Centralising financial transactions is beneficial because loans and investments with banks may be arranged on better terms than decentralised transactions involving smaller amounts. Before external financing is used, however, the in-house bank can provide visibility of the corporate group’s entire internal financing potential. Previously unused reserves can therefore be converted into productive capital and liquidity management can be optimised.
Introducing an in-house bank reduces the cost of maintaining local bank accounts or may eliminate these costs entirely. These savings can, in turn, benefit the subsidiaries if the central finance department is established as a service centre rather than a profit centre. When considering the company as a whole, however, a profit centre structure may also be appropriate, demonstrating that concentrated expertise and a well-designed in-house bank can significantly improve profitability. It also highlights the value of Treasury Management Software that ensures secure and automated processes. In some cases, the development of the in-house bank progresses to the point where separate financing holding companies or group-affiliated financial and credit institutions, known as captives, are established. In certain industries, these entities also provide sales financing.
In general, the in-house bank provides a better overview and enables faster, more targeted cash positioning. Incorporating internal cash flows into medium- to long-term planning enables more precise management of overall liquidity. As a trade-off, agreements can be made with the participating entities under which they receive better terms for their own financial transactions in return for providing the information required for optimal financial management completely and on time. This can be implemented directly through individual margins on reference interest rates and exchange rates, or by assuming hedging transactions and liabilities at market-standard “in-house terms”.
At the same time, the in-house bank reduces the workload. While processes are harmonised, automated and optimised centrally, a significant proportion of local reporting obligations, such as balance notifications and account balance checks, may no longer be required at the sales or production entity. Specialist expertise for local bank negotiations may also become unnecessary.
Rapidly growing companies, in particular, often accumulate a large number of accounts and banking relationships. These served various purposes during the expansion phase but now frequently represent an unnecessary cost factor. This is particularly common in project-based industries, such as building construction, civil engineering, road construction, plant engineering, power plant construction, property development and trade fair organisation, where a separate account may need to be opened for each joint venture.
Corporate bank accounts are rarely free of charge and are offered at widely varying prices around the world. Centralised bank account management, including the administration of authorised signatories, helps companies maintain an overview of their accounts and the associated costs.
The concept of electronic Bank Account Management (eBAM) was developed many years ago to digitalise the entire lifecycle of a bank account, from opening and amendments through to closure. As part of the ISO 20022 standardisation process, message types using the abbreviation acmt.nnn, which stands for account management, were also designed for many of these process steps.
Most companies are currently focused on reducing the number of their bank accounts and relationship banks to a minimum. Depending on their geographical presence, the optimisation process generally results in two to five cash management banks with different strengths in different regions, together forming a best-of-breed selection.
Where the cash positioning process is performed centrally through zero or target balancing as part of bank-operated cash pooling, Trinity TMS can use intercompany accounts to record the cash flows and calculate interest on the notional balances that the entities would have held without the cash pool. Transactions, interest and, where applicable, interest accruals can be calculated, reported and posted.
Depending on the company’s structure, internal receivables settlement processes, known as netting, may also be beneficial within the in-house bank. They generate further cost savings through standardised and automated processes that provide the required information to all parties involved. Find out more here…
Centralised payment processing also plays an important role for larger companies. Since the 1990s, the objective of reducing transaction costs in global payments has contributed to the establishment of numerous payment factories. It was not uncommon for payment optimisation projects to cost more than they subsequently saved. Today, the available options are more varied and often easier to implement. However, the appropriate solution always depends on the specific circumstances of the individual company. Trinity is available to carry out a joint assessment of the current situation and provide tailored advice. Find out more about payment processing here…
The abbreviations POBO and COBO frequently arise in connection with centralised payment processing. POBO stands for “payments on behalf of” and means that one entity executes a payment due by another entity. The head office or a shared service centre therefore pays the invoice through its own account and records the transaction internally. This relieves the subsidiary of the task and can largely eliminate the risk of payment fraud. In the past, national file formats were converted into the formats used by the main banks of a payment factory or into an internationally applicable SWIFT format. Today, virtual accounts are increasingly used instead. Virtual accounts are IBANs provided by the corporate’s relationship bank for centralised payment processing and can be used for both outgoing and incoming payments.
The functions of an in-house bank are wide-ranging, and not all of them are equally suitable for every company. Some functions are always worthwhile and comparatively straightforward to implement. Payment factories, netting and electronic Bank Account Management, however, require appropriate preparation and a minimum transaction volume to generate economic value. An in-house bank can generally be established and optimised step by step. As a general principle, all opportunities to increase transparency and process security should be pursued. Greater security may involve additional costs, but it will certainly pay off in the long term.
