Bank Account Rationalisation
Most large organisations have bank accounts with multiple banks, in many locations, and in various currencies. In most cases, Corporate Treasury manages these bank accounts for local entities as well as across the group, along with their associated flows and risks.
Every bank account represents additional cost and risk to the business. From a cost perspective - banks charge account maintenance fees, auditors charge to audit and circularise bank accounts, dedicated resources on payroll are allocated by the finance department to manage and reconcile bank accounts. From a risk perspective – each bank account has potential exposure to theft, cybersecurity risks, etc., and banks’ cybersecurity standards differ across banks. Hence, having a multiplicity of bank accounts requires more attention when it comes to managing risks.
For the above reasons, and to achieve operational simplicity and efficiency, treasury typically work towards rationalising the number of bank accounts used by the business, and minimising the number of bank accounts where possible. One of the best case scenarios for organisations is to have an IHB (In House Bank) set up; when done properly, the IHB results in just one bank account per currency for the whole group.
The need for bank accounts
In reality, however, there are many factors driving businesses to open more bank accounts than necessary. For instance:
- Businesses open bank accounts based on their customers’ requests to pay to accounts within a specific bank,
- Mergers and acquisitions often leave businesses with excess bank accounts that get neglected due to other priorities,
- Some businesses require separate bank accounts for each business unit or department to manage cash flow, particularly for those that do not have access to accounting systems or virtual account functionality,
- Bank relationship reviews may result in new accounts added, creating duplicated functionality.
It is worth noting that in some markets, businesses need to open a bank account for different kinds of banking activities. This may be due to market regulations on capital accounts, or having the Know Your Customer (KYC) process being tied to bank accounts; or to facilitate fee deduction by the bank.
As common banking practice in most markets, businesses do not need to open additional bank accounts for loans, derivatives, letters of credit, foreign exchange, guarantees, deposits, or any other business, unless required otherwise by law. Bank accounts are typically required to facilitate payments and collections; these types of accounts are commonly referred to as operating accounts.
Due to the varying nature of businesses across industries and markets, account rationalisation can mean different things. For example, bank account rationalisation could mean:
- Collapsing multiple collection accounts into one virtual account structure,
- Eliminating unneeded accounts resulting from mergers or acquisitions,
- Closing dormant and near dormant accounts,
- Centralising and moving away from department accounts,
- Rationalisation of cash management into a IHB set up or similar arrangement.
Collapsing multiple collection accounts
Businesses sometimes open bank accounts based on customer preferences, especially in markets where cheques and other paper instruments are common, as these customers prefer physical proximity for physical instruments. Increasingly, however, many businesses are evolving from paper to electronic instruments for both payments and collections. This is covered in greater detail in the ‘Transitioning from Paper to Electronic and Instant Payments’ article.
Businesses that have a large number of customers could consider using virtual account structures to maintain the granularity of collections data to facilitate accounts receivable reconciliation.
Transitioning collections to a different bank account – whether in the context of bank account rationalisation or following other cash management process re-engineering – is a delicate process and requires early and thorough communication with customers.
For internal controls reasons, customers may require complex processes and approvals to change a vendor’s bank account. This change may be good for the business if it reduces fraud and errors. However, it does mean that customers will need time to change vendor bank accounts, and sufficient time must be factored into the transition process. It is prudent that the bank accounts which are to be collapsed are kept open until all customers have successfully been converted to the new arrangements.
In addition to the usual RFP (Request for proposal) process to select a collections bank, it is important that customers accept the proposed new banking arrangements. If customer preferences are not already well understood internally, it would be wise to engage customers directly to understand their vendor payment processes and banking preferences.
Eliminating unneeded accounts after M&A
In post M&A scenarios, it is common that one entity’s bank accounts become redundant after the two entities’ processes have been unified. In this case, when payments and collections have been transitioned, it will simply be a case of closing the unnecessary bank accounts.
Even where processes are not unified for various reasons, it is still beneficial to rationalise bank accounts after M&A. In some cases, a RFP will be required if there are accounts with different bank. Once the new account arrangements are in place, the transition will be similar to other rationalisations.
Generally, transitioning collection accounts poses several challenges and issues, as described above. Payment accounts are simpler, especially after bank connectivity and direct debits have been transitioned correctly.
Closing dormant and near dormant accounts
Closing dormant accounts is the simplest form of account rationalisation. It is important to check for any transaction activity in the past year or so, to make sure that any recurring transactions are properly covered.
Centralising and moving away from department accounts
Businesses may open separate bank accounts so that each business unit or department can manage its own accounts in accordance with their preferences. Sometimes this is a vestige from past M&A activity.
The first observation, in such circumstances, is that for efficiency and control, most effective businesses centralise non-core activities like payments into centres of excellence such as Shared Service Centres (SSC). This trend accelerated sharply post the dotcom crash and consequent process legislation such as Sarbanes-Oxley in the USA and similar legislation in other markets.
Beyond the issue of bank account inefficiency, businesses with internally heterogenous processes should consider reviewing their overall processes with a view to improve efficiency and control. For example, leveraging the SSC functionality such as payment factory or IHB.
Some businesses continue to keep separate bank accounts for departments because they were previously unable to report payments and collections to the responsible department. Technically, this is no longer a problem because most ERPs cater to this need with functionality like “In-House Bank” and “In-House Cash”. Furthermore, most banks can offer similar functionality through virtual account structures.
Transitioning multiple departmental bank accounts to a single legal entity bank account entails multiple steps, depending on what banking activities are being transitioned:
- RFP banks to determine the arrangement that best meets the business’ needs
- Ensure that all payments types and instruments, as well as direct debits are catered for with the single bank account
- Extra caution with transitioning of collection accounts as described above
- Ensure bank connectivity to all required corporate systems (ERPs, accounts, payroll, etc)
Multi-entity bank account rationalisation
Domestic bank account rationalisation refers to how companies can minimise the number of bank accounts used to support their businesses within one market. Furthermore, bank account rationalisation most commonly refers to minimising the bank accounts of a single legal entity.
By using payments and collections on-behalf-of multiple legal entities, the principles of bank account rationalisation can be similarly applied to a group of companies. Just as a single legal entity should have only one bank account per currency (rather than separate bank accounts for every department or business unit or profit centre), a group of companies should can have only one bank account per currency.
Achieving bank account rationalisation across multiple legal entities is achieved through “on-behalf-of” (OBO) arrangements, commonly mediated by payment factories, shared service centres (SSC), or in-house banks (IHB). A designated legal entity holds the single bank account and executes payments and processes collections through that single bank account on-behalf-of itself and all the other legal entities in the group. ERP systems, or virtual account solutions, are normally used to manage the flows by a legal entity, business unit, department etc. as required by the business.
In detail, this arrangement works through general ledger intercompany (or inter-departmental) accounts in the ERP system, which act as internal reflections of the shared bank account, or as in-house bank accounts.
To illustrate, when entity A processes payments and collections on-behalf-of entity B, payments (which are credits on the general ledger), are booked as follows:
And collections (which are debits on the general ledger) processed by entity A on-behalf-of entity B are booked as follows:
In this way, the cashflows in the single bank account belonging to entity A (which are processed on-behalf-of entity B) are backed out to the intercompany account in A’s general ledger with no net effect to A’s balance sheet and profit and loss. And such cashflows are reflected in B’s intercompany’s account (which acts as a virtual account or in-house bank account) in the same way as it would be recorded if Entity B still had its own bank account.
The same logic can be applied to multiple entities in multiple markets, which is what we call in-house bank (IHB).
Cross-border (multi-market) bank account rationalisation
The ideal scenario of bank account rationalisation for multinational corporations is to have one bank account per currency globally. This scenario is subject to regulatory constraints in some markets, and Treasury Prism can assist in evaluating the efficacity of such rationalisation for any set of markets.
The most common way to achieve cross-border bank account rationalisation across multiple markets is with an in-house bank (IHB) arrangement. Subject to regulatory constraints, an IHB will have one bank account per currency, normally in the home market of the currency, i.e. onshore for that currency. This enables the organisation to have access to domestic clearing systems, which substantially reduces the cost of payments, and makes it easier and cheaper for customers to pay as well.
Most commonly, the one bank account per currency is legally owned by the IHB entity (i.e. it account is in the name of the IHB entity), but the one bank account per currency may also be legally owned by the relevant local subsidiary. In any case, for this arrangement to be effective, the cashflow processing is to be centralised in an ERP or TMS system.
The accounting entries for IHB are the same as described above, except for the fact that entities A and B are in different markets. This is how regulations can affect the viability of an IHB. From a tax perspective, interest on intercompany balances are subject to withholding tax (if any) and BEPS considerations. For specific tax implications on intercompany balances, do refer to your organisation’s tax consultants for advice.
In cases where the one bank account per currency is owned by the IHB entity, transitioning to a full IHB arrangement means that subsidiaries will have no bank account at all. A full IHB set up results in one bank account per currency for the whole group. This is a significant change that normally requires a phased approach for different markets, and different types of payments from a functional and geographical perspective.
A full IHB arrangement also implies that payments and collections will be made by IHB on behalf of subsidiaries. This means that all customers and vendors, including employees, must be transitioned to the new bank accounts. To facilitate an IHB arrangement, generally an ERP or TMS software will need to be implemented.
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