Using your company’s own resources for financing, an in-house bank (IHB) is a cost-effective way of consolidating your treasury functions — such as funding, FX and cash management — into one central entity rather than having each subsidiary work through a different local bank.

It is transparent and efficient, and allows you to centrally handle your banking relationships, currency risk, payments and collections. Now, let’s dive a little deeper.

The Right Conditions for an In-House Bank

The most common use of IHBs is by large, multinational companies. Because these organizations tend to have complex external banking structures, a large number of affiliates and a significant volume of vendor payments and intercompany invoices, it makes sense. For example, logistics giant DHL Americas uses an in-house bank.

They operate in 220-plus countries and have a multitude of subsidiaries in the U.S. Through its IHB, each subsidiary is treated as a separate entity with its own separate external bank account(s), and all bank accounts are ZBA structured into DHL’s parent’s master account in the U.S. Every day, the subsidiaries’ balances in their disbursement and collections accounts are zeroed out, which is effectively for scorekeeping. And the net cash gets swept to Europe every day. DHL also uses its in-house bank for intercompany clearing. Rather than sending money to the 220-plus countries in which it operates, DHL clears intercompany invoices via debiting the in-house bank of the paying party.

Using an IHB also allows DHL to cut out a lot of expenses. For example, DHL’s freight forwarding division, which ships intermodal containers, operates in more than 150 countries. If a DHL location in China sends a container to the United States, it needs to pay its counterpart to unload it and deliver it to its customer’s warehouse. Clearing the payments through an internal system and scorekeeping in an IHB saves them all the wire and transaction fees of moving money around the world. Plus, in-house banking provides a way for parent companies to manage FX exposures for their subsidiaries — something DHL’s IHB does on a regular basis.

Learn the why and how of liquidity management.

All this is not to say that only these complex organizations should use an IHB. With the technological advances of the last several years, the creation of an IHB is now feasible for smaller, less complex companies than the giant multinationals.

However, a lot of pieces have to fall into place for an in-house bank to work. If treasury is planning to implement one, it’s a good idea to keep a few factors in mind:

• Moving to an in-house bank is a huge undertaking; treasury will need to build a strong business case to gain support from upper management.
• The bank account structure of the organization will need to be aligned to allow funds to move between subsidiaries and the parent.
• Given the Treasury Department’s changes to section 385 of the Internal Revenue Code, treasury will need to document the movement of cash to show that it’s not all a one-way flow

Capabilities of an In-House Bank

What exactly does an IHB allow you to do? IHBs allow treasury to:

• Control all of its subsidiaries’ accounts and FX exposures in one place.
• Use a concentration account to accumulate and distribute funds to all business units.
• Rely less on external funding and investment instruments.
• Determine company-specific lender and borrower rates and terms.
• Keep track of cash and balances.

Benefits of an In-House Bank

As noted by Manuel Martinez, senior manager of treasury services for The Rockefeller Group, there are five key benefits an in-house bank offers treasury departments.

1. Centralization of control: An in-house bank allows treasury to control all of its subsidiaries’ accounts in one place.
2. Concentration of funds: Through ADT (auto dollar transfer) and ZBA (zero balance account) features, an in-house bank uses a concentration account to accumulate and distribute funds to all business units.
3. Less reliance on external funding and investment instruments: An in-house bank reduces the need for business units to obtain external loans, credit facilities, investment instruments, bonds, commercial paper, etc.
4. Creation of lender and borrower rates: An in-house bank provides treasury with a way to determine company-specific lender and borrower rates and terms.
5. Cash visibility: Perhaps most importantly, an in-house bank provides treasury with a better means of keeping track of cash and balances.

Structuring Your In-House Bank

There are some critical decisions to be made when thinking about how to structure your IHB, the most important of which includes:

• The legal entity (or entities) that should serve as owners of the IHB.
• Processes that should be included.
• Whether to structure the IHB for COBO (Collect on Behalf of) or ROBO (Receipt on Behalf of) for certain entities.
• Choosing which countries should participate in regard to the entities and processes, be sure to think through currencies and which countries enable intercompany lending, as well as the growth potential of the countries you’re doing business in.  
• The person(s) who will ultimately be responsible for any FX exposures as well as the back office staff to manage the operations side.
• Potential regulatory issues and tax implications.

Technology Solutions for an In-House Bank

There is no question that an investment in technology will be required of any organization that plans to set up an IHB. Technology is what will hold the entire process together, and a treasury management system (TMS) is a must for tracking intercompany transactions and realizing the level of automation needed to reach a state of efficiency.

Your accounting team and ERP will be needed in the management of intracompany (IHB subaccounts) and intercompany (between the IHB and outside banks) loans and the clearing of accounts. Development of an automated program is your best course of action. Once you define your scenarios, e.g., receipt of non functional currencies, information can be mapped by passing it from the ERP to the TMS, which can then generate data.

Another possibility is the pairing of virtual accounts via an outside bank with your IHB. Virtual accounts have the ability to segregate and organize data within one physical account, which makes them prime vehicles for operating as intercompany ledgers. In addition to tracking intercompany transactions and descriptions, virtual accounts also have the potential to administer intercompany interest, AR and AP.

Thanks to innovations in technology and the loosening of regulatory restraints, more and more companies are able to start thinking in real terms about the possibility of using an IHB. You don’t have to be a large multinational organization to reap the benefits – increased efficiency, reduced banking fees and improved visibility and control – of an IHB. Now is the time to evaluate the very realistic possibility of making the switch to an in-house bank.