Why an in-house banking solution could make sense for your organization

In-house banking has become increasingly attractive to multinational corporations (MNC) seeking to streamline their treasury functions. By creating an in-house bank (IHB), companies can gain greater control over their money flows and lending rates as well as safeguard assets against ever-shifting financial regulations.

In-house banking provides a level of flexibility and oversight that cannot be achieved by working solely with external banking partners. It allows organizations a greater degree of financial control as well as lets them establish lending terms for subsidiaries.

Rather than have every company under the MNC manage its own cash flows and financing needs, the central IHB sets lending rates that benefit the organization. The bank can also manage liquidity needs and provide support to subsidiaries instantly, without having to go through a third party. The New York real estate corporation the Rockefeller Group oversees the finances of 85 affiliate business accounts from a central IHB. Using automation software, the company receives ongoing notifications regarding transactions and can make swift decisions about how best to manage its accounts. Although the IHB still subjects internal borrowers to interest rates, it is able to take advantage of lower rates for higher borrowings and apply policies that benefit the overall organization, instead of grappling with an outside bank’s terms.

Compliance is also a key motivator for establishing an IHB. Because federal and international bank regulations can change at any time, an MNC without an IHB can be vulnerable to regulatory shifts. Creating an IHB can insulate the organization against the most severe impacts of those changes.

Yet establishing an in-house banking function is a significant move, one that can easily go awry without the appropriate due diligence and planning. If your company is considering an IHB, consider the following steps to help avoid missteps and set it up successfully.

Clarify the IHB’s role within the organization

Unless you plan to purchase an external bank and bring it in-house, as Airbus elected to do with Salzburg Muenchen Bank AG in 2014, you will likely continue working with a banking partner for some of your treasury functions. To avoid redundancies and overspending, an IHB should have clear parameters and responsibilities.

An IHB can take on different functions depending on the company’s goals and needs. Begin by clarifying the priorities for the IHB. Will it primarily focus on streamlining lending, reducing transaction expenses? Or are compliance and oversight the top concerns?

The multinational German manufacturer Siemens created an IHB to streamline its clearing processes and a central cash repository. However, improved oversight was a key feature of its strategy. As well, the company wanted its treasury experts to have a greater hand in its risk advisory activities.

Include all relevant parties in the planning

Before rolling out plans for an IHB, meet with senior treasury officials to get their input. Some of them may have misgivings, and others will have ideas for the functions and processes that could be overhauled.

Make sure to communicate with the rest of the treasury team as well. While you don’t need to secure full-throated support from every junior employee affected by the change, clear communication helps with the transition. Explain why you’re moving toward an IHB and how the company will benefit. Create a feedback channel so team members know they can voice their opinions and concerns. This will be especially important in the early days of the IHB as you troubleshoot problems and look for ways to run it more efficiently.

Of course, you’ll also want to communicate with the broader financial team and with all department heads. Provide detailed guides to how lending, payments, budgets, and other key concerns will be handled well in advance of the change, giving them time to prepare their teams as well.

Structure with an eye to scale

If your company operates in a number of different countries or intends to expand globally, be sure to factor differing international regulations. For instance, regulations related to cross-border transactions and local currencies are a key concern for MNCs in Asia.

In some Asian countries, companies must establish or partner with a local company in order to take payments in the local currency. MNCs operating in the region have gotten around this by creating payments-on-behalf (POBO) or receivables-on-behalf (ROBO) businesses wherever such regulations apply, but it’s critical that you survey the legal landscape in your prospective markets to ensure that your IHB is equipped to address such obstacles.

Establish a clear order of operations

Once you know your goals for the IHB, create a priority list of which functions you’ll integrate first. Do not attempt to cover everything at once. In-house banking requires thoughtful, strategic set-up and you’re more likely to avoid problems if you’re deeply focused on each element.

Although you’ll want to tailor your strategy to your company’s unique needs, The Global Treasurer recommends first optimizing internal funding and credit lines, then moving toward foreign exchange functions and multi-lateral netting. From there, you can evaluate your liquidity processes and set up POBO and ROBO systems as necessary.

Leverage technology

Centralized banks require fast, scalable, and centralized software programs. Siloes and spreadsheets will be anathema to its success. Take advantage of cloud-based programs that store data centrally and increase capacity as operations become more sophisticated. Incorporate automation where possible as well and implement select real-time monitoring and fraud prevention tools.

Bank better with an IHB

In-house banking is resource-intensive to set up, but worth the investment. An IHB solves a number of treasury pain points while decreasing costs, mitigating risks and increasing profits.