In-House Banking: A Treasury Technology Implementation Guide

What Is In-House Banking?

In-house banking is a centralized structure where your corporate headquarters acts as an internal bank for all subsidiaries and business units. Instead of each subsidiary maintaining separate banking relationships and cash balances scattered across multiple accounts, the parent company consolidates all cash management, funding, and investment activities under one centralized treasury function.

Think of it as creating your own internal bank within your corporate structure. Your subsidiaries deposit excess cash with the corporate treasury and borrow (withdraw) when they need funding, just like they would with an external bank—but at better rates and with complete transparency.

Avoid excessive internal rates—e.g., 50% for withdrawals—these destroy trust and compliance. For example, when calculating rates for withdraw, you should take into consideration credit risk premium + sovereign risk premium to determine the stand-alone margin. Of course, you can also consider a synergy margin, but this is another discussion, not part of this tutorial.

The Business Case: Why In-House Banking Matters

Cash Visibility Crisis: Without in-house banking, you’re flying pretty… blind. Your German subsidiary might have €2 million sitting idle while your US operation pays 8% on a credit line. You can’t optimize what you can’t see.

Interest Rate Arbitrage: External banks charge your subsidiaries prime + 2% for loans while paying you 0.5% on deposits. In-house banking captures this spread internally, typically saving 150-300 basis points on funding costs. Again, you can add synergy margin if you want to allocate benefits based on subsidiary-level contribution.

FX Risk Concentration: When subsidiaries hedge FX exposure independently, you might have offsetting positions. Centralized treasury eliminates redundant hedging costs and reduces overall risk.

Technology Setup: The Core Components

1. Treasury Management System (TMS) Configuration

Your TMS becomes the central nervous system of in-house banking. Here’s how to configure it:

Account Structure Setup:

• Create virtual account hierarchies in your TMS: BA1 -> VA1 (BA =  bank account, VA = virtual account).
• Configure subsidiary account codes (e.g., DE001 for German operations, US001 for American subsidiary)
• You can set up account types: operational, concentration, and intercompany loan accounts

Interest Rate Engine Configuration:

• Input your funding curves (eg., SOFR + margin for USD, ESTR + margin for EUR)
• Configure withdraw and deposit rates
• Set up automatic rate updates from market data feeds

Cash Positioning Module:

• Configure real-time balance aggregation across all subsidiary accounts
• Set up cash forecasting workflows with subsidiary input requirements
• Create overdraft and surplus threshold alerts, if possible
• Create rules to automate postings on VA when statements are posted for BA.

2. Banking setup

Physical Bank Account Structure:

• One master concentration account at headquarters, for each currency (for example)
• Zero Balance Accounts (ZBAs) for each subsidiary
• Automated sweeping configured to move all balances to the concentration account daily

Payment Factory Setup: You can opt to:

• Centralize all payments through headquarters (POBO)
• Route subsidiary payment requests through approval workflows
• Maintain subsidiary cost center allocation for internal reporting

Practical Implementation Example: GlobalTech Corp

Let’s walk through a setup for GlobalTech Corp, a US-based imaginary technology company with imaginary subsidiaries in Germany, Singapore, and Mexico.

Step 1: Infrastructure Setup

TMS Configuration:

• Created subsidiary codes: GTUS (headquarters), GTDE (Germany), GTSG (Singapore), GTMX (Mexico)
• Configured USD as the reporting currency with EUR, SGD, and MXN as local currencies
• Set up interest rate curves: USD SOFR+1.5%, EUR ESTR+1.5%, SGD SORA+2.0%

Banking Relationships:

• Opened concentration account with JPM in New York ($50M credit facility)
• Established ZBAs for each subsidiary with daily auto-sweep functionality
• Configured SWIFT connectivity for international transfers

Step 2: Policy and Rate Setting

Internal Transfer Pricing Policy:

• Deposit rates: SOFR-0.25% for USD deposits, ESTR-0.25% for EUR deposits
• Lending rates: SOFR+1.25% for USD loans, ESTR+1.25% for EUR loans
• FX rates: Mid-market rates updated daily from Reuters/Bloomberg/Refinitiv feed

Credit Limits by Subsidiary:

• GTDE: €5M revolving credit line
• GTSG: S$3M revolving credit line
• GTMX: $2M revolving credit line

Step 3: Operational Workflow

Daily Cash Management Process for US:

• 8:00 AM EST: Automated balance reporting from all bank accounts feeds into TMS (statements are posted)
• 8:30 AM EST: Regional or HQ treasurers review cash positions and submit funding requests
• 9:00 AM EST: HQ treasury approves/modifies requests
• 10:00 AM EST: Funding transfers execute automatically/manually
• 4:00 PM EST: End-of-day position reporting and next-day forecasting

Monthly Interest Calculation:

The TMS automatically calculates intercompany interest based on daily balances:

• GTDE had at EOM surplus of €1.2M earning ESTR-0.25%
• GTSG borrowed S$800K at SORA+2.0%
• GTMX maintained surplus of $500K earning SOFR-0.25%

Intercompany Accounts: The Technical Foundation

Virtual Account Structure

• GTUS-001: Master concentration account holding all excess cash
• GTDE-001: German subsidiary’s net position with headquarters
• GTSG-001: Singapore subsidiary’s net position with headquarters

Interest Calculation Engine

Your TMS should automatically calculate interest on intercompany balances using this logic:

For Surplus Positions (Subsidiary lending to HQ):

Daily Interest = (Account Balance × (Base Rate - Spread) × Days) / 360

For Deficit Positions (Subsidiary borrowing from HQ):

Daily Interest = (Account Balance × (Base Rate + Spread) × Days) / 360

Monthly Accrual Process:

1. System calculates daily interest on all intercompany balances (Daily interest rate + margin)
2. Monthly interest calculation entries post to both subsidiary and headquarters books
3. Annual adjustment of margins, depending on the transfer pricing analysis done (or not).

Treasury Technology Perspective: System Integration

Data Flow Architecture

Real-Time Position Management: IF your TMS receives balance updates every X minutes from banking partners via SWIFT MT942 messages or camt.052 or API connections, the data flows through three processing layers:

1. Validation Layer: Confirms transaction authenticity and account mapping
2. Translation Layer: Updates your transactions on your bank accounts and (OPTION 1) posts (using rules) also on VA or (OPTION 2) doesn’t post anything on VA until EOD statements is posted.
3. Aggregation Layer: Consolidates positions across currencies and entities for BA, optionally for VA, depending on setup.

Possible Integration Touchpoints

ERP Synchronization:

• Daily GL balance updates from subsidiaries using TMS VA balances (not very used in practice)
• Real-time AR/AP aging for cash forecasting (not very used in practice)

Banking Platform APIs:

• Payment initiation through secure REST APIs (not very used in practice)
• Account balance monitoring via APIs (not very used in practice)
• FX rate feeds for mark-to-market valuations (normal practice)

Risk Management Systems:

• VaR calculations on net FX exposures (all TRMS should calculate it, but it is not very used in practice)
• Credit limit monitoring across all subsidiaries (usually done in excel)
• Stress testing of liquidity scenarios (not very used in practice)

Common Implementation Pitfalls

Technology Mistakes to Avoid:

1. Insufficient API Bandwidth: Don’t underestimate data volume. A $5B company can generate hundreds or thousands of daily transactions across subsidiaries.
2. Manual Interest Calculations: Excel-based interest tracking breaks down quickly. Invest in automated calculation engines (A TMS should do more than fine).
3. Weak Audit Trails: Regulators scrutinize intercompany pricing. Ensure your TMS logs every rate decision and approval. If your company is big, then a transfer pricing tool would be your best investment.
4. Currency Mismatch: If your German subsidiary reports in EUR but borrows in USD, you need automated hedge accounting in your system. Consider a cross-currency swap.

Measuring Success: KPIs That Matter

Financial Metrics:

• Net interest margin improvement: Target 150-200 bps over external banking
• Cash utilization efficiency: Maintain idle cash balances below 2% of total revenue
• FX hedging cost reduction: Achieve 30–40% cost savings through effective netting strategies

Operational Metrics:

• Daily cash position accuracy: Maintain 99%+ forecast accuracy on daily cash positions
• Payment processing time: Target same-day execution for all intercompany transfers
• System uptime: Treasury systems require 99.9% availability

Next Steps: Your Implementation Roadmap

• Step 1 (Months 1-3): Technology foundation and policy framework
• Step 2 (Months 4-6): Pilot program with largest subsidiary
• Step 3 (Months 7-9): Full rollout to remaining entities
• Step 4 (Month 10+): Optimization and advanced features (automated investing, dynamic hedging)

The key to successful in-house banking isn’t just implementing the technology—it’s configuring your systems to work seamlessly together while maintaining the controls and transparency your CFO demands. Start with solid technical foundations, add robust processes, and the financial benefits will follow naturally.