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    Assessing the Value of an In-House Bank

    Make certain an in-house bank is the right step 

    For a corporation aiming to reap the rewards of centralizing its treasury functions, setting up an in-house bank (IHB) should be a strategic component of the plan. An IHB can increase efficiency, enhance control and improve risk management capabilities. Establishing one is often a logical next step for organizations that may already have reorganized their treasury functions through a shared service center or payments factory.

     

     

    Many multinational corporations have already used the momentum provided by becoming SEPA compliant to drive the harmonization of their treasury functions across multiple jurisdictions, paving the way for an easier move towards an IHB. It’s a journey that is also becoming less fraught as treasury and banking technology becomes more capable.

    The functions of an In-House Bank

    So, what can an IHB do? It can centralize both liquidity and risk, offering services such as payment processing, collections, short-term intra-company lending, investment services and foreign exchange (FX) to the wider business. Individual subsidiaries and operating units can interact with the IHB in much the same way as they would with an external financial institution, while the corporation benefits, not just from efficiencies and cost savings, but also from an improved flow of financial information.

     

    At Western Union Business Solutions (WUBS), the IHB structure allows for much greater visibility of its cash positions. The company helps businesses make and receive payments around the clock in all time zones and in over 130 currencies through a global network that spans 200 countries and territories, so timely, accurate information is essential.

     

    The IHB had to be able to handle multiple payment types including international wire, domestic wire, low-value batch payments and –drafts or checks, while at the same time ensuring a clear flow of information into and out of WUBS’s treasury management system (TMS).

     

    Today the IHB’s bank account maintenance tool manages its global accounts in a central location while its cash management reports display balances in real time. A direct connection to SWIFT allows the treasury team to initiate SWIFT MT103/202 global funding transactions, while a counterparty trade function allows treasury to buy and sell funds.

     

    However, as Derrick Walton, head of operations at WUBS, points out, the level of bank technology integration differs from region to region, while banking regulations can change frequently and without notice – so it’s essential to view the IHB as an ongoing project and continually review its systems and processes.

     

    With this in mind, perhaps the most critical factor in setting up an IHB is ensuring that you have senior management’s commitment, the necessary budget dollars to finance the project, and the support and commitment of operations, finance, legal, accounting and tax personnel.  Given the resources needed to pursue this project, it is critical that treasury build the business case which demonstrates that setting up an IHB is the right course of action for the corporation to take.

     

    While the size of a corporation can be an important factor in this decision - the larger the organization, the greater the potential benefits tend to be - it is not the only consideration. Perhaps more important is the complexity of a company’s operations. A smaller corporation may turn out to be a good candidate for an IHB if the corporation has a large number of inter-company transactions, numerous bank accounts and is spread across multiple countries.

     

    Companies which are already highly centralized may have little to gain by adopting an IHB, so it is important to analyze the expected business benefits in detail. Alternatively, a company with decentralized operations, and which has non-integrated enterprise resource planning (ERP) and treasury management systems, may struggle to implement an IHB structure within a set timescale.

     

    The tax implications of setting up the structure should also be explored, with internal tax expertise involved in the project at an early stage. Proposed changes to Section 385 and the Base Erosion and Profit Shifting Tax (BEPS) initiative could have significant effects on the effectiveness of the IHB.  Your tax counsel should be brought in to explain the implications to you during the planning stage.

     

    Regulatory factors will also need to be taken into account, from central bank reporting requirements to the types of liquidity management structures permitted in the relevant markets. Companies should also determine at the outset how the value of an IHB will be measured and managed.

     

    At Brown-Forman, the company behind Jack Daniel’s and many other premium wine and spirits brands, the case for an IHB was well made at the outset. The company’s USD 4.0bn annual sales are increasingly global, with the U.S. representing 46%, Europe 31%, Australia 9% and the rest of world 14%. That geographic diversity has brought with it growing offshore cash balances and a complex banking structure with over 200 bank accounts in 25 currencies across 40 countries.

     

    Brown-Forman’s solution is to implement an IHB at its treasury center in The Netherlands, which will both pay-on-behalf-of and receive-on-behalf-of the group’s business entities. The company set five key objectives for the IHB:

     

    • Risk, control & compliance: reduce counterparty and sovereign risk, increase control and enhance governance
    • Liquidity optimization: make more efficient use of cash, with just one balance to invest or lend per day instead of many; reduce operating working capital trapped ‘in process’
    • Cost reduction: Reduce bank fees, FX fees and transaction fees
    • Efficiency and scale: Improve straight through processing (STP) and reduce error rates
    • Operational capability: Centralize treasury, so increasing capability to support business objectives and respond to change

     

    The IHB structure to meet these objectives includes physical currency pools in EUR, GBP and USD. Each participating subsidiary will have IHB accounts in the currencies they transact, with the processing handled by an IHB module with the company’s existing SAP ERP system.

     

    If the IHB meets these objectives, Brown-Forman should recoup its investment in the project in a little over five years through costs savings and efficiencies.


    HOW WE CAN HELP

    step11. Company Size – Often the larger the organization, the greater the potential benefits, but a smaller corporation spread across multiple countries with a larger number of inter-company transactions may be a better candidate than a larger, simpler one.
    step22. Centralization – Highly centralized companies may have little to gain from an IHB. The benefits for a decentralized company may be greater, but so are the barriers, such as disparate enterprise resource planning (ER) and treasury management systems.
    step33. Tax Implications – there may or may not be advantages here. Internal tax experts should be involved in the project at an early stage to ensure the most efficient structure possible.
    step44. Regulatory Environment – Central bank reporting requirements vary and some liquidity management structures may be permitted in some markets and not in others.
    step55. Value – It’s important to determine at the outset that an IHB will add value to the business and decide how that value will be measured and managed.

    Planning for a successful IHB

    The Brown-Forman example shows what can be achieved through an IHB, but before the company started on its chosen path it had already spent considerable time and resources in the planning stage.  The implementation of an IHB should be seen by treasurers as a transformation project and its design should not be planned in isolation but in partnership with the overall business. Development should start at the top, with key stakeholders being considered, as treasurers will need to demonstrate to all areas of the business how the in-house bank can add value to their specific operations.

     

    While the benefits of the IHB may be clear to head office, setting one up represents a major change and can meet with internal resistance. Subsidiaries that had individual bank accounts in the past may no longer have them under the in-house bank model: they will need to be persuaded of the benefits of giving up that control. External customers, meanwhile, will need to pay into a central account rather than an individual bank account.

     

    Determining the scope of the project may pose another challenge. A company may wish to set up an in-house bank to cover all its operations. While this may be entirely achievable for a company with operations in a small number of markets, a multinational company with operations in restricted markets such as Brazil or China may not be able to apply an in-house bank across its entire organization.

     

    For countries such as these, it is advisable that corporates create bespoke models which sit outside the main in-house banking structure but within its function. In doing so, oversight and control can still be centrally maintained.

     

    Ideally, the bank itself should be located somewhere where it can provide the most value to the business for the bank to achieve its maximum benefit. However, a number of areas such as the wider business operating model, its memorandum and articles of association, current operational locations, tax and regulation must be carefully considered in the selection process.

     

    Once all the factors have been considered, implementation can begin, ideally driven by a CFO-level sponsor, led by the group treasurer or assistant treasurer and overseen by a steering committee which includes representatives from key stakeholders in the subsidiaries as well as from corporate headquarters.

     

    The right combination

     

    While an IHB brings many benefits, it can’t function in isolation. Success will depend on many partnerships, both internal and external - not the least of which is a banking provider with the experience and scale to support the corporation through what will be a challenging- but ultimately rewarding - transition.


    Authored By:

    Mark Kirsch

    Mark Kirsch

    Treasury Practitioner Executive

    Global Transaction Services Advisory 

    Bank of America Merrill Lynch

    Key Takeaways

    • IHB’s help centralize both liquidity and risk, offering services such as payment processing, collections, short term intra-company lending, investment services and FX
    • An IHB can’t function in isolation. Success depends on many partnerships to support the corporation

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    You agree to receive certain documents and information provided by Bank of America and its Affiliates through the Sites and/or through email provided to you via the Sites. This delivery will generally consist of certain Content on the Sites, and certain other documents relating to Bank of America and its Affiliate’s business. This electronic provision and delivery will be regarded by you as appropriate delivery pursuant to any delivery requirements under the various statutes and rules, where applicable, of the Securities and Exchange Commission, the National Association of Securities Dealers and any state or other jurisdiction. You acknowledge that you have the appropriate technological equipment to use the Sites and to receive email via the Internet and understand that your use of the Internet may incur certain operational costs such as monthly fees for a service provider. You agree to notify Bank of America or the applicable Affiliate in the event that you no longer desire to receive content through this delivery procedure and will allow a reasonable amount of time to permit proper delivery to you through other means.

    NO WARRANTY

    Client acknowledges that any information provided through the Sites is not intended to be a recommendation, offer or solicitation of any particular products or services. In addition, all research, analysis and similar market information from non-affiliated third parties provided represent the views and opinions solely of the author or the indicated source. Bank of America and its Affiliates do not independently verify the accuracy or completeness of such information, nor does Bank of America and its Affiliates endorse any particular views expressed therein. Except for offering memoranda, Bank of America and its Affiliates disclaim any liability to Client for this information or for any consequence of your decision to use it. Client agrees that it shall independently confirm any such information presented through the Sites before relying on such information. Bank of America, its Affiliates and their respective employees, contractors, agents and various contributors to the Sites have no duty to correct or update any inaccurate or out-of-date information on the Sites.

    Client acknowledges that it is acting for its own account, and it has made its own independent decisions to enter into a Transaction and as to whether a Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisors as it has deemed necessary. Client is not relying on any communication (written or oral) of Bank of America or its Affiliates as investment advice or as a recommendation to enter into a Transaction; it being understood that information and explanations related to the terms and conditions of a Transaction shall not be considered investment advice or a recommendation to enter into that Transaction. Further, Client has not received from Bank of America or its Affiliates any assurance or guarantee as to the expected results of a Transaction.

    COMPLIANCE WITH LAWS AND INDEMNITY

    The Sites may be used only for lawful purposes. Client’s conduct may be subject to local, state, national and international laws. Client agrees that it and any of its Authorized Persons shall comply with this Agreement, applicable laws, rules, regulations, ordinances and other similar national and international requirements of the country, state and province in which you are accessing and using the Sites.

    Client agrees to abide by applicable export control laws and not to transfer, by electronic transmission or otherwise, any content on the Sites subject to restrictions under such laws to a national destination prohibited under such laws, without first obtaining, and then complying with, any requisites government authorization. Client further agrees not to upload to the Sites any data or software that cannot be exported without prior written government authorization, including, but not limited to, certain encryption software. This assurance and commitment shall survive termination of these Terms and Conditions. Offices, residents and operations of your organization in Cuba, Iran, Iraq, Libya, North Korea, Sudan, Syria and any other countries that are the subject of sanctions by the United States Office of Foreign Asset Control or other general U.S. embargo restrictions are not permitted to access and use the Sites, and any such access and use is a violation of these Terms and Conditions.

    Upon request by Bank of America or its Affiliates, you agree to defend, indemnify and hold harmless Bank of America, its Affiliates, their officers, directors, employees, agents, contractors or other suppliers from all liabilities, claims and expenses, including attorneys fees, that arise from a breach of these Terms and Conditions for which you are responsible, or from third-party claims arising from your use of the Sites. Bank of America and its Affiliates reserve the right to assume the exclusive defense and control of any matter otherwise subject to indemnification by you. Notwithstanding the foregoing, you are not required to indemnify Bank of America or its Affiliates for its own violations of applicable laws.

    • FOR RESIDENTS OF BRAZIL:

      The information contained here does not constitute a public offering or distribution of securities in Brazil and no registration or filing with respect to any securities or financial products available on the Sites has been made with Commisao de Valores Mobiliarios.

    • FOR RESIDENTS OF CANADA:

      The information contained here does not constitute a public offering or distribution of securities in Canada or any of its provinces. No registration or filing with respect to any securities or financial products available on the Sites has been made with any regulatory agency thereof.

    • FOR RESIDENTS OF FRANCE:

      The Sites do not constitute a solicitation to enter into a transaction involving financial instruments, is not being distributed in the context of a public offer in France within the meaning of Article L. 411–1 of the Monetary and Financial Code, and has thus not been submitted to the COB for prior approval and clearance procedure. Any offers, sales or distribution of financial instruments through the Sites shall only be made in France to qualified investors (investisseurs qualifi?s) as defined in and in accordance with Article L. 411-2 of the Monetary and Financial Code and d?cret no. 98–880 dated 1st October, 1998. The contents of the Sites may not be redistributed or reproduced (in whole or in part) by any User. The Sites are made available with the understanding that Users will make investment decisions for their own account with the conditions set out in d?cret no. 98–880 dated 1st October, 1998. By using the Sites, Users undertake not to transfer, directly or indirectly, any financial instrument acquired through the Sites to the public in France, other than in compliance with applicable laws and regulation. Services hereunder may be provided by Banc of America Securities, Limited, as agent or otherwise.

    • FOR RESIDENTS OF GERMANY:

      The Sites are made available only to professional investors as such term is defined in the Securities Sales Prospectus Act.

    • FOR RESIDENTS OF HONG KONG:

      Access to the Sites is by invitation only to institutional investors. No information or material contained in the Sites is or should be construed as amounting to an offer to enter into any transaction or investment whatsoever. The information on these Sites is provided by the Hong Kong branch of Bank of America, N.A., and is compiled from information prepared by subsidiaries and affiliates of Bank of America Corporation. Your agreement for the use of this Site is with the Hong Kong branch of Bank of America, N.A.

    • FOR RESIDENTS OF IRELAND:

      Access to the Sites is by invitation only to professional investors.

    • FOR RESIDENTS OF ITALY:

      Access to the Sites is by invitation only to professional investors as defined in article 31 of CONSOB regulation no. 11522 of July 1, 1998.

    • FOR RESIDENTS OF JAPAN:

      Access to the Sites is by invitation only to financial institutions as defined under the Law Concerning Foreign Securities Firms.

    • FOR RESIDENTS OF KOREA:

      Access to the Sites is by invitation only to professional investors with a valid password. The information contained here does not constitute a public offering or distribution of securities in Korea.

    • FOR RESIDENTS OF NETHERLANDS:

      Access to the Sites is by invitation only to professional market parties as defined in the Dutch Securities Transactions Supervision Act 1995. Securities or other instruments on these Sites are only offered to professional market parties.

    • FOR RESIDENTS OF SINGAPORE:

      Access to the Sites is by invitation only to institutional investors. The information contained here does not constitute a public offering or distribution of securities in Singapore. The information in these Sites is provided by Bank of America Singapore Limited and is compiled from information prepared by subsidiaries and affiliates of Bank of America Corporation. Your agreement for the use of these Sites is with Bank of America Singapore Limited.

    LIMITATION OF LIABILITY

    THE FOLLOWING LIMITATIONS OF LIABILITY IN THIS SECTION SHALL NOT APPLY TO VIOLATIONS OF LAWS RELATING TO THE OFFER AND SALE OF SECURITIES. YOU ACKNOWLEDGE THAT NEITHER Bank of America, ITS AFFILIATES NOR THEIR OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, CONTRACTORS OR OTHER SUPPLIERS MAKES ANY WARRANTIES OR GUARANTEES WITH RESPECT TO THE SITES, INCLUDING WITHOUT LIMITATION, WARRANTIES REGARDING THE ACCURACY OR COMPLETENESS OF ANY CONTENT, OR WARRANTIES OF MERCHANTABILITY, NON-INFRINGEMENT OF INTELLECTUAL PROPERTY, TITLE OR FITNESS FOR A PARTICULAR PURPOSE. Bank of America, ITS AFFILIATES AND SUCH PERSONS SHALL NOT BE LIABLE TO YOU FOR ANY LOSS, COST, DAMAGE OR OTHER INJURY, WHETHER IN CONTRACT, TORT, NEGLIGENCE OR OTHERWISE, ARISING OUT OF OR CAUSED IN WHOLE OR IN PART BY (I) CLIENT’S USE OF OR RELIANCE ON THE SITES, OR (II) Bank of America’s PERFORMANCE OF ITS OBLIGATIONS UNDER OR IN CONNECTION WITH THESE TERMS AND CONDITIONS. Bank of America DOES NOT REPRESENT, WARRANT OR GUARANTEE THAT THE SITES WILL BE FREE FROM ERRORS OR WILL BE AVAILABLE. FURTHERMORE, Bank of America WILL NOT BE LIABLE FOR ANY DELAY, DIFFICULTY IN USE, INACCURACY OF INFORMATION, COMPUTER VIRUSES, MALICIOUS CODE OR OTHER DEFECT IN THE SITES, OR FOR THE INCOMPATIBILITY BETWEEN THE SITES AND FILES AND THE USER’S BROWSER OR OTHER SITES ACCESSING PROGRAM. NOR WILL Bank of America BE LIABLE FOR ANY OTHER PROBLEMS EXPERIENCED BY THE USER DUE TO CAUSES BEYOND THE Bank of America’s CONTROL. IN NO EVENT WILL Bank of America, ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, CONTRACTORS OR OTHER SUPPLIERS BE LIABLE TO YOU OR ANY THIRD PARTY FOR ANY PUNITIVE, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR SIMILAR DAMAGES, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.

    Because some states or jurisdictions do not allow the exclusion or limitation of liability for certain damages, in such states or jurisdictions, the liability of the Bank of America, its officers, directors, employees, agents, contractors or other suppliers shall be limited in accordance with this agreement to the extent permitted by law.

    Neither Bank of America, its Affiliates nor any of their officers, directors, employees, agents, contractors or other suppliers shall be liable in any way, and you agree to indemnify and hold harmless Bank of America, its Affiliates and such persons for (1) any inaccuracy, error, or delay in, or omission of (a) any information on the Sites, or (b) the transmission or delivery of any information on the Sites; (2) any loss or damage arising from or occasioned by (a) any such inaccuracy, error, delay, or omission, (b) non-performance, (c) interruption of use of the Sites due either to any negligent act or omission by Bank of America, its Affiliates, their officers, directors, employees, agents, contractors or other suppliers or to any "force majeure" (i.e., flood, extraordinary weather conditions, earthquake, or other act of God, fire, war, insurrection, riot, labor dispute, accident, action of government, communications, power failure, or equipment or software malfunction) or any other cause beyond the control of the Bank of America, its Affiliates, their officers, directors, employees, agents, contractors or other suppliers. You understand that Bank of America accepts no responsibility for security of information on the Internet.

    UK CONDITIONS

    Banc of America Securities Limited has approved the Sites for the purpose of Section 57 of the Financial Services Act of 1986. Banc of America Securities Limited is regulated for the conduct of investment business in the United Kingdom by the Securities and Futures Authority Limited. No access to the Sites shall be given in the United Kingdom to Private Customers, as that term is defined under the rules of The Securities and Futures Authority Limited; and any investments will not be made by us to any Private Customer.

    CHANGES TO AGREEMENT

    Bank of America may make changes to this Agreement at any time, without prior notice to you. Your continued use of the Sites indicates your continued agreement to be bound by this Agreement, as changed from time to time. You should view these Terms and Conditions often to stay informed of changes that may affect you.

    GOVERNING LAW

    This Agreement shall be governed by and construed under the law of the State of New York and the Federal law of the United States. You hereby consent and submit to jurisdiction in the Federal or state courts of the State of New York, U.S.A. You hereby irrevocably waive your rights to a jury trial.

    THIRD-PARTY LICENSORS

    The Sites may, from time to time, provide Client with various licensed programs ("Licensed Programs") from third-party vendors ("Vendors") which have been licensed by Bank of America for Client use and/or which require Client to sign a third-party license agreement ("License Agreement"). In using the Licensed Programs, Client agrees that it will

    • protect any confidential information of Bank of America, its Affiliates or Vendors contained in the Licensed Programs;
    • restrict the use of the Licensed Programs by Client solely to conditions agreed upon in the Agreement and the License Agreement;
    • restrict the copying of Licensed Programs to that number reasonably required for Client use and backup purposes
    • include Bank of America and Vendor copyright and all other proprietary notices in the use of all Licensed Programs;
    • prohibit the sale, relicensing, leasing, rental, lending and transferring of Licensed Programs;
    • prohibit, and take reasonable measures to prevent, the decompiling, disassembly, reverse engineering or modification of Licensed Programs;
    • comply with all export laws in respect of Licensed programs;
    • disclaim any liability on the part of Vendors for damages, liabilities, costs or expenses incurred by Client in the use of License Programs; and
    • make all vendors a third-party beneficiary of all Client waivers, disclaimers, limitation of liabilities, confidentiality and IP provisions contained in the Agreement.

    MERRILL LYNCH, PIERCE, FENNER & SMITH – FURTHER INFORMATION

    "Bank of America Merrill Lynch" is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ("Investment Banking Affiliates"), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered as broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp are registered as futures commission merchants with the CFTC and are members of the NFA. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured • May Lose Value • Are Not Bank Guaranteed.

    © 2017 Bank of America Corporation

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