-hanging fruit. By focusing on the easiest countries first, a company may be able to migrate 80% of its volumes and then tackle the remaining 20% in a later stage. In practice, regulatory restrictions may mean that it is not possible to include 100% of a company’s volumes within the structure, depending on its geographic footprint within the region.
It is important to be realistic about the likely timing of the project when planning to set up an in-house bank. For one thing, a substantial amount of time and resources will be required to work through compliance and regulatory issues. The process of opening accounts is also likely to take a significant amount of time – possibly up to a year. The project will include a fiscal and regulatory component, a liquidity component, and a bank communication component. These will be followed by a contractual component, including guarantees and comfort for daylight overdraft lines. Companies can greatly reduce the time required for all of these components by planning the project in advance with their core banks.
When setting up an in-house bank in Latin America, companies will find they can be much more efficient when appointing a dedicated project leader, as well as dedicated IT and legal resources to the project. Another essential step is to obtain buy-in from senior management, sales and purchasing, and other internal clients or users. In-house banking is a project which should not be undertaken in isolation: the structure will have an impact on all of the corporation’s organisational arms and, as such, representatives from other departments should be regularly updated and consulted throughout the process.
In order to get buy-in from these parties, the project leader should build a persuasive business case outlining the benefits an in-house bank is expected to provide, the main objectives of the exercise and ways in which the success of the project will be measured.
Once the planning stage has been completed, the steps involved in setting up an in-house bank will include standardising and making compatible all of the company’s bank accounts and getting visibility of all of them in the same place. Suitable technology will need to be put in place, such as a TWS, ERP system or SWIFT connection. The legal structure will also need to be established should include a shared cash and interest agreements as well as service level agreements. Depending on the company’s requirements, some aspects of the project may be outsourced to a third party. Choosing the location of the master account holder that eventually becomes the in–house bank, has important regulatory and fiscal consequences.
Finally, the structure needs to be executed and controlled. During the implementation process, the project team should monitor any tax or regulatory changes within the region which could impact on the project. Once the in-house bank is fully up and running, the company should continue to monitor any changes in market conditions which could affect the way the structure operates. Additional changes to the company’s structure, such as new acquisitions, should also trigger a review of the in-house bank in order to keep the structure as efficient and relevant as possible.
Setting up an in-house bank can be a daunting prospect, no matter the region. In Latin America, the diverse regulatory and political climate can add time and complexity to the task. This should not detract from the substantial benefits companies can gain by putting in place this type of structure. As long as the considerations specific to the region are fully understood, companies can use an in-house bank very effectively to reduce costs, improve efficiency and increase control over their financial processes. A trusted bank can help navigate even the roughest seas.
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