Inhouse Bank

When a company's central finance department provides banking services for its own companies, it is called an Inhouse Bank. If a subsidiary needs money or has excess liquidity, it simply asks the parent company about financing and investment options. In addition, the head office can serve as an internal clearing centre for intra-group receivables and payables or as a hedging specialist for company-wide accumulated financial risks. If the inhouse bank takes over the processing of payment transactions for other companies, this is usually referred to as a payment factory. Furthermore central treasury can maintain virtual accounts for collections on behalf of their affiliates.

As long as the banking transactions are carried out for the corporation's own affiliates and not to cover external needs, the inhouse bank in Germany does not require a banking licence and is not subject to the German Banking Act or BAFin supervision. However, the operation of an inhouse bank beyond national borders should always be legally examined before it is set up.

Trinity TMS Functions at a Glance

To build an inhouse bank, Trinity TMS offers numerous functions that can be implemented as required and expanded over time, e.g.:

• Maintaining interest-bearing accounts for intercompany settlements
• Management of all financial transactions with affiliated companies, e.g.

• • intercompany loans,
  • shareholder loans,
  • letters of comfort,
  • guarantees,
  • foreign exchange and interest rate hedges

• Mapping of all cash flows to interest-bearing intercompany accounts
• Preparation and control of cash pool statements and periodical account closings
• Calculation and posting of (accrued) interest
• Automated mirroring of intercompany planning data
• Creation of electronic account statements for intercompany accounts
• Multilateral netting for internal offsetting of payables/receivables
• Observing of internal credit lines and limits
• Compliant interest rates linked to market data
• Individual margin definition depending on creditworthiness
• Reporting evaluations per company/group of companies from the perspective of the head office and the counterparty

Benefits

Best Practice

The centralised execution of financial transactions makes sense because better conditions can usually be achieved for consolidated loans and investments with banks than in decentralised transactions with smaller amounts. However, before accessing external financing, the entire internal financing potential of the corporate group can be made visible via the inhouse bank. Previously unused reserves can thus be converted into productive capital and liquidity management optimised to a maximum.

By introducing an inhouse bank, the costs of maintaining local bank accounts are reduced or even eliminated. These savings can in turn benefit the subsidiaries if the central finance department is established as a service rather than a profit centre. Looking at the company as a whole, a profit centre organisation can of course also make sense, showing that with the help of concentrated competence and a well-designed inhouse bank, the profit situation is noticeably improved. The value of treasury management software that ensures secure and automated processes also becomes apparent. In some cases, the development of the inhouse bank goes so far that it evolves into its own financing holding companies or group-affiliated financial and credit institutions (captives), which also take over sales financing in certain industries.

The inhouse bank generally provides a better overview, faster and more targeted account disposition. The influence of internal cash flows in medium- to long-term planning enables more precise control of the corporation’s overall liquidity. As a trade-off, it can be agreed with the affiliated companies that they will be rewarded in the form of better conditions for their own cash transactions if they provide the information needed for optimal financial planning on time and in full. This can be realised directly through individual margins on reference interest rates and exchange rates or the assumption of hedges and liabilities at "inhouse" conditions in line with the market.

At the same time, the inhouse bank makes work easier. While processes are harmonised, automated and optimised at the head office, a large part of the reporting duties (balance notifications, account balance checks) can be omitted at the local sales or production company and special know-how for local bank negotiations can be dispensed with.

Especially fast-growing companies often drag a lot of accounts and bank accounts with them. These served various purposes during the expansion phase, but today often prove to be an unnecessary cost factor. This is particularly often the case in project-related industries (e.g. building/civil engineering/road construction, plant construction, power plant construction, real estate development, trade fair organisers) when, for example, a separate account has to be opened for each work community. However, in some countries a local account is mandatory – always check before closing!

Bank accounts for companies are in very few cases free of charge and are offered at very different prices worldwide. An overarching bank account management with administration of authorised signatories helps to keep an eye on the overview and the associated costs.

In order to digitise the entire life cycle of a bank account, from opening to changes to closing, the idea of electronic Bank Account Management (eBAM) was conceived a long time ago. In the course of ISO 20022 standardisation, message types with the abbreviation acmt.nnn (for account management) were also designed for many process steps.

However, most companies are currently busy reducing the number of their bank accounts and house banks to a minimum. Depending on their geographical spread, they end up with 2-5 cash management banks after optimisation, which have different strengths in different regions and together form a "best-of-breed" selection.

If the account disposition process is carried out centrally through zero or target balancing as part of cash pooling as a banking service, Trinity TMS can be used to map the intercompany accounts to the cash flows and interest on the notional balances that would result for the companies without cash pooling. Turnover, interest and, if applicable, accrued interest can be calculated, reported and booked.

Depending on the structure of the company, procedures for the internal offsetting of receivables and payables (netting) also make sense within the framework of the inhouse bank and lead to further cost savings through standardised and automated processes that provide the necessary information for all parties involved.

The central processing of payment transactions also plays a role for larger companies. The goal of reducing transaction costs in global payment traffic has contributed to the creation of numerous payment factories since the 1990s. Quite often, optimisation projects in payment transactions have swallowed up more money than was later saved. Today, the possibilities are more versatile and often easier to implement. However, the appropriate solution always depends on the given conditions at the respective company. Trinity is available for a joint assessment and individual consultation. You can find more about payment transactions here...

The abbreviations “pobo” and “cobo” often appear in connection with central payment transaction processing. Pobo stands for "payments on behalf of" and means that one company makes the due payment for another, i.e. the headquarters or a shared service centre pays the invoice via its account and records this internally so that the subsidiary is relieved of this task and the risks of payment fraud can be eliminated as far as possible. Whereas in the past national file formats were converted into those of the main banks of a payment factory or an internationally usable SWIFT format, today virtual accounts are used. Virtual accounts are IBANs that are made available to the central payment transaction processing of the corporate by its house bank and can be used for outgoing as well as incoming payments.

The functions of the inhouse bank are diverse and not all are equally suitable for every company. Some are always worthwhile and comparatively easy to implement. Payment Factory, Netting, Electronic Bank Account Management, however, require corresponding preparations and minimum quantities of transactions in order to generate added value economically. An inhouse bank can usually be built up and optimised piece by piece. In principle, all possibilities to increase transparency and process security should be sought. A plus in security may cost something, but it will certainly pay off in the long run.

Case Study

TMD Friction

Tags

Inhouse-bank, intercompany, eBAM, netting, payment-factory, authorised-signatories, internal-financing, interest-accrual, virtual-accounts, cash-pooling, collections-on-behalf-of