• Cash Management

    Doing more with less

26 April 2021

More than a year on since the onset of Covid-19, the pandemic has made centralisation a top priority for many corporate treasurers and strengthened the case for using an in-house bank, reports flow's Graham Buck

Corporate treasurers have never been short of advice on how to extract opportunity from testing times and Covid-19 has presented the biggest challenge in decades, its impact for many surpassing even the global financial crisis of 2008–09. The pandemic has intensified the focus on business resilience, particularly in the early stages when companies had to suddenly adapt and employees were required to work from home full-time. So while corporates were already aware of the potential centralisation benefits of an in-house bank (IHB) before coronavirus upset normal business activity, the disruption has seen many take a fresh and closer look over the past year.

Bank account rationalisation

The strengths of IHBs are much the same as they were before the pandemic struck, notes Deutsche Bank’s Global Head of Treasury Automation Solution Dirk Kronshage. What has changed is treasurers’ priorities. Centralisation – most notably through bank account rationalisation – has moved to the top of their ‘to do’ lists. As he observes “For many corporates, the crisis provided further evidence that they are still using too many bank accounts and also, at its peak in late Q1 and Q2 2020, the painful realisation that they did not have full oversight when they possibly needed it most”.

Rationalising or reducing the number of external bank accounts held by the company helps treasury’s oversight by consolidating cash flow into fewer bank accounts, especially when driving such reduction by the usage of virtual account solutions.

A multinational corporation (MNC) typically holds anywhere between 250 and 450 bank accounts in a region such as Europe, so the potential benefits of account rationalisation and consolidating the cash flow spread are evident. As Kronshage explains, once cash flow is diverted from decentrally maintained bank accounts to a central treasury account this can greatly alleviate liquidity management. “You receive money straight away and direct it to where you want it, which allows for more accurate cash disposition. And you may be able to get a complete handle on your aggregate FX liquidity and associated exposures, as you can reduce the continued need for foreign currency-denominated accounts at a local subsidiary level, especially where those are presently maintained in non-core currencies”. However, it also creates the need for distributing account and transaction level information back to their affiliated group companies, in particular when these may no longer have a bank account of their own. And that is exactly where technology has a role to play.

With the period since early 2020 bringing home to many companies that centralisation could enable them to better manage their cash and liquidity, the case for setting up an IHB has been strengthened. Corporate technology, which for many years too often represented an inhibitor, has advanced significantly more recently. This has lowered the barriers to setting up an IHB, making it more of an affordable proposition for a broader range of corporates, while also opening up new possibilities such as “In-house banking as a service”  (IHBaaS). An IHB provides multiple options also for smaller firms seeking to improve their cash and liquidity management: some companies have a pressing need for improved cash visibility – one which has become more apparent since the pandemic – and have used it as the starting point. Others may focus their efforts on centralising payables and receivables or to insource intra-group flows among affiliated group companies. As the breadth of services provided to your group companies is increasing, this in turn may create a need for calculating and settling interest with your affiliated group companies, all of which can be supported by an in-house bank with the requisite reporting.

For larger corporations, which operate across a greater number of geographies, the additional appeal of an IHB solution lies in the ability to streamline and enhance internal controls, thus becoming more resilient. Apart from internal efficiency gains, this can also help to reduce the fraud potential.

Dirk Kronshage, Global Head of Collection Products, Deutsche Bank“For many corporates, the crisis provided further evidence that they are still using too many bank accounts… and for some the painful realisation that they did not have full oversight when they needed it most”
Dirk Kronshage, Global Head of Collection Products, Deutsche Bank

In-house banking as a service

A more recent development has been the introduction of IHBaaS, whereby a cash management bank provides the necessary technology backbone that corporates can leverage for establishing an IHB, yet without operating a heavy on premise technology solution. Deutsche Bank launched IHBaaS in several markets earlier this year and is extending it to further countries globally over the course of 2021.

Christof Hofmann, Deutsche Bank’s Head of Corporate and Payment Solutions, explains: “Our client conversations are consistently showing that this offering is of great interest to mid-sized corporates. But also MNCs are keen to leverage our solution in order to address some specific pain points that they may have in certain parts of their organisations. This holds particularly true as a bank operated offering is less reliant on availability of internal resources.”

Importantly though, regardless of the scope of change that a corporate intends to implement, the control around what is being implemented, in which sequence and for how many subsidiaries – as well as the day-to-day operations – continues to fully rest in the hands of the treasurer.

Beyond operating an IHB for a corporate, the underlying technology can also cater to other use cases that equally gravitate around bank account rationalisation, for example, in the factoring business or client money management. “For them it represents a huge step forward by providing the opportunity to eliminate potentially up to hundreds of bank accounts, which adds further to the wide spectrum of potential uses.”

Hofmann previewed, in a summer 2020 interview, how the Bank’s IHBaaS platform would operate for corporate clients. “Bank portals, can be replaced by our virtual solution, thereby reducing external points of entry and bank accounts to a minimum as well as consolidating cash flow of affiliated group companies,” he explained.

“Local entities can request to make payments via the central treasury entity, which are consolidated and executed by the IHB. Effectively, your central treasury team gains a fully-fledged cash and liquidity management tool that enables them to consolidate and operate your subsidiaries’ cash management activities on a single platform”.

Beyond centralisation – laying the foundation today for tomorrow’s changes

The pace with which treasurers need to adapt and change invariably differs among organisations. Yet “In-house Banking as a Service” provides them with the flexibility and agility to tackle their individual priorities in a sequence and at a pace that they can individually set themselves. Whether the immediate priority is to streamline payments processes, or to simplify liquidity management, or to automate inter-company loan and interest management, its modular structure allows treasurers to match the available functionality to what they need and in such manner that it complements, for example, existing treasury management systems.

Similarly, a leaner treasury management structure can help to facilitate the speed and ease with which treasurers can embrace present and upcoming payment innovations, such as SWIFT gpi or XML, to exploit their potential to the fullest.

“On balance, the centralised management of cash and treasury activities when facilitated through IHBaaS  allows you to consolidate cash, liquidity and even FX management across your organisation and can support the required intra-group accounting and reporting,” concludes Hofmann. “Moreover, it can provide greater agility to the treasury function, such that new solutions and technologies can be embraced and bundled quicker. Even when looking beyond day-to-day treasury operations, an IHB can also assist with reducing cybersecurity and fraud risks reducing as corporates manage cash flow through fewer external bank accounts than before.”

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