Globalization has been the catalyst for more complex cash flows, in multiple currencies from multiple locations, and multiple legal entities. The impact of this can create treasury and finance structures that are disparate, multi-locational and, indeed, complex. This has led some corporates to review their structures as well as key performance indicators, and implement structures that enable them to manage a whole host of disciplines, including funding, risk management, investment, liquidity management, payments and collections, and management information systems. In short, they setup a so-called in-house bank (IHB).
These structures are not exactly banks in the true sense of the word, but offer the type of services and adopt the characteristics associated with a cash management-focused bank. This structure is particularly relevant—and effective—when the corporate in question has a complex network of subsidiaries.
Canadian multinational aerospace and transportation company Bombardier was an early advocate of the concept. “We were looking to consolidate a new treasury workstation model, moving the center of competence from Brussels to Zurich,” said Debra Hinds, Bombardier’s director, global cash management. “The overriding theme was to seek out efficiencies and, quite simply, to better manage and provide greater transparency around our cash.”
In most cases, an IHB enables companies like Bombardier to take the place of third-party banks. The company’s subsidiaries open accounts with the IHB, either in a single functional currency or multiple currency accounts. Subsidiaries can not only be granted credit lines, but can also borrow and invest with the IHB.
No easy task
While the pluses are many, it is not simple to implement an IHB. “There are so many considerations and so many people to align in the process, so expectations have to be tempered around timelines,” Hinds said. “You are looking at many jurisdictions and with that comes tax, legal and regulatory issues that will vary across the regions. Once you have made the decision to take this route to financial efficiency, enthusiasm builds at a pace that has to be managed.”
So what are the benefits for companies like Bombardier? “We have been able to achieve a much better level of cash utilization,” she said. “Importantly, we have also been able to rationalize FX transactions executed locally and regionally. And we have certainly been able to make better use of cash on account, directing money in the pool towards lending to entities.”
Certainly, those corporates that have already used an IHB have moved from structures that invariably resemble Gordian knots to more streamlined and consolidated cash flows as well as enhanced working capital management, greater control and risk management and better reporting.
But any corporate wanting to set up an IHB has to fulfill a number of requirements, not least of which is getting buy-in across the organization and senior management endorsement. An IHB is not something that can be taken out of a box and plugged in. The scope of the project has to be determined, and the corporate has to ensure it has the optimal technology and cross-organization cooperation and service level agreements.
“It’s important to realize across the company that this is an evolutionary—rather than revolutionary—process,” Hinds said. “It’s very much one step at a time. In our case, it was 190 different accounts into the structure and therefore not something that could be done in one step. In many ways, it’s a job that will never end. There will always be new efficiencies to capitalize on and large corporate bodies, after all, are organic and constantly changing.”
Furthermore, implementing an IHB has to balance global, regional and local requirements as well as the locations where the IHB will operate. Wherever that may be, the support infrastructure has to be in place along with communications and, of course, the appropriate skillsets to support the project.
Bombardier also ensured that the best possible structure and practices were put in place. “We made certain that we did not just incorporate the old way of doing things,” Hinds said. “It was not a question of bringing legacy structures into the IHB. This was a chance to do something new and that’s what I would advise people to do if they are taking this route.”
Drew Arnold, Director—Working Capital Advisor, Deutsche Bank, and Debra Hinds, Director, Global Cash Management, Bombardier, co-presented on in-house banking at the 2014 AFP Annual Conference.
A longer version of this article appears in the July/August edition of AFP Exchange.