In today’s climate of economic slowdown with the cost of capital increasing, corporates need to maximise cash visibility, collect as fast and digitally as possible, while managing their payments in the most efficient way possible. An in-house bank (IHB) can help here, improving processes and lowering costs when it comes to funding, hedging, payments and cash management.

The webinar In-house banks: best structures to manage liquidity in testing times, hosted by The Economist and supported by Deutsche Bank, gathered expert panellists to discuss the benefits and approaches to creating in-house banking structures:

• Moderator: Lisa Dukes, Co-founder, Dukes & King
• Daniel Duriancik, EMEA treasurer, 3M
• Hans Petter Skjølås, VP, head of internal treasury, Equinor
• Jeremy Hamon, Head of group finance, CFO Primetals Technologies Financial Entities
• Dirk Kronshage, Head of client solutions, corporate cash management, Deutsche Bank

This article summarises the three key takeaways from the webinar:

• IHB can take different forms. Depending on the scope of activities covered, IHB provide several benefits.
• Given the flexibility and scalability of IHBs, starting from basic buildings blocks such as cash pooling is a sound approach, whilst maintaining flexibility for future extension at the same time.
• Companies need to watch out for several pitfalls when it comes to creating IHBs.

Lisa Dukes opened the webinar by noting that “in-house banking can mean very many different things to very many different people” asking the participants to share their definitions of an IHB and how the concept is used in their company.

In essence, an IHB involves creating a separate entity or department within an organisation that functions like an internal bank. “Our objective is to replace the interaction of our entities with banks in order to achieve two targets: cash concentration and cash centralisation,” explained Jeremy Hamon, Head of Group Finance at the UK-based steel engineering and plant construction company Primetals Technologies.

In the case of Primetals Technologies, the IHB covers all the treasury activities that are not regulated, Hamon added. Namely, this includes:

• Payments and collections on behalf (for over 90% of the companies’ payments flows);
• Intercompany derivative trading (with a book of over 10,000 derivates a year);
• Intercompany netting for receivables and payables; and
• Centralised bank guarantees.

Depending on the scope of activities covered, there is a long list of associated benefits. In general, IHBs act as a vehicle to streamline corporate treasury operations, enabling treasurers to manage the organisation’s cash concentration more efficiently, while minimising costs, optimising risk management and maximising control and visibility.

“Control and visibility over the cash generated across the whole company is of significant strategic importance”
Hans Petter Skjølås, VP, Head of Internal Treasury, Equinor

“Control and visibility over the cash generated across the whole company is of significant strategic importance,” said Hans Petter Skjølås, VP, Head of Internal Treasury at the Norwegian-state majority owned energy company Equinor. “An IHB can facilitate optimised liquidity management and funding, netting of cash balances and FX positions, reduced bank charges and bank relationships, reduced administrative burden, stronger risk and fraud protection, and facilitating cash forecasting.”

Against the recent backdrop of economic uncertainty, geopolitical upheaval and rising interest rates, there is a renewed focus on IHBs, Dirk Kronshage, Head of Client Solutions, Corporate Cash Management, Deutsche Bank said, “In the conversations we are having with clients, having full visibility of cash positions is consistently highlighted as a key focus, alongside managing risks and assessing the full potential for internal and external cost savings.”

There is a growing recognition that the efficiency with which a corporate can ultimately run its treasury function, is very often directly correlated with the number of bank accounts it maintains across markets, currencies and counterparties. Multinational conglomerates often still maintain hundreds of bank accounts, meaning that there is cash that the corporate may not always have visibility to, with counterparties that they may not be fully comfortable with, or in currencies that they would not want to hold for longer than necessary.

“This focus expands beyond the treasury function – with pressures coming from the working capital management side,” added Kronshage. For example, some customers are consciously looking to carry larger inventories to buffer supply chain uncertainties, which, in turn, ties more liquidity than before. Others, may be increasingly confronted with challenges in their distribution channels as buyers demand extended payment terms. “These pressures are unfolding their impact on available cash in the treasury function, which is another reason why efficient liquidity management is such a topical focus,” he reflected.

One aspect that featured regularly in the conversation was the flexibility of the forms that in-house banking can take. From one perspective, as Skjølås previously explained, an IHB structure is simply a more sophisticated form of cash pooling, increasing the visibility of a corporate’s cash position. It can increase in complexity all the way to a sophisticated global payments and collections on behalf of (COBO) system.

Starting from these foundational buildings blocks and increasing the complexity of the structure is therefore a sound approach. One potential initial step is to introduce virtual accounts into a broader IHB structure, with the resulting benefits from centralising treasury activities. Consolidating cash flow into fewer, or as little as one, bank account per major currency, “gives you an alternative to existing, physical cash sweeping, enabling faster access to information on liquidity positions, and consequently on optimising investments,” explained Kronshage. “Depending on the kind of industry you are in, you may want to process information about receipts closer to real-time, respectively to optimise the timing of your accounts payable by introducing more regular payment intervals.”

Furthermore, employing an existing virtual account solution simplifies the consolidation of a corporate’s disparate banking, cash management, and business activities quickly, without requiring extended periods where banking infrastructure needs to be built.

However, scaling up an IHB operation will involve active participation by internal stakeholders. “Integrating the IT department on the systems side is essential so that we are able to follow up on any pain points they might have at any given point in time,” said Skjølås. This is especially the case when working to consolidate it into, for example, an existing enterprise resource planning (ERP) system. Implementing a single format matching banking requirements to treasury systems vastly simplifies the internal usability, leading to a managed transition.

One challenge associated with an IHB is meeting the compliance standards for each region in which the corporate operates – a factor that is brought into sharp focus when you consider the potential benefits that a well-managed and centrally operated treasury department can generate. According to Kronshage, corporates need to operate with “the arm’s length principle in mind”. “In particular where intergroup lending or borrowing activities are concerned, you need to be aware of the legal, fiscal and regulatory boundaries you are operating in, which is why it is imperative to conduct the appropriate due diligences upfront,” he added.

“You need to be aware of the legal, fiscal and regulatory boundaries you are operating in, which is why it is imperative to conduct the appropriate due diligences upfront”
Dirk Kronshage, Head of Client Solutions, Corporate Cash Management,
Deutsche Bank

Consideration should also be given to the IHB’s location, and how different tax regimes and interest rates might impact the operation relative to the respective regulatory burden. “On a global scale, you want to look at countries where the level of withholding tax on interest income is lowest,” explained Hamon.

As the complexity of the structure increases, so do the regulatory demands. Moving from simpler virtual account solutions to a collections on behalf of (COBO) model may not be allowed in every jurisdiction. For example, in Korea, IHBs are complex to run because local corporates need to be sensitive to central bank reporting requirements. Maintaining simplicity in communicating with local branches is central to a painless transition. “The key objective is to convince external partners despite the difficulties of operating in certain regions,” said Hamon, “This is especially the case in scaled operations where it takes maybe 12 months from the moment you start informing your customers that your bank accounts have changed to seeing substantial receipts for your IHB.”

"In-house banks: best structures to manage liquidity in testing times," an Economist Impact webinar, supported by Deutsche Bank, took place on 5 October 2023. The full panel discussion can be viewed here.