When does inhouse banking make sense for a company?

Reading time: 4 min.
With in-house banking, a company itself takes over central functions that usually fall within the remit of a bank.

In-house banking is becoming increasingly popular among corporations and companies that operate multinationally. It simplifies processes and helps minimise costs. Here we show you how in-house banking works, what the benefits of it are and how companies use it efficiently.

What is inhouse banking? Meaning explained

With in-house banking, a company itself takes over central functions that usually fall within the remit of a bank. The aim is to manage the cash flow within a group in the best possible way and to reduce bureaucratic hurdles so that the subsidiaries can work efficiently and cost-effectively.

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With in-house banking, the group makes its own funds available to the affiliated companies as a loan. It can also bear foreign exchange risks and optimise cash management. The aim is to minimise the costs of financial management throughout the group.

Who uses inhouse banking?

Inhouse banking is mainly used by corporate groups and large multinational companies. With in-house banking, the treasury management in the group takes care of granting loans to subsidiaries and assumes other activities of a traditional bank.

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The group uses its own resources for this. This means that the costs for the affiliated companies are lower and processes can be made more efficient.

What is the difference between bank and inhouse bank?

A company that does in-house banking is not a bank in the classical sense. It only uses its own funds to lend to its subsidiaries. This means that in-house banking is not subject to the control of financial supervisory authorities, as is the case with traditional banks.

Inhouse banking example

A group in the UK has subsidiaries in several countries in Europe. It uses in-house banking to simplify and manage its internal financial processes more efficiently.

One of its subsidiaries in Spain needs a loan of 200,000€. As interest rates are very high at the moment, it turns to the group. The treasurers have access to all relevant data about the subsidiary and can thus quickly assess its financial situation.

You provide the subsidiary with a loan in the desired amount at an interest rate that is several percentage points below the usual market interest rate. The subsidiary receives its money quickly and easily, can make its investments quickly and earn a profit with them.

Primary benefits of in-house banking

Set interest rates yourself

In-house banking can have many advantages for corporations. By lending to its subsidiaries, it can set its own interest rates, allowing the subsidiaries to benefit from favourable conditions. This ultimately increases the group's profit.

Simplify processes

Another advantage is that in-house banking simplifies processes. A subsidiary does not have to apply for a loan at a bank, present documents and then negotiate the conditions, but simply turns to the group. The group already knows the financial situation of the subsidiary, which means that the money can be made available faster and with less bureaucracy.

More independence from traditional banks

Subsidiaries located in countries where political or economic unrest is frequent are also less dependent on the Landesbanken. This allows them to work more efficiently and to finance their business independently of the political and economic situation.

Centralised cash flow management

The treasury management department in the group has a better overview and closer control of the entire cash flow in the group via in-house banking. This makes it easier to adjust financing strategies and manage liquid funds.

A central treasury account is used to grant loans and carry out transactions for the subsidiaries throughout the Group. In this way, many financial activities of the entire Group converge there, making it easier and more accurate to prepare cash flow forecasts and better plan investments.

Inhouse banking software

The treasury management in the group uses certain software for in-house banking so that its processes run as efficiently as possible. Depending on which in-house banking activities the treasurer is responsible for, software with different functions is necessary.

Since the main task of treasury management is generally cash flow management, it uses cash flow management software to monitor and forecast cash flows within the group.

If the group does international business that is conducted in foreign currency (e.g. if a subsidiary is located in a country with a different currency), in-house banking software is needed that monitors exchange rates in real time, makes transactions in foreign currency and calculates what a transaction in foreign currency costs the group.

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