The rise and rise of the in-house bank

Apr 13th 2015 |

Companies had in-house banks (IHBs) long before the Single Euro Payment Area (Sepa) project was brought to fruition, but standardisation of EU payment formats has given IHBs a boost. It’s a structure that makes sense for many global corporates with operations in multiple countries.

Sepa has opened the door for more integrated and centralised payments for companies in Europe. The Sepa Direct Debit (SDD) has brought a uniform collections tool to all Eurozone countries and the Sepa Credit Transfer (SCT) is lowering the cost of European payments. Companies have been finding innovative ways to use these instruments. The virtual-IBAN is just one example of how Sepa has given rise to simpler payment and bank account structures within Europe [see page 9].

Econocom, the Belgiumlisted provider of B2B digital services, began restructuring its treasury function to incorporate an IHB after M&A activity. According to the company’s group treasurer, Françoise de Longueville, the centralised view that the IHB provides has brought benefits above and beyond the expected ones (visibility, control, efficiency). She explains that the IHB has been a big help with regard to standardising the group’s credit facilities: “When we negotiate a credit facility we provide documentation to the banks and now this process is managed centrally by the IHB, we know that the wording of the documentation is standard. This reassures our banking partners because they know we are giving each of them the same level of guarantee.”

Unique payment conditions

Another major benefit for Econocom was being able to negotiate unique payment conditions. Françoise adds: “Sepa has helped with this. Since the Sepa migration we have renegotiated all our financial conditions through the IHB, so it can provide better pricing to affiliates and costs are standardised across the company (with some country differences).”

Roche, the Swiss-based pharmaceuticals company, also has an IHB, which has given it full transparency and visibility over the group’s liquidity, with a structure that enables the internalisation of inter-company payments, resulting in major benefits not only in terms of reduced bank fees but also in process-efficiency.

Roche’s cash manager, Zampeta Fameli, says they have already seen significant benefits since Sepa. “I’m excited to see what will come out of Sepa. It could lead to benefits in other countries if the Sepa payment formats are adopted outside the Eurozone.”

Fameli explains that Roche’s intention is to centralise banking services completely for all its affiliates, to the point where it has bank-free affiliates. “Maybe it’s an ambitious idea, although, this is already happening except for credit card services and payroll.”

Denis Reneau, treasury IT support at Roche says: “In the past few years, affiliates would not be happy if they didn’t have their own bank. Sepa made it easier for our subsidiaries to do without a bank. Now they just have an IBAN and all cross-border payments have become more cost-effective with Sepa and they are processed centrally by the IHB.”

Outside the Eurozone

Companies operating mainly outside the Eurozone are also implementing IHBs. When US potash and phosphate company Mosaic set up its IHB for its Canadian entity, it was able to eliminate many of its bank accounts. Treasury manager Michael Crawford says: “It works very well. There are a lot of benefits, with significant savings in collapsing bank account structures. Our banks are getting the same volume, but we’re running one account rather than 30. This really helps to manage inter-company payments so there’s less movement of money between bank accounts.”

The company is in the process of extending the IHB structure to its US operations. One of the main benefits is that the structure enables the one central entity to manage payments and receivables for the numerous subsidiaries or affiliates, with considerable reductions in cash movements (and the fees, taxes and compliance this entails). Crawford adds that managing payables, receivables or collections ‘on behalf of’ smaller entities – abbreviated as POBO, and ROBO or COBO – through the IHB makes sense for global companies with numerous subsidiaries. “Many of our affiliate entities use the POBO or COBO services through our IHB because it maintains a more streamlined relationship with the banks. Many of these entities have a low volume of transactions and consolidating them into our IHB creates operational efficiencies.” While the ‘on behalf of’ services bring increased efficiency and savings, it’s not suitable for all business models. Econocom’s de Longueville explains that they aren’t using POBO/ COBO because a large part of their business revenues come from leasing contracts. “We have very different payment terms according to the different business lines and in most of the business, our services are leased. This means we rely on refinancing to pay suppliers, while customers have a lease contract. Having the IHB involved in this process would be too complicated and it would have no value for the IHB.”

THE FUTURE: POTENTIAL DISRUPTIONS

In-house banks (IHBs) are becoming increasingly common financial models for global companies, but there are clouds.

Dennis Hewitt, group treasurer at the global media advertising and marketing services group Omnicom says that the greatest threats to the IHB model would probably be currency restrictions, political sanctions and regulation. “We’ve been fortunate to operate in an environment with relatively relaxed cross-border regulations. We rely on ease of moving money across borders efficiently,” Hewitt says.

“Dodd-Frank could also be an inhibiting factor – it has been around for a few years but there is still uncertainty on how the US government will handle it in future – it could affect documentation and increase reporting requirements, which could be a burden for treasury back-office.”

Stephen Medhurst, director of treasury, Europe & Asia, at Omnicom, says: “Tax regulations such as the financial transaction tax, currently being debated in Europe, would have an effect on our current model of zero-balance cash concentration; a prerequisite for our IHB bank.”

However, not all future disrupters will have a negative effect on companies and their IHBs. “China remains the biggest growing market and further liberalisation of regulations will be very positive especially if it means we can move cash more freely and efficiently cross-border,” Medhurst says.

Mosaic’s Crawford is also hopeful that Sepa heralds more standardisation of payment instruments and messaging to come. He says: “I think the US should move in that direction and move away from the BAI files to XML. I also think that without more global payment standards, you’re going to see some nations struggling for a while – China specifically. If they want to continue being a world player, they need to think about aligning with more international standards.”

Ten years on, goodbye paper?

The US B2B payments industry will have finally said goodbye to paper 10 years from now, predicts Crawford. Econocom’s De Longueville also foresees some leaps ahead to mobile and digital payments. “We’ll see more electronic, digital and mobile payments through tablets and smartphones in 10 years. We’ll be moving away from computer and desk-bound payments,” she says. “People want things done quickly, automatically, with as little intervention as possible.”

But she notes that the future of the digital payments environment depends wholly on combatting the threat of fraud and creating a secure environment. “At Econocom we receive fraud emails almost every week. Security will be essential to the entire process in future, to guarantee that hackers can’t intercept files sent from company to bank.”

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