Phil Pettinato, bobsguide Contributing Blogger.
In a recent Reval webinar, 63% of financial professionals said they are already using an in-house bank or planning to implement one in near future. The concept has been around for many years, but why is this trend on the rise today? The advancement of cloud-based technology platforms is making the in-house banking concept really pay off with efficiencies and savings. Companies are gaining the real-time visibility they need to optimize cash globally and process transactions effectively and efficiently, anywhere in the world.
Foundation: Global Cash Visualisation
As globalisation increases, so does complexity in treasury operations. Finance professionals commonly oversee hundreds of bank accounts with different bank partners, in multiple currencies and in many countries around the world, each with their own set of regulations. To make their global cash flows visible, they need technology that can truly connect their treasury centres and subsidiaries, and do so, easily as they continue to grow.
The multi-tenancy of software-as-a-service (SaaS) cloud technology is ideal for multinational finance teams accessing their treasury systems anytime, anywhere, and, increasingly from their mobile devices. All their bank partners are connected to the platform and bank statements are collected automatically. More financial data is loaded into the solution from market data feeds, ERP systems, matching and trading platforms. In this manner, the treasury system evolves to a hub for cash and risk information.
With modern technology, cash visualisation is a requisite step to payment optimisation.
Continuous Payment Optimisation
As treasuries implement a single, global cloud platform, making global cash positions visible, they phase in other areas for automation, making payment efficiencies through an in-house bank the next step in the project. In-house banks offer financial services to their business units that would typically be provided by a commercial bank. The overriding motivation for in-house banking is to reduce cost and better manage cash, although depending on the structure of the company, in-house banks can look quite different. However, the concept behind is commonly the same.
In-house banks use different techniques to minimise the physical amount of money that's moved around within the enterprise. Corporates use intercompany accounts and pooling structures in order to reduce the number of physical accounts, simplifying bank structures and saving banking fees. Possibilities range from simple zero balancing to physical pooling and notional pooling for multiple levels and currencies.
In contrast to external bank-client-relations, intercompany relations are often more complex. The terms for "Lending in the family,” between subsidiaries, is usually more flexible, and therefore varied and changing, when it comes to taxes or late payments. However, companies need to closely track intercompany activity for accounting purposes. Treasuries that want their in-house banks to work for them, rather than revert some processes to spreadsheets, breaking the information flow and control, need to make sure that their treasury technology is able to support the intricacies of their internal transactions as well as manage and document external transactions. When looking for technology, finance professionals should make sure, the software in not only able to map their intercompany lending structures, but also supports internal hedging, intercompany clearing and netting, all concepts to further reduce payment cost.
In addition to saving money through virtual accounts, finance teams can further reduce transaction costs and fees through payments-on-behalf-of (POBO) and receipts-on-behalf-of (ROBO). These advanced concepts help shift international payments to local payments. When choosing POBO and ROBO, technology is needed that mirrors virtual bank accounts and identifies the origin of each transaction.
5 Reasons for Cloud Software
When it comes to technology, treasury professionals should invest in a robust, single cloud platform that helps them to make their global cash positions visible and to build an in-house bank. And many treasurers do so, because cloud software makes it easy to:
- connect to banks and third party systems to streamline cash and payment workflows
- add capabilities as needed, enabling treasury teams to take a step-by-step approach to in-house banking. That said it is a precondition that the cloud treasury platform offers a breadth of capabilities to cash, payments and risk management.
- choose the pace for the in-house bank project as the vendor takes care of IT infrastructure, software implementation, roll out and upgrades, no internal IT resources are needed to move things along.
- handle large volumes of global payments. Client-server-systems are typically developed for one company, whereas SaaS technology is designed for thousands of companies and hundreds of thousands of users. As all clients are working on the same version of the platform, robust SaaS solutions are built to load and process large amounts of data at the same time, ensuring high performance even at "payment rush hours."
- stay up-to-date with new payment formats, channels and concepts. Investing in innovative software also pays off quickly when it comes to cybercrime protection.
As the cloud continues to bring new possibilities to business, it is breathing new life into existing concepts like in-house banking structures. A global, cloud-based platform that is scalable and provides advanced capabilities for the intricacies of an in-house bank is a pre-requisite for real-time information flow and real savings.
By Phil Pettinato, CTO, Reval.