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. 

Cash management 

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. 

 

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Cash pooling 

Some organisations can benefit from using the in-house bank to manage account sweeping and pooling operations to optimise the usage of the available cash. The in-house bank uses internal accounts to track the contributions of the pool members, to calculate and apply the correct debit or credit interest, and to control the process. 

Cash forecasting 

An in-house bank can collect commercial cash forecasts across the corporate infrastructure, and construct forecasts of future cash shortages and surpluses by applying the forecast data to the cash position, the maturities of outstanding borrowings and investments, and committed future value payable and receivable flows. The organisation thus secures a dependable projection of the future liquidity scenario, so that management can take informed decisions on the planning of any necessary funding or investment programs based on enhanced insight into the organisation’s financial condition. 

Subsidiary finance 

Many companies use their in-house bank to provide low cost finance to their network of operating subsidiaries. The central visibility of current and projected multi-currency cash positions enables the in-house bank teams to organise financing operations efficiently and accurately, through cash transfers and the execution of inter-company loans, in compliance with tax legislation and regulatory requirements such as transfer pricing. The in-house bank delivers finance for commercial operations, and additionally provides the required administrative processes and reporting through centralised automation. 

More effective market dealing 

In-house banks can be used to perform all required external FX and money market dealing activities on behalf of the subsidiaries. The in-house bank can take advantage of any natural offsets to settle internally as far as possible, and then where permitted amalgamate deals to achieve best price execution in the market. The in-house bank can achieve superior results on behalf of the whole organisation. Further, the organisation eliminates the costs, overheads and risks of running multiple small dealing operations which may use individuals who are not experienced in effective financial market interventions. 

Central risk management 

The in-house bank can take advantage of its central visibility of financial exposure and risk to provide a cost effective and accurate hedging service for the company. Again, the concentrated expertise within the in-house can provide a superior, low cost risk management performance. 

Making the case 

It is clear that the detailed case for investing in a new in-house bank operation must be built systematically for each company, so that its specific business structure, transaction volumes, risk profile and operational priorities are all fully and properly accommodated. It is most likely that a given company will need to scale its in-house bank structure to fit its specific needs and priorities – and budget. The justification in one case might be the problems caused by inefficient cash management, leading to poor visibility and usage of cash, inaccurate reporting, and the incurring of unnecessary costs. In another, it may be the lack of transparency and control of financial operations, if they are distributed among non-specialist staff using insecure tools such as spreadsheets. In another case, poor quality exposure analysis and hedging performance may lead to ineffective risk management, resulting in excessive levels of profits and earnings volatility. 

In these and similar problem situations, the CFO or treasurer should consider working with internal and external finance consultants and specialists to perform a cost/benefit analysis of implementing an in-house bank solution for the most urgent issues. Discussions with industry peers who have implemented solutions to address comparable business issues will provide insight into how a compelling business case can be built. The details will reflect some local differences, but it is very feasible to identify parallels and to construct a specific case which addresses the most pressing needs and identifies the tangible improvements which would be realised by implementing the most beneficial in-house bank solution. Positive cost/benefit analysis is naturally essential, and the key is to focus on which treasury and finance solutions should be scaled into the solution to yield the most valuable ‘wins’. 

Not every company will be able to build a compelling justification: volumes may be too low, and risks may be found to be insignificant. However, companies which are succeeding and growing are likely to find a proportionate increase in their risk profile, and this can signal the change which justifies moving forward and establishing an in-house bank to improve results in key business areas. 

 

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Building the in-house bank

Many companies will need to work with their business partners to design and deliver in-house banking solutions which provide the required business benefits within budgetary constraints. This may require working with both internal and external resources to build the solution which best fits a given corporate environment and budget. 

The solution will have several components which need to be implemented harmoniously to achieve optimal results.These are:

Technology 

Robust treasury management technology to provide scalable cash, treasury, financial risk management and treasury accounting functionality, to deliver automated support for the business functions. The technology provides the control hub which schedules and manages the in-house bank workflows and provides the required reporting to fulfil operational, management and regulatory requirements. When evaluating different technology platforms, a detailed set of functional and technical requirements needs to be listed and each vendor meticulously measured against these criteria to ensure the business selects technology solution that will best meet and support the organisation’s needs. 

Integrating to the organisation’s ERP is particularly important for effective in-house banking as the treasury system can replicate the necessary GL entries for inter-company loan transactions and automatically post them to the GL – further enhancing straight-through processing, control and transparency of the in-house bank.

Communications 

The infrastructure to initiate and control the required information flows between the in-house bank, its clients (the operating subsidiaries) and third parties such as banks and accounting systems. Key data includes bank balance and transaction statements, deal requests, cash forecasts, accounting journals and customised reports. 

Human resources 

The dealing, administrative and specialist staff to provide the centre of excellence needed to add in-house bank value to the treasury and finance business functions. 

Implementation partner 

As much as functionality, cost and integration to third party systems play a significant role in selecting the appropriate technology platform, ensuring the most suitable partner implements the solution is often neglected. Vendor viability – in other words, the likelihood the implementation partner and product remain in business and functional for years after the implementation – should be the first critical consideration by any organisation. Secondly, the partner needs to have experience with designing and implementing a similar solution in your industry and geographic market and must preferably have resources based locally. The last key consideration companies need to consider when evaluating a partner that needs to implement their desired technology platform is its after sales and implementation support services. It is imperative that the partner has a dedicated local support desk to address any future problems or queries quickly and effectively. 

These resources need to be fully scalable to deliver the optimal solutions. Today’s technology is sufficiently powerful, flexible and functionally rich to deliver solutions which fulfil objectives accurately, efficiently and cost effectively. 

High quality professional resources are central to consistently delivering superior in-house bank performance. Smaller finance organisations may not have the necessary internal resources to cover all areas of expertise, in which case outsourced treasury services may be integrated into the team to cover the gaps. The economies of scale that can be achieved through working with a trusted professional partner enable the in-house bank to deliver the planned business improvements cost effectively. The team that is formed will be bound to follow the organisation’s treasury policy, covering controls and permissions, risk levels and credit exposures. The underlying technology controls and monitors the processes, secures the workflows, manages communications and generates real time reporting of all exposures, transactions and risk positions. 

 

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The strategic benefits 

The initial establishment of an in-house bank as described sets up an efficient financial management environment which provides specific solutions for the most pressing problems. Additionally, it provides future-proofing by putting in place a robust and flexible platform to meet the challenges of supporting continued growth and change. Such challenges will naturally vary according to each company’s business patterns and priorities: the key strategic benefit is that the organisation has at its disposal a powerful resource that will enable it to manage change quickly and effectively. There are many examples of what could be achieved, such as standardising and controlling payments through a payments factory, using expert resources to oversee financial risk centrally, and achieving the efficient administrative, control and treasury integration of new business acquisitions. 

The efficiencies which are now available through contemporary technology and professional treasury service provision now offer more and more companies the opportunity to make step change process and performance improvements through in-house banking, to enhance productivity, quality and profitability. These value-adding opportunities are now in the budget range of many more corporate organisations, providing a secure route to competitive advantage through superior operations and financial performance.  

 

 

Rudolph Janse van Rensburg Director and Head of Treasury Technology, TreasuryOne Rudolph is a leading expert on treasury technology with in-depth knowledge of best practice treasury set-up and treasury outsourcing models, as well as the integration with banks, ERP systems and other financial institutions. He has been involved in treasury management system projects for the past nine years and has completed more than 45 treasury implementations across Southern Africa, Europe and the Middle East. As Director and Head of Treasury Technology at TreasuryOne, he designs and delivers system demonstrations, performs needs analysis and solution design exercises, scopes and manages implementation projects, and is responsible for client relationship management.  Rudolph holds a B Com Accounting and a B Com (Hons) in Financial Management, from the University of Johannesburg.