Businesses of all sizes need to execute a sound treasury strategy that ensures liquidity, safeguards financial assets and manages risk.
Inefficient and ineffective use of cash can increase operating costs and limit a treasury team’s ability to ensure financial resiliency. With higher rates, external debt costs even more to borrow, and every trapped dollar not put to strategic use represents an opportunity cost in foregone interest income.
At the largest, most complex multinational companies, effective management of cash and treasury operations may take the form of an in-house bank (IHB) model. That won’t be the ideal structure for every business, but all organizations can consider adopting an IHB’s key functions and then realize a positive impact to their working capital through cash management, investment and funding enhancements.
An in-house bank (IHB) is a structure within an organization where a specific entity takes on centralized management of treasury functions, such as cash management, liquidity and risk.
Let’s look at a few key functions of an in-house bank and how some similar steps could help your organization.
Under an IHB structure, the in-house bank is the owner of all corporate cash. When business units don’t share their cash efficiently, it can come at a high opportunity cost to the broader organization.
The fundamental lesson: A strong cash culture underpins the IHB and effective treasury. Empower your treasury to be the responsible custodian of the organization’s cash and financial assets.
Within an IHB structure, treasury has clear visibility, access and control over corporate cash. Without this visibility, treasury often spends considerable time and expense to gain visibility over funds across fragmented subsidiaries, often involving multiple countries, currencies and operational delays. This may result in the organization relying on increasingly expensive external credit when it may not need to.
The IHB structure simplifies the treasury infrastructure and allows organizations to readily identify—then consolidate—cash from various sources to allocate funds strategically, leveraging the organization’s aggregate cash position for the benefit of the whole firm.
The fundamental lesson: Simplify your account structures and obtain reporting to produce a consolidated view of organizational cash, in real time if possible. A single view of balances makes it easier to monitor cash positions. New technologies can enhance the ease and speed at which data is received, giving timely—up to real-time—visibility over accounts.
Ensure your organization’s accounts are well-connected so that liquidity can be readily accessed and quickly deployed. Appropriate account structures—whether through physical consolidation or notional pooling—can ensure subsidiary funding and reduce or eliminate the need for smaller lines of credit for individual subsidiaries, often in different countries and currencies.
Organizations frequently operate in multiple locations and jurisdictions, many with discrete banking and regulatory environments that can add complexity in the treasury infrastructure over time. In the IHB model, treasury acts as the single interface for the organization with external lenders. By aggregating credit needs, the company can borrow funds strategically from lenders that offer more advantageous terms and conditions.
The fundamental lesson: Consolidate external vendor relationships, such as banks, where possible. Reducing duplication can result in many efficiencies in relationship management, cost, complexity and compliance burdens.
In the IHB model, the treasury acts as the single interface for the organization with external lenders. By aggregating credit needs, the company can borrow funds strategically from lenders that offer more advantageous terms and conditions.
Effectively forecasting cash needs will ensure the organization has appropriate liquidity to finance its obligations and reduce the opportunity cost of lost investment yields on surplus funds.
The fundamental lesson: Leverage the value of aggregated relationships to obtain better pricing. Focus on stronger forecasting that can help executives make better-informed decisions on how to allocate funds.
Many organizations look to create economies of scale in processing to create efficiency and enhance execution accuracy and control over financial operations. The IHB model consolidates activities into centralized functions that can help to negotiate transaction costs and may minimize the need for external financial services or facilities.
The fundamental lesson: Centralizing treasury functions and risk management activities gives treasury a big-picture view of the organization, which can help a company more effectively identify, assess and address risks around credit and liquidity. Centralization generates organizational expertise and allows the organization to present a single consolidated front to the market, using its scale to drive value. Reviewing payment-processing tasks enables cost savings, reduced administrative burdens and more efficient processes.
An IHB structure often simplifies the administration of intercompany lending positions between subsidiaries, replacing multi-entity lending relationships with bilateral arrangements between the subsidiary and the IHB entity. In addition, intercompany transaction flows are often netted, which can significantly reduce transaction settlement charges and banking fees.
The fundamental lesson: Many organizations can benefit from a similar simplification of intercompany relationships. The streamlined structure can, in turn, reduce banking costs that would be otherwise be incurred on intercompany transactions.
Though it should generate value in the long run, setting up an in-house bank structure may carry expensive upfront costs. Organizations must also seek to recruit and train the right professionals to manage the structure and support them with the necessary technology to handle demands securely and sustainably.
J.P. Morgan does not provide tax, legal, or regulatory advice to clients, therefore we suggest that you seek the appropriate advice as you consider the tax, legal, and regulatory-related implications relevant to entering into any liquidity structure.
An IHB can introduce benefits for more organizations than just large and complex multinational companies. By focusing on the function of the structure rather than the features, organizations of all sizes can realize a positive impact to their working capital through cash management, investment and funding enhancements.
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