1. Is an In-House
Bank or Payment
Factory right for your
organisation?
Written by Krister Backlund

2. We live in a time of change, and corporate
financial processes are no exception. As a
result of new technology and regulations,
companies must review their financial
processes in order to remain competitive. We
are currently seeing organisational changes
such as establishment of shared service
centres and changes to the responsibilities
and mandates of treasury departments.
Other changes arise in technology in the
form of virtual accounts, scanning services,
In-House Banks and SaaS solutions as well
as in standards such as CGI XML 20022 and
introduction of new regulations. How should
organisations seek to handle these changes?
• Could an In-House Bank or Payment
Factory form part of a solution to achieve
the level of efficiency required?
• What does the implementation of an
In-House Bank or Payment Factory
demand of an organisation?
• Is there a Business Case for the
implementation of a Payment Factory or an
In-House Bank?
This article seeks to provide a factual basis
for assessing why your organisation should
implement an In-House Bank. Further,
it outlines what is required so that your
organisation can answer the above questions.
Cash management is changing
There are a number of motivating factors
behind the changes currently taking place,
occurring within corporations and banks with
external and internal drivers.
New regulations are putting banks and
corporations under pressure. The banks
are being forced to prioritise compliance
with regulations rather than developing new
products. At the same time, technological
legacies make it difficult for them to deliver
what their customers want and need. Banks
are adopting different approaches in order to
engage customers. These range from lock-
in effects to the identification of innovative
solutions, within the scope of the new prevailing
conditions, with the aim of attracting new
customers.
The finance department is under pressure
to demonstrate increased efficiency. Key
performance indicators which track efficiency,
for example, measuring the number of
employees in the financial department in
relation to turnover, are becoming more
commonplace. In order to make intended
improvements on efficiency, companies are
placing greater demands on their banks,
internal organisations and system suppliers.
Companies are seeking a greater degree
of automation, fewer IT solutions and user-
friendly interfaces requiring minimal manual
input. A greater degree of mobility on the
part of the finance department personnel,
requires location-independent solutions, with
mobile services and real-time information as
fundamental requirements.

3. What are the requirements for
implementing an
In-House Bank?
The complexities associated with implementing
an In-House Bank should be neither under nor
overestimated. What is clear, however, is that
it can represent a highly profitable investment
for many organisations. The Vision, Strategy
and Policy of the treasury department are
fundamental to this process. This being the
case, active support from management is
vital for effecting this type of change, since it
concerns more a shift of approach than the
implementation of new system support.
The company’s operational structure must
be able to accommodate the introduction
of an In-House Bank. Implementation of an
In-House Bank is not only about automating
and centralising payment flows. Parts of the
processes previously managed by the bank
will now be handled internally. An In-House
Bank also requires someone to manage internal
agreements, such as interest rates and limits,
in addition to the other activities requiring
attention.
The company’s banking arrangements are
fundamental to the implementation of an In-
House Bank. The capacity of selected banks
to meet standards such as XML20022 will
assume even greater importance to carry out
straightforward implementation and being
able to easily change banks. Support in the
form of virtual accounts is a key requirement
for carrying out COBO (collection on behalf)
payments.

4. The difference between an
In-House Bank and Payment
Factory
The terms Payment Factory and In-House
Bank are used in different ways by different
market players. “In-House Bank” is often used
in order to describe the role performed by the
treasury department in many companies. When
we talk about systems, however, in simple
terms, a Payment Factory can be classed as a
system used for centralisation and automation
of payment flows, whereas an In-House Bank
is used to insource management of accounts
from the bank into the internal organisation. It
is important for an In-House Bank to enable
POBO (Payment on behalf of*) payments
as well as to minimise internal payments at
the bank. COBO (Collection on behalf of*)
payments can be performed within In-House
Banks. Once this is achieved, the number of
external accounts can be kept to a minimum.

5. The link between an In-House Bank and
Payment Factory is outlined in the illustration
above. The different components can be
coordinated or used in isolation as units in the
illustration.
• Cash Management – in this function, the
company keeps track of balances and
projected cash flows.
• Payments and Collections – this function
is used to manage incoming and outgoing
payments. The payment regulations in
effect for validation and optimisation form a
central part of the process.
• In-House Bank – manages the company’s
accounts as well as all terms, such as
interest rates and internal limits. External
accounts are replaced by internal ones,
which thereby enables POBO (Payment on
behalf of) and COBO (Collections on behalf
of).
POBO and COBO - what are they
and how do they work?
POBO and COBO payments, as well as
elimination of internal payments within the bank,
are key components implementing an in-house
bank. With this in mind, I will provide a brief
explanation of these concepts.
POBO - Payments on behalf of (payments in
someone else’s name): The debit account for
the outgoing payment is replaced by another
account. The subsidiary does not have a
bank account in the currency of the payment,
or has no account at all. Instead, it only has
an account in an In-House Bank. The parent
company’s bank account is used as the
debit account when the bank performs the
payment (the parent company’s bank account
is also mirrored in the In-House Bank). The
subsidiary’s account in the In-House Bank is
debited, with a credit applied to the transaction
account of the In-House Bank.
COBO - Collections on behalf of (payments
received in someone else’s name): The
subsidiary does not have an external account
in order to receive the payment. Therefore,
the customer has been instructed to make
the payment to the parent company’s bank
account. When the parent company’s account
is credited, the payment is mirrored in its In-
House Bank account. The reference information
serves to identify the subsidiary to which the
payment is linked, with this subsidiary’s In-
House Bank account credited and the parent
company’s In-House Bank transaction account
debited. In the case of COBO payments,
identifying the recipient can be more difficult.
Using a bank which provides virtual account
management can provide an effective solution
to this problem. We will revisit the subject of
virtual account management in a future article.

6. The route to an In-House Bank?
The route to an In-House Bank is a process,
which involves a number of steps. Naturally, it is
important for companies to assess their current
situation before proceeding. It is important to
bear in mind that this is not an IT project or an
isolated Treasury project, although as project-
owner, Treasury is tasked with leading and
coordinating the process. The organisation as
a whole must be engaged, with subsidiaries,
IT units, shared service centres and legal
departments, this is key to the to the project’s
success. It can be difficult for the internal
organisation to handle a project of this nature
without involving external resources. Previous
experience working with similar projects
can be invaluable. Commissioning external
consultants is often considered expensive,
however, preventing costly errors may enable
savings in the long term. This may also serve to
ensure that the project progresses and reaches
completion as quickly as possible, even though
internal resources may be stretched from time
to time. It is important to emphasise that each
company is unique. If you have the ambition
to become a best-in-class treasury, you can’t
simply duplicate what others have done
previously. The point of departure must be the
company’s unique circumstances and agreed
objectives, which then provide the solution for
the path it needs to take.
Examples of stages towards the implementation
of an In-House Bank with Straight Through
Processing include:
1. Centralised ownership of accounts and
funds.
2. Improved banking and account structure.
3. Replacing banks’ bilateral connections with
SWIFT.
4. Standardisation and automation of
outgoing payment flows.
5. Moving internal payments from the bank.
6. Centralising incoming payment flows.
7. Closing accounts to be replaced by internal
accounts in an In-House Bank.

7. In summary
Thanks to standardisation and technological developments, implementing a Payment
Factory or In-House Bank is also a viable option for mid-size enterprises. Standardisation
has also made the implementation easier. To determine if an In-House Bank is suitable for
your organisation, and to form the basis of your business case, a number of factors must
be evaluated, including the number of subsidiaries, payment flows in overseas currencies,
the nature of banking arrangements, operational structure, efficiency of payment processing
and currency risks, etc. As referred to earlier, a pre- study is the first logical step towards
implementation of an In-House Bank. Introduction of an In-House Bank is a key part of the
process to become a best-in-class treasury, so why wait?
For further information go to www.tieto.com/tcb
Contact: Krister Backlund, Lead Business Analyst krister.backlund@tieto.com + 46/ 70 350 6909
Is there a business case?
There is no doubt that a positive business case
exists for the implementation of an In-House
Bank for the majority of companies of a certain
scale and complexity. The implementation
of standards and STP (Straight Through
Processing) enabled by an In-House Bank are
integral to this business case. The savings
provided by the implementation of an In-House
Bank are as follows:
• Keeping better track of and gaining easier
access to the company’s liquid assets.
• More efficient integration and
standardisation of cash management
processes.
• Simplified IT infrastructure, with fewer
systems and bank connections.
• Reduced bank costs, fewer accounts and
fewer cross-border payments.
• Simplified risk control, making it easier to
secure compliance with KYC and AML.
• Payment history data available in one
location.
Each area provides both qualitative and
quantitative improvements to be included in the
business case. The full effect of all savings will
not be immediately apparent, rather, it could
take some years until this is the case. However,
the total savings made are significant.
There are likely to be significant hidden costs
associated with processing payments locally
among the company’s subsidiaries. These
costs are included in the processing of such
costs itself. In this context, it is vital to focus
on identifying hidden inefficiencies in payment
processes. This will ensure improvement of
the business case as well as the realisation
of intended improvements when the project
is carried out. This is of importance not least
when the time comes to follow up the savings
generated by the project.
At a minimum, the following costs should be
included when assessing the business case:
project costs, implementation costs, licence
costs and operational costs.