How to Successfully Implement an In-House Bank (IHB)Monday, October 21, 10:30 am

With You Today...

Sam Vallotton

Salesforce Senior

Director, Treasury

Naman Kuwadia

PwC, Treasury

Director

Catherine Hill

Salesforce Director,

Treasury

Polling Question - 1What best describes the reason you came to this session?

A. I want to understand what an IHB means

B. To gain insight into what other companies are doing as it relates to IHB

C. To better understand the needs and benefits of an IHB

D. To better understand challenges faced during an IHB implementation

E. I need to kill some time before tonight’s fun events

Key Drivers of IHB

What forces warrant implementation of an IHB?

Regulatory & Business Drivers for IHBShifts in the macro-economic environment due to regulatory and business drivers have significant

impact on companies and treasury, driving the need for an IHB

Pushing taxable revenue into the

country of the customer, increasing

transparency on tax bills and fair “arms

length” pricing on IC positions

Broad range of tax reforms affecting capital

allocation, funding strategies, liquidity

mgmt., & operating models

Higher volume of intercompany settlements resulting in higher IC cash flows & associated costs

Distributed cash collections result in multiple cash puddles, trapped cash, and fragmented investments

Impact on Treasury

Cash Profile

IC Profile

Risk Profile

Fragmented FX needs often result in inefficient FX operations and high cost (more trades, less favorable bid-ask spreads)

Company growth stemming

from changes in business

landscape driven by organic

and inorganic factors:

- International Expansion

- New product offerings

- M&A

In House Bank

IHB Drivers for Salesforce (1 of 2)Adding local resellers in EMEA region, driven by BEPS

Single Reseller Model Multiple Reseller Model

Reseller

Country 1

Country 2

Sales &

Marketing

Country 3

Sales &

Marketing

Country 4

Sales &

Marketing

Country 5

Sales &

Marketing

All EMEA

Customers

Revenue & Cash

Country 2

Reseller

Country 3

Reseller

Country 4

Reseller

Country 5

Reseller

Local Customers

Revenue & Cash

Local Customers Local Customers

Revenue & Cash

Cost + Reimbursement

Local Suppliers, Employees, etc.

Cash Outflows

Rest of EMEA

Customers

Revenue & Cash

Countries

6, 7, 8

Sales &

Marketing

Local Suppliers,

Employees, etc.

Cost + Reimbursement

Local Suppliers, Employees, etc.

Cash Outflows

Cash Outflows Cash Outflows

IHB Drivers for Salesforce (2 of 2)Impact on Treasury due to changes in cash, risk and IC profiles, driving the need for an IHB

Reseller - Country 2

€ ￡

$ Kr

Reseller - Country 3

$

Reseller - Country 4

$ €

Sales & Marketing

$ €

Data Centers

$ €

- Cash Puddles - lots of idle cash

- Double volume in FX Trades

- Duplication of Investment Accounts

￡

Back to the stone age without IHB:

Building Blocks of IHB

What constitutes an IHB?

IHB - Building Blocks

Entity ServicesSystemPeople

• Characteristics of the

entity

• Entity and participant

interaction model

• Scope of services

based on cost-benefit

analysis

• Scope of services by

participant

• Timeline and

roadmap for

implementation

• TMS and ERP

configuration and

interaction

• Integration with 3rd

party systems

• Stakeholders for IHB

setup and ongoing

operations

Banking

• Banking and liquidity

structure options

• Banking services and

capabilities

• Bank connectivity

Polling Question - 2Which building block(s) would you like to understand better today?

A. Entity

B. People

C. Systems

D. Services

E. Banking

Entity Overview

What is the best-fit IHB structure?

What is the functional currency for the IHB Header?

Who are the participant entities & which services will they participate in?

Should a new entity be established or leverage an existing entity?

Key considerations for designing an entity structure for an IHBCategories

New vs. Existing Entity

Participants

Functional Currency

IHB Structure Decisions

Location / Jurisdiction of Header

Key Considerations

What is the optimum location for the header entities?

No. of IHBs

Tax Implications (Active Vs. Passive Income, VAT Offsets, etc.)

Separate Finance Entity Vs. Commingled with Operating Entity

Substance Requirements Withholding Tax Treaties with other countries

Brexit Impact Stamp Duty Impact

Local country / tax regulations regarding IHB services

Primary economic environment Forecasted cash flows and balances per currency (external & IC)

Participant entity’s characteristics (ex. cashflow currencies, special payment entities, etc.)

Regional and/or Global Consolidation Options

Dependence on parent’s economic environment

1

1

1

1

1

2

2

2

2

2

3 4

3

What is the best-fit IHB service model?

IHB Service ModelEntrepreneurial Vs. Service Provider Vs.

Hybrid1 IHB Benefit / Loss (retained by header vs.

shared vs. allocated to participants)2

3 Adequate Capitalization / Debt-to-Equity

Cash PaymentsCash Collections & Payments

Entity - Salesforce Decisions

Single IHB header for EMEA; no interaction with AMER and APAC regions in initial implementation

USD

All entities in EMEA except Morocco and Israel

New entity

New vs. Existing Entity

Participants

Functional Currency

IHB Model & Entity Decisions

Location / Jurisdiction of Header

Based on Tax impact and substanceCountry 2

Reseller

Country 3

Reseller

Country 4

Reseller

Country 5

Sales &

Marketing

FinCo

Country 1

Cash Pooling

Salesforce Entity Structure Key Decisions

IHB Structure Decisions

Cash Collections & Payments

Cash Collections & Payments

IHB Service ModelEntrepreneurial model with transactional pricing only for participants

Separate Legal Entity

People - OverviewRoles & Responsibilities

Treasury Controllership IT Tax

Legal AR Ops AP Ops 3rd Parties

- IHB affects the broader finance group and

hence, requires a cross-functional

collaborative approach

- Early buy-in from relevant stakeholders is

essential to ensure successful implementation

- IHB implementation is a good opportunity for

reviewing 3rd party relationships (FX,

Investments, Banking Partners, etc.) to assess

fit with long-term strategy, automation

opportunities, etc.

Key Stakeholders Considerations

Centralized management of FX (liquidity and hedging of exposures)

IHB – Typical ServicesAn IHB effectively in-sources services from the banks and recaptures substantial amount of fees and spreads paid to the banks

Collection-on-behalf-of (COBO) Centralized Collection Strategy = fewer physical bank accounts✔

Payment-on-behalf-of (POBO) Intelligent & Cost Efficient Payment Routing = fewer bank accounts✔

✔

Cashless settlement of intercompany transactions / balances✔

Pooling and Internal Funding Centralized & standardized funding vehicle and cash consolidation✔

Investments Centralized investment management of excess cash✔

IC Current Account Management Automatic tracking of intercompany positions and interest calculations✔

Intercompany Settlements

FX

Focus for today

Polling Question - 3Which IHB services have been implemented at your organization?

A. Cash Pooling

B. FX

C. IC Settlements

D. POBO

E. COBO

Services - Pooling & Internal Funding OverviewThe pooling service facilitates aggregation of cash balances to improve liquidity management

✓ Centralization of cash resulting in reduction of idle cash

✓ Centralized Investment Management resulting in process & time/effort efficiencies

✓ Increased visibility into cash positioning and global liquidity

Cash Pooling

- Physical Vs. Notional Pooling

- Physical Pooling (single vs. multi-tiered)

- Notional Pooling (single entity vs. multi-entity)

Systems

Banking

- Bank connectivity options (SWIFT, H2H, etc.)

- File format options (MT, BAI, XML, CAMT, etc.)

- Transaction (ZBA) identification

- Conversion of non-functional ZBA movement to

functional IHB entries

Service Overview & Benefits Key Considerations

IHB

$, ￡

Country 1 Country 2

$ - Col ￡- Col

Single Tiered Multi Tiered

Country 3

€ - Col

€

Physical Accounts

Options for IHB Header:- Physical pooling- Multi-currency Notional Pooling- Manual liquidity mgmt.

€ - Pay

Physical cash

flows at EOD

for pooling

￡- Pay

Virtual Accounts

$ - Pay

Virtual Accounts‘Instantaneous’ cash pooling

with cash physically received

in IHB account

External Investments

- # of banks, accounts & currencies

- Physical vs. virtual bank accounts

- Physical location of bank accounts

Services - Salesforce Pooling DecisionsStructure finalized with collaboration of Treasury, Controllership, and IT

- Physical Pooling

- Single tiered pooling, with some legacy exceptions

Cash Pooling

Systems

Banking

- One major bank in EMEA with partner bank in Nordics

- Physical accounts only

- Most new accounts opened in same location as FinCo for

enhanced automated ZBAs

- Combination of SWIFT and H2H, moving towards one SWIFT solution

- BAI2 for statements, MT / XML for payments

- Automated ZBA identification and conversion of non-functional ZBA

movement to functional IHB entries

Salesforce Pooling Service Salesforce Decisions

FinCo$ ￡ € Kr

Country 1

$, ￡, €, Kr

Country 2

$, €

Country 3

$, ￡

Country 4

$, Kr

Physical Header Accounts

Virtual Participant Accounts under FinCo Header

FinCo$ ￡ € Kr

Country 1

$, ￡, Kr

Country 2

$, €

Country 3

$, ￡

Country 4

$, Kr

Single + Multi-tiered, Physical Participant Accounts

€

€

Finalized Structure

Ideal Structure

Instantaneous Cash Pooling

Physical Cash Pooling

Physical Header Accounts

✓ Reduction in Wires & FX transactions & corresponding fees

✓ Reduction of operational risk due to cross-border flows

✓ Increased process efficiency due to automated netting/settlements

✓ Increased transparency & visibility into IC settlements

✓ Automated clearing and recon of IC AP/AR invoices (for gross cashless settlement)

Services - IC Settlements OverviewThe IC settlement service facilitates streamlined & least-cost payment routing of IC transactions

Service Overview & Benefits

GBP

EUREUR

USD

USD

GB Co

FR CoDE Co

US Co

USD

USD

EUR

GBPGBP

GB Co

FR CoDE Co

US Co

Key Considerations

Before IHB

After IHB

Netting Strategy

- Volumes & Values of IC and cross border transactions

- No Netting Vs. Bi-lateral Netting vs. Multi-lateral Netting

- Cash Vs. Cashless Settlements

- TMS vs. ERP vs. Specialist Netting Tools vs. combination

- Participant Entities, Currencies, IC transaction types

- Multiple IHB headers, cross-header settlements- In case of netting, Netting Center Entity (same as IHB header or another entity)

Structure

Systems

Process- Clearing of IC AP/AR invoices

- Reconciliation of IC balances post netting/settlements

- In case of netting, preliminary run, review and approval, dispute resolution,

FX trading, final run and settlements

InvoiceInvoice

Services - Salesforce IC Settlement DecisionsBalanced use of existing ERP Settlement processes and TMS functionality

FR CoDE Co

FinCo

UK Co

TMS

Salesforce IC Settlement Service Salesforce Decisions

Gross Cashless IC Settlements

ERP

Netting Strategy

- Gross cashless IC settlements across IHB accounts for FinCo

participants (inter-EMEA)

- Continue bilateral netting for invoices between non-FinCo

participants or between a FinCo and non-FinCo participant

Combined use of TMS and ERP for IHB entries (participants’ entries produced by ERP and FinCo’s entries produced by TMS)

- All FinCo participants with IC invoices in any FinCo currency for all

invoice types, included in gross cashless IC Settlements service

Structure

Systems

Process

- Automated clearing of IC AP/AR invoices in ERP, while sending information to TMS

- Automated reconciliation of IC balances using common identifiers (e.g., invoice #)

between ERP and TMS

Invoice

Services - FX OverviewThe FX service facilitates streamlined & cost-efficient FX risk management

Header A/Cs

Ctry 1 € -￡

Ctry 2 € -￡ 3 External Hedges

Bank

✓ Reduced number of hedging transactions (and costs)

✓ Reduced cost of FX spreads on external trades

✓ Greater visibility to corporate-wide FX exposures

✓ Fewer administration requirements & enhanced controls

Header A/Cs

Ctry 1 € -￡

Ctry 2 € -￡ 3 Internal Hedges

IHB

Header A/Cs

1 External Hedge

Bank

Individual Hedging

Netted Hedging

Service Overview & Benefits Key Considerations

FX Risk Management Strategy

- Scope of hedging (Balance Sheet, Cash Flow, Net Investment)

- Back to Back hedging (between IHB, participants and street) vs. IHB

hedging only against its own functional currency

- Data sources for exposure identification

- Hedging frequency - daily vs. weekly vs. monthly

- Hedging thresholds & roll-forward frequency

- Trade confirmations - automated vs. manual vs. combination

- Bi-lateral vs. multi-lateral settlement

- MTM calculation methodology

- FX gain/loss budget, mgmt. reporting, hedge accounting

Process

Systems

- TMS vs. specialist system vs. combination

- FX trading platforms, confirmation systems

- System Interfaces (Trading, Confirmation, Settlement, Market Data)

- Ensuring ISDAs in place for external trading entities

- Hedge documentation for cash flow hedging (hedge effectiveness)

Contracting & Documentation

Ctry 3 € -￡

Ctry 3 € -￡

Services - Salesforce FX DecisionsImplementation required the most interaction with TMS peripheral systems and external vendors

Salesforce Decisions

FX Risk Management Strategy - Balance sheet hedging

- Net exposure hedged externally (with back to back with entities)

- Combination of internal & external hedges

- ERP reporting for exposure identification

- Daily hedging, thresholds applied to identify net new trades

- Quarterly rollforward of FX trades

- Automated trade confirmations, with exception for some exotic FX instruments

- Combination of bi-lateral vs. multi-lateral settlement

- MTM calculations using FX forward, zero coupon and CDS curves

- Management and disclosure reporting automated to the extent possible in TMS

Process

Systems- only TMS, no specialist system

- Interfaces between ERP, TMS, Reuters, FXall (bi-directional) and banks for automation

of exposure identification, trading, confirmation, market data and settlements

- FinCo ISDAs in place for go-live; legacy ISDAs also retained for back-up

Contracting & Documentation

Salesforce FX Service

Header A/Cs

Ctry 1 $ -€Ctry 2 € -￡Ctry 3 € -￡

Ctry 4 Kr - $

FinCo FX

Counterparty /

Banks

ERP TMSFXAll (Front Office,

Settlement Center)

Reuters

System Workflow

Non-Functional Currency Balances → FX exposures

FX rates, ZCC, CDS rates

Bi-lateral Settlements

Internal hedges

External hedges

Multi-lateral Settlements

Trade Confirms

Services - IC Current Account (CA) Management

✓ Track / manage intercompany balances on a regular basis

✓ Tax compliant, arms length interest calculations and bookings

The IC Current Account service automates tracking of intercompany positions and interest accruals

IHB Header

Country 1 Country 2 Country 3 Country 4

Country 1 Country 2 Country 3 Country 4

€, $ €, ￡ € $, €, SEK

Mirror IC Current Accounts

Service Overview & Benefits Key Considerations

Tax / Transfer Pricing

- IC agreements between IHB header and participants

- Interest rates on IC current accounts (fixed vs. floating, by participant, by

currency, by deposit / borrowing position, etc.)

- Source of truth for IC current account balances / management (TMS vs. Bank)

- Integration with market data source (FX rates, Interest rates, etc.)

- Analysis of direction and materiality of IC flows

- In only functional currency of participants (FX exposures at IHB header)

- In functional and non-functional currency of participants (FX exposures at

IHB participants)

IC Current Account Setup

Systems

Process

- Frequency of interest calculations (daily vs. monthly vs. quarterly)

- Conversion to IC Term Loans based on amount / duration thresholds

- Monitoring of non-functional currency balances to convert to functional currency

€, $ €, ￡ € $, €, SEK

Services - Salesforce IC CA Mgmt. DecisionsIC CA service built with overall guiding principles and stakeholder ownership in ERP and TMS

FinCo

Country 1 Country 2 Country 3

Country 1 Country 2 Country 3

Mirror IC Current Accounts

Salesforce IC Current Account Mgmt. Service Salesforce Decisions

TMS

ERP

Systems Workflow

IHB Header Entries

ERP acts as subledger for Participants’ IC current acct. entries

€, $ € £

€, $ € £

TMS acts as subledger for FinCo (IHB Header).

Participant IC current acct. entries are booked in TMS subledger to track IHB balances and to calculate interest

Tax / Transfer Pricing

- Transfer pricing analysis to determine interest rates on IC current accounts

(floating, different interest curves by currency, different spread for deposit

vs. borrowing positions)

- Formal IC agreement between FinCo and participants

- TMS as single source of truth for IC current account management, for flexibility

(bank-agnostic) and scalability

- ERP and TMS use same source of FX rates for consistency

- Feed of interest rates into TMS for interest calculation automation

- In only functional currency of participants, with one exception based on

analysis of direction and materiality of IC flows

IC Current Account Setup

Systems

Process

- Monthly calculation of interest based on daily IHB balances

- Conversion to IC Term Loans based on amount / duration thresholds (planned)

Implementation

Typical IHB Maturity Model

Polling Question - 4What are the key IHB implementation challenges for your organization?

A. Where should I start?

B. What should the IHB scope look like?

C. How do I convince executive management to implement an IHB?

D. All of the above

What’s Next?

Confidential Information for the sole benefit and use of PwC's Client.

IHB Maturity Model: Services and Geographical Coverage

Put IHB policies in

place including

current account

agreement

Rationalize banks and

bank accounts

Set up cash pooling

to concentrate

liquidity within

legal entities

Implement

intercompany netting and

cashless settlement

of IC invoices

Centralize FX hedging by

consolidating

exposures,

conducting

internal

hedges, and

utilizing a

central entity

for external

hedging

Introduce

POBO/ COBO transactions

Full IHB & Payment Factory

All payments

and receipts

routed through

the In-House

Bank

✔ ✔✔

✔ ✔

Session Takeaways- Reduce costs, risks and dependency on external banking partners and maximize returns

and shareholder value by considering implementation or expansion of in-house bank

(IHB) for your organization

- Discuss impact of US Tax Reform on your organization with the Tax team to explore

possibilities of “global” cash pooling and IHB (US and non-US)

- Proactively collaborate with your product/services and M&A teams to stay current on

upcoming business landscape changes to understand impact on Treasury and explore

IHB as a solution