Why should large corporates consider in-house banking?
Large companies are always looking to improve their asset management and cash flow processes, and in-house banking provides a way to do so. An in-house bank (IHB) lets larger, multinational organizations insulate themselves against regulatory shifts, conduct better oversight, and build more efficient workflows.
Three benefits of in-house banking
There are several advantages to developing an in-house financial infrastructure, including decreased vulnerability to regulatory changes. For instance, as J.P. Morgan notes, a change in how government regulations define cash deposits will force banks to reconsider the types of deposits and assets they prioritize. Depending on your operating procedures and industry, regulatory shifts like this could negatively impact your company. Bringing your banking in-house can help you avoid upsetting your operations and mitigate the impact of changing bank standards. Here are three additional benefits of an in-house bank.
Benefit #1: Flexibility
If your company operates an IHB, it can transfer funds throughout its subsidiary organizations as necessary, according to Treasury Management International. By establishing an inter-organizational lending system, you can create cash for entities in which capital is largely illiquid and who are waiting for invoices or returns. The in-house organization could also qualify for greater lines of credit than a stand-alone subsidiary. Having a central internal system overseeing such applications and processes could lead to improved access to cash.
Companies that own several affiliates may find an IHB attractive because it affords them more cost-effective options for financial management than using external banks. Not only can the multinational set its own internal lending rates, it can set different rates based on the borrowing entity’s size and profile.
The flexibility to set internal rates and standards may be especially appealing to businesses that operate in the Middle East, where the influence of Islamic banks is growing rapidly. An EY report found that Islamic banks studied in the Gulf Cooperation Council (GCC) countries alone held $606 billion in asset value and that these banks saw sustained interest despite regional volatility, as detailed by Consultancy.uk. An IHB that can cater to its affiliates’ demands for specific types of banking could do well not only in the GCC countries but elsewhere in the Middle East and in Muslim-majority countries in South and Southeast Asia as well.
Benefit #2: Ease of use
One of the most appealing features of an in-house bank is the way it simplifies processes. Instead of each subsidiary applying for external loans and credit lines, they apply directly to a single internal department. The Treasury can set its own borrowing and lending rates, ensuring favorable terms for both the overarching corporation and its subsidiaries.
If you generate large amounts of cash or need to move money from subsidiaries to the parent company, an in-house bank can be especially useful. According to the Association for Financial Professionals, the wine and spirits company Brown-Forman is an example of the former. It prefers to use its own cash to fund its foreign subsidiaries and sees an in-house approach helps retain control, regardless of geopolitical unrest. By having its subsidiaries around the world send money to a central account, it’s mitigated the potential for payment lapses and delays because of economic upheaval.
Benefit #3: Centralized control
By bringing financial control in-house, treasurers can simplify their processes and reduce the amount of coordination required to manage external accounts. They also have closer oversight of the company’s financial activities. The Global Treasurer notes how the treasury team can adjust funding and liquidity levels as needed, streamline accounts, and better monitor cash flows. The latter is especially important for forecasting and anticipating future needs.
In an in-house banking model, funds are pooled into a single account from which the treasury can issue transfers and loans. Not only does a centralized account make funds management easier, but it can also generate better investment returns than having multiple subsidiary accounts.
Roche, a pharmaceuticals company headquartered in Switzerland, found that centralizing its banking processes alleviated the need for subsidiaries to establish their own in-house banks, reports Eurofinance. Thanks to the Single Euro Payments Area standard, which effectively treats all cross-border payments conducted in euros as domestic transactions, companies have been able to restructure their IHB models to become more streamlined and cost-effective. Eurofinance also reported that the Belgian company Econocom enjoyed the benefits of creating a centralized treasury as well, including the standardization of processing and contract language, which reassures its partners that the organization treats them equitably.
Implementing an in-house bank
Creating an in-house bank is no small feat, and you’ll need buy-in from a number of organizational leaders. Once your in-house bank is established, monitor regulations regarding such entities. If the government issues stricter regulations, you must be ready to act on those. While in-house banking can reduce the impact of regulatory changes, your organization is still subject to laws specific to in-house processes.
Technology can help you run an in-house bank with transparency and efficiency. Automation lets you schedule regular payments and funds transfers, and data and analytics platforms can monitor the movement of funds.
Ultimately, an in-house bank can increase visibility, save money, and provide you with the tools to do your job more effectively. Automation and data analytics will be useful in painting a clear picture of where your organization stands and paving the way for more efficient and high-performing financial processes.
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