Cost and process efficiencies remain top priorities for thefinance function, but some organizations are passing up theopportunity to gain better control of companywide cash throughin-house banking. IHB can help companies of all sizes improveprocess efficiency, reduce costs, and realize greater control overtheir cash. Still, there's a great deal of resistance to in-housebanking within some organizations, typically stemming from concernsabout regulations, controls, and restrictions on intercompanyrelationships intended to block tax dodging.

It's true that IHBs require extensive supporting documentation,as well as proof that relationships between affiliated entities areappropriately arm's-length (e.g., appropriate interest rates onloans) to achieve regulatory compliance. Essentially, companiesmust take steps to prove that they aren't using in-house banking toavoid taxes in the jurisdictions where they have operations. Whenthey take these steps, the benefits are typically well worth theeffort.

Shifting IHB Options

In-house banks are most commonly used by large, multinationalcompanies that have complex external bank account relationshipstructures, large numbers of affiliates within the enterprise, andsubstantial volumes of both vendor payments and intercompanyinvoices. Historically, these were the organizations that hadadequate resources to manage many of the same activities ascommercial banks, but via manual processes and spreadsheets.

Old-school IHBs provided internal account holders with resourcesand services such as centralized intercompany and third-partypayment and receivable processing, liquidity management, foreignexchange (FX), and internal lending and borrowing facilities. To doso, the treasury and accounting teams on the back end interactedwith a variety of disparate, standalone systems for banking,payables and receivables management, intercompany invoicing,intercompany loan tracking, FX trading, and market data management.Most smaller companies didn't have a large enough staff to take onthis work, which was time-consuming, subject to error, difficult toreplicate, and complex.

Today, however, widely available IHB technology has changed theback-end processes, making management of an in-house bank much moreautomated, efficient, and effective. It's not possible to build anin-house bank using IHB solutions alone; an in-house bank requiresfoundational structures and contractual relationships establishedby the treasury, finance, and legal departments. However, thetechnologies available today make in-house banking feasible forcompanies that are far less complex than the giant multinationalsthat originally developed the concept.

There is no easy,one-size-fits-all model for constructing an IHB or deciding whichprocesses should be included. There are an infinite number ofpossible variations. For this reason, the development of anin-house bank typically requires the engagement of an outsideexpert who can guide the organization through the necessarycomprehensive analysis of its particular business requirements,objectives, and priorities.

What is common across all organizations working to design anoptimal IHB structure: They need to analyze their internalcorporate and external banking structures, the objectives of theirintercompany financial relationships, the breadth of their needsaround payment and receivable processing, their governance policiesfor FX exposure management, and tax and legal regulations for therelevant countries of operation.

The most critical decisions typically pertain to which legalentity or entities should serve as the in-house bank owner(s);which processes should be included; whether the IHB should bestructured as a profit center; which entities, from whichcountries, should participate in the IHB (and for which processes);and who should be held accountable for FX exposures.

POBO, ROBO, COBO, and Cash

As technology has made IHB structures more feasible for smallerorganizations, the increasing international standardization ofpayment formats has paved the way for greater centralization ofpayment processes. Driving this trend are the Common GlobalImplementation (CGI) initiative, which promotes wider acceptance ofISO 20022 XML as the international standardformat for payments, and Europe's Single Euro Payments Area (SEPA),which has greatly simplified bank transfers denominated in euros.Together, these changes in payment regulations have opened up newpossibilities for companies to streamline their accounts payable(A/P) and accounts receivable (A/R) processes and have incentivizedcompanies to set up payment and collection factories.

To take advantage of these expanding opportunities, in-housebanks can serve as payments-on-behalf-of (POBO) and receivables- orcollections-on-behalf-of (ROBO/COBO) service providers. Whencombined with the right IHB structures, the POBO and ROBO/COBOmodels enable an organization to centralize, consolidate, andrationalize its bank accounts and banking relationships to providegreater control, increased levels of transparency, and reducedbanking costs.

Organizations wanting to incorporate POBO into their IHB shouldlook for IHB technology that seamlessly integrates with their A/Psystem and enables automated payment optimization. The softwareshould be designed to evaluate the specific requirements of eachexternal payment, then determine the most effective bank accountand least expensive payment type (e.g., wire, ACH, SEPA) which willwork for that particular transaction. The IHB solution should alsoaggregate payments of each type and automatically route them forexecution.

On the liquidity management front, an in-house bank serves asthe organization's global cash pooling center, allowing corporateaffiliates to deposit funds when they have excess cash and withdrawfunds when they need additional cash flow to cover expenses. Whenconsidering IHB solutions from the perspective of liquiditymanagement needs, a treasury team should seek out technology thatwill integrate seamlessly with their bank statement managementsystem, to allow for automated capture of cross-company pooling andfunding activity. They should also ensure that the technologyincludes robust loan management functionality that will fullyaccommodate the wide variety of interest calculation models andwithholding tax requirements typically encountered with a globalin-house banking solution.

Settlement of Intercompany Invoices

Another key function of an in-house bank is streamliningsettlement of invoices between internal entities. In most largeenterprises, affiliates generate invoice activity for goods andservices through their normal course of business. The number ofinternal bilateral relationships, and the volume of intercompanyactivity, can be immense. When appropriate, an IHB solution cansupport these activities as well, especially when the technology isembedded into the organization's core enterprise resource planning(ERP) system.

In an optimal structure, the IHB solution completesmultilateral, multicurrency intercompany settlement viastraight-through processing, from end to end, and finalizesintercompany transactions using book (accounting) settlement,rather than cash payment. Straight-through processing fullyautomates the matching and clearing of the intercompany A/P and A/Rinvoices being settled, which results in substantial efficiencygains for most organizations.

When considering IHB management solutions from the perspectiveof intercompany settlement processing, treasury professionalsshould look for technology that will integrate seamlessly withtheir A/P and A/R systems. The software should also include robustalgorithms that automate invoice matching and clearing. Withoutdirect integration or sufficiently robust algorithms, theend-to-end automation is much less likely to be successful,increasing the need for manual intervention and materially reducingthe solution's efficiency.

Companies new to in-house banking may be disappointed todiscover that some legal entities around the globe cannotparticipate fully in automated IHB intercompany settlement. Manycountries' regulations and tax laws prevent legal entities withintheir borders from fully participating in multilateral netting andbook-settlement processing. Businesses domiciled in some countries,especially in Latin America and Asia, are explicitly prohibitedfrom participating in these processes. Other countries placecorporate IHB structures under such onerous requirements forcentral bank approvals that entities within their borders are, ineffect, unable to participate.

At the same time, some jurisdictions restrict companies fromnetting payables against receivables. A physical cash settlementmay also be required. Affiliates in these countries may stillbenefit from participation in IHB processing, if they are able tomultilaterally aggregate their intercompany payables andreceivables. They may not achieve every benefit of IHBparticipation, but multilateral netting can greatly reduce theirvolume of physical payments, and they can still benefit from theIHB solution's straight-through processing automation andreconciliation of invoices.

Successful navigation of global regulatory restrictions andrequirements requires treasury to engage the assistance of theorganization's tax and legal departments.

Fraud Protection

An in-house bank also has the potential to reduce theorganization's risk of fraud by:

• Employing technology and financial systems that minimize manualintervention by employees around the world, thus maximizingcentralized control by the treasury group over banking activitiesacross the organization;
• Establishing consistent processes, governance, and controlsover payment activities, which helps ensure that oversight iseffective and payments are transparent; and
• Consolidating bank relationships, bank accounts, and globalcash, to provide better visibility and fewer opportunities forfraudulent transactions to occur.

Advances in artificial intelligence (AI) and robotic process automation (RPA) now also makeit possible to tightly integrate comprehensive fraud protectionalgorithms into the centralized in-house banking POBO paymentmanagement process. These technologies enable wide-ranging analysisto be performed on underlying payment data, to identify and drawattention to potentially fraudulent transactions.

For example, the algorithms can search for payments in amountsthat are slightly below the threshold for additional approvals, orfor payments that are made to a vendor directly following a changein the beneficiary payment instructions stored in that vendor'smaster record. Transactions that meet these descriptions might befraudulent, and the algorithms can draw extra attention to them, toensure they receive additional review.

Tips for Implementing an In-house Bank

In the ideal scenario, a company's in-house bank serves as thenerve center for the treasury function and as the hub for liquiditymanagement and payment activities enterprisewide. Businessobjectives behind establishment of an IHB structure often includeimprovement of governance controls and compliance, standardizationand automation of processes, establishment of effective bankrelationship management, optimization of global liquidity,increased efficiency of internal and external financing andinvestment, and mitigation of the FX and tax impacts of globaloperations.

These are laudable objectives for nearly every organization. Toachieve these goals, treasury teams should ensure that theirin-house bank implementation follows a few best practices:

1. Consult with affected groups throughout theorganization. The tax and legal functions are key inthis process; failing to consult them early in the design of anin-house bank can lead to serious issues down the road, such asunexpected tax liabilities or financial penalties for not adheringto statutory requirements in individual countries.

In addition, many organizations are already using someIHB-related functions—such as POBO, ROBO/COBO, or intercompanynetting—but may be using these processes in a narrow and limitedmanner, rather than considering them from the perspective of a morebroad-based IHB model. A discussion among the relevant stakeholdersshould help treasury staff uncover where the organization stands ineach area that they want to transition to a more comprehensivein-house banking solution.

2. Tap external expertise to ensure solutionoptimization. Once the treasury team consults otherinternal stakeholders to get a lay of the land, the organizationmay benefit from engaging a trusted external consulting adviserwith expertise in the in-house banking space. The guidance andinsight of an expert may accelerate the team's analysis of aproject's potential; help in building a business case; and bring tolight any potential challenges, pitfalls, and risks. Additionally,the adviser should be able to provide guidance on how to optimizeIHB management technology and integrate it with the organization'sbusiness processes.

3. Implement incrementally. It oftenmakes sense to approach implementation of an IHB solution insmaller, more manageable chunks, rather than in one big bang. Thus,the organization would focus on a particular geographic region orchoose a group of countries in which corporate entities stand tobenefit the most from an in-house bank, with the fewest tax orlegal barriers to implementation. (North America and Western Europeusually fit that bill.)

Then the company should consider implementing one IHB functionat a time. For example, the initiative may start with a foundationof moving cross-company cash pooling and intercompany loan management into the IHB, thenlater add POBO, followed by ROBO or COBO, etc. Approaching theproject in multiple steps of limited scope enables the organizationto quickly realize business benefits, while prudently managingbudget, avoiding overwhelming staff members, and gradually gainingupper-management confidence and commitment to expansion of the IHB.Fully implementing the IHB takes longer with this approach, but italso minimizes risk.

The organization should create a step-by-step plan forincrementally implementing core IHB capabilities, based on thevalue proposition each offers to the business. Companies generallystart by addressing the organization's biggest pain points first.After the organization has established the IHB structures andprocesses that are core to its operations, it can more easily rollout additional in-house banking functions and expand the approachinto other regions and countries.

Treasury must consult the tax and legal teams at each step inthe initiative, to ensure that all planned IHB structures andprocesses support the organization's unique business obligations,objectives, and priorities.

4. Minimize the number of different technologysolutions in use. When choosing technology to supportthe IHB, look for a solution that natively incorporates as much ofthe underlying data—and invoices that require settlement—aspossible. The goal is to minimize the need for custom interfaces.Many ERP systems have sophisticated IHB capabilities embedded intotheir finance modules. Check with the IT department or ERP softwareprovider to see what IHB functionality the organization can takeadvantage of—and may already own.

In-house banking management structures and technology canprovide substantial financial and operational benefits to treasurydepartments and other stakeholders across the organization, at boththe corporate headquarters and affiliate levels. More and morecompanies are expressing interest in leveraging an IHB to increaseefficiency, reduce costs, and improve visibility and control.

Although in-house banking still may not be the right solutionfor every company, technological innovation and looseningregulatory constraints are making IHB solutions more attractive fora wider range of companies. Organizations of all sizes can nowrealistically evaluate the prospective benefits of making theswitch to in-house banking.

Peter Wolf is asenior vice president at Serrala and a member of Serrala's NorthAmerican Leadership Council. He is a leading solution designer inSAP treasury, in-house banking, and liquidity management, havingspecialized in this area for over 20 years. Prior to joiningSerrala, Wolf was one of the founding partners of e5 SolutionsGroup, which became part of Serrala in 2017. You can reach himat [email protected].