Perfecting virtual account management with an in-house bank
A case study at the EuroFinance Strategic International Treasury conference showed how it is possible to leverage virtual accounts to enable a ‘collections on behalf of’ structure with an in-house bank.
Global healthcare company Roche has an established record of innovation, with a CHF11 billion R&D investment budget powering 30 R&D sites around the world. This approach to innovation is also seen in its treasury function, where the centralised set-up in Basel sees 25 staff providing worldwide treasury solutions for the CHF56.8 billion organisation.
“We also have a dedicated IT team of 8 people that help us with daily operations, two of whom are purely developers” said Stefan Windisch, Senior Cash Manager-Treasury Operations at F. Hoffmann-La Roche. “This gives us much more flexibility for our in-house bank treasury system – we come up with an idea and they translate it into a technical solution”.
The in-house bank at Roche operates in an SAP environment, and connects to 15 ERP systems, to trading platforms for FX hedging, and connects via SWIFT to the company’s cash management banks and other financial counterparts.
The in-house bank covers all aspects of treasury within the group. “We are currently connected to 232 cash pooling participants, and to our customers’ companies in 48 countries” said Windisch. “We offer 46 currencies, actively managing 30. We now have around 70 companies that have no direct bank account access – their bank partner is the in-house bank”.
Becoming the company’s bank
The basis for Roche’s banking principles today is that it does not need bank accounts at a local level. Rather, they look for key banks that can serve multiple products in multiple markets.
“We built up cash pooling and centralised bank statements to understand what is happening in the bank accounts” explained Windisch. “Communication between Roche and a bank only happens through our system”.
The next step involved putting the company’s entire payments process – low value payments, high value payments, and treasury confirmations – into the SWIFT network. This provided visibility and increased automation. Whenever a payment was entered and executed in a local SAP system, it was reported to the treasury SAP system, alerting the team which currency is needed and when.
From there, Roche started making foreign currency payments-on-behalf-of (POBO). “If our Australian entity was paying for something in the US in dollars, under the old process they would set the payment instruction at their bank, the Aussie dollar account is debited, the payment goes around the world picking up charges and deductions, and whatever was instructed actually doesn’t arrive” Windisch commented. “With the in-house bank in place, the payment is instructed to the in-house bank and this decides on the executing account, in this case it would go to the US account and be executed as a domestic US dollar payment”.
Tackling a collections challenge
Having managed POBO with the in-house bank, the next step was to look at receivables-on-behalf-of (ROBO), something that was prompted by a bank relationship issue.
“We faced a situation in one of the Baltic countries where a bank gave us three months notice that they would pull out their business” Windisch reflected. “We had a requirement to either use another local bank or to serve the entire banking business from outside the country”.
The Roche treasury was able to use the single euro payments area (SEPA) to create a solution. SEPA states that an international cross-border payment should be no more expensive than a domestic payment. Therefore the company could ask its customers to pay to a Roche bank account outside of the country with no disadvantage to them.
“This meant we had to find this account and then make sure that the reconciliation worked and we could understand which part belonged to which entity” said Windisch. “Back then we were already using a virtual account, which was offered by Deutsche Bank, so we were able to create an entire virtual account structure in Frankfurt and have our customers pay in to that. Our in-house bank had to enhance its location logic to ensure this was properly done”.
The company’s use of POBO and ROBO combined with the in-house bank means that any need for regional treasury centres is completely redundant, saving considerable cost and effort. “We currently have more than 70 bank-free entities around the world, mostly in Europe and Asia, and are going live almost every new quarter in additional countries” said Windisch.
Understanding virtual accounts
Virtual account offerings differ from bank to bank and can also be offered by certain third-party providers.
“In terms of what is standard – there is always a physical account involved” said Windisch. “Virtual account transactions are effectively shadow transactions on a real account. We mainly use them for collections, but payments with virtual accounts are also possible. It is critical if you’re a treasurer looking at virtual accounts that you understand what your actual needs are”.
Virtual accounts not only offer a way to drastically reduce the number of bank accounts a company holds, but also their number of partner banks. As the example from the Baltics shows, Roche was able to cut some smaller local banks in countries where their core banks were not present, as the ‘on behalf of’ structure allowed them to move this business to their core banks, serving those entities from outside the country.
“If you want different divisions in your organisation to have access to an individual bank account, you can set this up with virtual accounts” said Windisch. “This can become tricky if you have different names between the physical account and the virtual account holders, which is something to consider from a compliance angle”.
Another consideration is the system that treasury runs the virtual accounts process on, according to Windisch: “This requires a strong ERP system. Where we take out the local bank, treasury becomes the only contact and therefore you can be inundated with every question that the local entity has”.