In-house banking now within reach: Treasury Technologies CEO Rudolph Janse van Rensburg explains

An in-house bank may be simply defined as an internal organisation which assumes some of the functions traditionally performed by external commercial banks to provide enhanced performance, transparency and control. Traditionally, the operation of an in-house bank was regarded by most finance executives to be the preserve of the largest corporations. Despite the many benefits, these structures were thought to be too expensive and complicated to add cost effective value. As more efficient cloud solutions become available, the threshold barriers for justifying in-house bank adoption have been steadily lowered, and positive cost/benefit analyses are becoming more and more common.

By Rudolph Janse van Rensburg, CEO of Treasury Technologies, gold partner at the 2017 Finance Indaba

Identifying suitable in-house bank activities - plus their potential benefits

There are many different financial operations where an in-house bank can add value. These naturally vary from organisation to organisation, depending on the nature of the underlying core business, the actual transaction volumes, the scale of the risk exposures versus revenue potential, and the incidence, nature and impact of operational and process inefficiencies. The following examples outline some contrasting in-house bank justifications which have been successfully used in different business situations.

Cash management: This is often the primary focus for improvement. An in-house bank provides central visibility and control of cash resources. It delivers a complete and up-to-date cash position through the automated and standardised collection of current balance and transaction statements from a diverse network of domestic and foreign bank accounts. It validates the cash position using automated, rules-based account reconciliation. It provides the means to research and repair errors and omissions, so that the treasury or finance team can work confidently, based on fully dependable information. This empowers the team to move cash accurately to where it is needed, which means that the business can be financed at the lowest cost, borrowings can be minimised, and surplus cash can be concentrated for investment at the best available rates, in bank deposits and money market funds as authorised by finance policy.

Cash pooling: Some organisations can benefit from using the in-house bank to manage account sweeping and pooling operations to optimise the usage of the available cash. The in-house bank uses internal accounts to track the contributions of the pool members, to calculate and apply the correct debit or credit interest, and to control the process.

Cash forecasting: An in-house bank can collect commercial cash forecasts across the corporate infrastructure, and construct forecasts of future cash shortages and surpluses by applying the forecast data to the cash position, the maturities of outstanding borrowings and investments, and committed future value payable and receivable flows. The organisation thus secures a dependable projection of the future liquidity scenario so that management can take informed decisions on the planning of any necessary funding or investment programmes.

Subsidiary finance: Many companies use their in-house bank to provide low-cost finance to their network of operating subsidiaries. The central visibility of current and projected multi-currency cash positions enables the in-house bank teams to organise financing operations efficiently and accurately, through cash transfers and the execution of inter-company loans, in compliance with tax legislation and regulatory requirements, such as transfer pricing.

More effective market dealing: In-house bank can be used to perform all required external FX and money market dealing activities on behalf of the subsidiaries. The in-house bank can take advantage of any natural offsets to settle internally as far as possible, and then, where permitted, amalgamate deals to achieve best price execution in the market.

Central risk management: The in-house bank can take advantage of its central visibility of financial exposure and risk to provide a cost effective and accurate hedging service for the company.

Building blocks for an in-house bank

Technology: Robust treasury management technology to provide scalable cash, treasury, financial risk management and treasury accounting functionality, to deliver automated support for the business functions. Technology provides the control hub which schedules and manages the in-house bank workflows, and provides the required reporting to fulfil operational, management and regulatory requirements.

Although functionality is usually the main driver when organisations decide to select and implement a new treasury technology platform, aspects such as upgrade cycles, costs associated with these upgrades, embedded bank connectivity, multilingual interoperability, costs associated with monthly/annual licence fees, as well as the ability to integrate with the business's current ERP/BI/3rd party systems in various formats, cannot be overlooked during the selection process.

Integrating to the organisation's ERP is particularly important for effective in-house banking, as the treasury system can replicate the necessary GL entries for inter-company loan transactions and automatically post them to the GL, further enhancing straight-through processing, control and transparency of the in-house bank.

Communications: The infrastructure to initiate and control the required information flows between the in-house bank, its clients (the operating subsidiaries), and third parties, such as banks and accounting systems. Key data includes bank balance and transaction statements, deal requests, cash forecasts, accounting journals, and customised reports.

Human resources: The dealing, administrative and specialist staff to provide the centre of excellence needed to add in-house bank value to the treasury and finance business functions.

Implementation partner: As much as functionality, cost and integration to third party systems play a significant role in selecting the appropriate technology platform, ensuring that the most suitable partner implements the solution is often neglected.

Vendor viability - in other words, the likelihood that the implementation partner and product remain in business and functional for years after the implementation - should be the first critical consideration by any organisation.

The partner needs to have experience with designing and implementing a similar solution in your industry and geographic market, and must preferably have resources based locally. The last key consideration companies need to consider when evaluating a partner that needs to implement their desired technology platform is its after sales and implementation support services.

The strategic benefits of in-house banking

The initial establishment of an in-house bank as described sets up an efficient financial management environment which provides specific solutions for the most pressing problems. Additionally, it provides future-proofing by putting in place a robust and flexible platform to meet the challenges of supporting continued growth and change. Such challenges will naturally vary according to each company's business patterns and priorities: the key strategic benefit is that the organisation has at its disposal a powerful resource that will enable it to manage change quickly and effectively. There are many examples of what could be achieved, such as standardising and controlling payments through a payments factory, using expert resources to oversee financial risk centrally, and achieving the efficient administrative, control and treasury integration of new business acquisitions.

The efficiencies that are now available through contemporary technology and professional treasury service provision now offer more and more companies the opportunity to make step change process and performance improvements through in-house banking, to enhance productivity, quality and profitability. These value-adding opportunities are now in the budget range of many more corporate organisations, providing a secure route to competitive advantage through superior operations and financial performance.