What Is an In-House Bank (IHB) and Why Should You Build One?
Treasury Optimization, Finance Centralization, Cash Management, In-House Banking
Are you headed for the ultimate destination of cash management centralization, an in-house bank? In this blog we will dive into the key features of an IHB.
On the road to treasury and cash management centralization, establishing an in-house bank (IHB) is the ultimate destination. It will provide you in the treasury with the widest set of tools for efficient group-level cash management. But an IHB solution can also feature different levels of harmonization, depending on how deep an integration you want to create between the group and the subsidiaries, and depending on which functions you want to take control of centrally in the group treasury.
In this blog, I will briefly describe the key features of an IHB structure. If you want to dive more deeply into the topic, you can skip this blog and head straight to downloading our in-depth whitepaper.
The best way to achieve full centralization of cash and finance processes is to build it step-by-step. An IHB allows you to lay the foundations for transparent group-level cash management. You can also take care of a variety of other finance and treasury functions centrally, such as banking relationship management, currency risk management, payment and collection management, and internal lending.
At the basic level, an IHB setup can be used to manage corporate bank account structure. Instead of external zero balance accounts that are typically used to centralize cash at a group level, the group’s balances can be managed in a similar, but internal, structure. The upside is that the subsidiaries’ real account balances don’t become blurred in the process, and you gain clear visibility over both group-level and unit-specific balances.
The next step is to expand the use of the internal IHB accounts for making payments, both internal and external. Many corporations start by streamlining internal payments. Subsidiaries’ IHB accounts are credited or debited according to the payables or receivables flow within the structure, without value date losses, transaction fees or FX costs. The treasury now has a powerful tool to track the balance development of each unit in the group.
IHB functionalities for external payments help to reduce the need for external bank accounts, as the payment flows can be directed through the group treasury’s account. A payments on-behalf-of structure allows subsidiaries to process the payment data in their own systems, and group treasury gets to decide on the most cost-efficient payment method and banking connection.
A collections on-behalf-of model means taking a step further in replacing external bank accounts, giving you a greater degree of independence from banks and maximizing cost efficiency. Payments for the subsidiaries are received through the group’s external bank accounts, and automatically allocated to the appropriate subsidiary’s IHB account. Centralizing the collection of receivables can have a profound effect on working capital management, as you are able to aggregate surplus cash for investment and business opportunities.
This brings us to one of the most beneficial features of an IHB, managing internal financing. You can eliminate the complexity of arranging and managing loan agreements for each internal debt as you can cover subsidiaries’ short-term financing needs, for example, by internal IHB account credit limits. Interest can be simply calculated and booked to the internal accounts at the end of each month. With the help of transparent and automated contracts, you can also be sure to document and control the process for regulatory compliance.
Would in-house banking be a good fit for you? Next time, we will take a closer look at the factors you should consider when determining whether establishing an IHB would be the right solution for your organization.
Jaakko Kilpinen has over 15 years of experience in corporate cash management and has deep expertise in cash forecasting, netting, and in-house banking. Jaakko has previously held e.g. a position as Group Treasurer in a publicly listed Finnish company. Currently Jaakko works as a Solution Manager at OpusCapita.
Read more blog posts about In-House Banking
Are You Still Thinking About Virtual Accounts or Already Implementing POBO and COBO?
26 - 05 - 2020
In a world where the next fraud attempt is lurking around every corner, no company wants to create processes with different banks, tokens, and user lists for each of their differen
Forget Virtual Accounts! In-House Bank with Modern Matching Solves the COBO Challenge
23 - 10 - 2018
Centralization of cash processes is a key objective for corporate Treasurers. This blog explores how to best build a collection on-behalf-of structure without virtual accounts.
Keep Going! 6 Reasons to Consider POBO and COBO
05 - 06 - 2018
Take a step further in in-house banking and boost the efficiency of your organization’s financial processes with POBO and COBO. Here are 6 reasons why it pays off.
Other content you might be interested in:
Is in-house banking the right solution for you?
on demandAre you ready to take the next step in treasury centralization? Watch this webinar and determine if in-house banking is the right solution for you.
Take Control: In-house bank at the core of proactive cash management
Do you have control over cash or are you struggling even to gain visibility to it? This whitepaper outlines in-house banking, which helps put treasury in control over group cash.