Regional Treasury Centre Structures

How to structure a centralised treasury system

Location, location, location

Just like when buying a house, the locations you choose to site your centralised Treasury function and the global treasury headquarters they report into, are key. It is possible to take advantage of the incentives available in its location, and many companies give tax incentives top priority in their assessment of location. But there are a number of other key factors to consider.

Alongside tax incentives, government incentives should also be assessed. In financial terms, you need to consider banking factors, acess to capital markets, country credit ratings and the currency environment. The general business environment and availability of skills and talent are also hugely important, as is the infrastructure required for the successful operation of a company. Often, the presence of other regional treasury functions in the same area may help tip the balance.

Getting started

Once location or locations have been approved, its time to establish the structure of the centre. Separate legal entities can be created, which act as an extension of the global treasury HQ, usually handling middle- and back-office treasury activities. Creating regional teams helps pave the way for more sophisticated solutions to further centralise operations. They deliver ‘soft’ financial benefits to the organisation through a more responsive, and ideally proactive, corporate treasury, and ‘hard’ financial benefits through more efficient cash management, FX and consolidated cash positions.

This model can include any or all of the following:

• Cash concentration/pooling (treasury header) – both global and regional pools.
• Investment and lending – this is usually complemented by centralised policies, e.g., in-country cash limits, third-party borrowing-lending guidelines, and more.
• Netting Centre – here it will be critical to determine inter alia the settlement currency, settlement frequency and how to resolve disputes.
• Re-Invoicing Centre – a department that centralises intrafirm transactions. This may have tax implications in certain jurisdictions.

In the first instance, a company may also choose to implement a single bank connectivity gateway to pave the way for future centralisation. That’s often considered an easy win, as it doesn’t require significant changes in personnel.

Many ways to centralise

Depending on the complexity of your business needs and the subsequent demand for centralisation, there are a variety of roles that a regional model can play. Most are likely to require significant investment in technology like enterprise resource planning software (ERP) and treasury management systems (TMS) to fully realise the benefits.

1. Payment Factory: A payment factory offers a degree of central control and management over the processing of previously decentralised payment flows. The actual structure of a payment factory can manifest in a number of ways with internal factors – such as configuration of processes, technology, staff – and external factors – such as bank counterparties, connectivity and account structures – leading to varying models.
2. Shared Service Centre (SSC): An SSC is generally a separate legal entity that brings together various business functions as well as treasury services, including some or all the marketing, HR, legal, tax, procurement or finance roles. Setting up a successful SSC requires significant organisational change, stakeholder buy-in and extensive planning, but it can be achieved with minimal involvement from banks relative to the other functions and processes.
   
   In a recent Deloitte survey of corporates operating SSCs, the majority had implemented finance functions (94%) and more than half had implemented HR (57%) and procurement (54%). Of the tangible benefits achieved, 88% cited a reduction in costs, 78% standardisation and process efficiency and 63% business value.¹
3. In-House Bank (IHB): An IHB has become an increasingly popular concept with treasurers as a solution for a number of cash management challenges. An IHB can centralise flows and balances into one currency account for the group. Group companies have internal accounts, designated as intercompany current accounts, with the IHB.
   
   At a high level, the IHB can act as a treasury centre to operate internal loans, deposits and FX for the group and the execution of external operating flows such as payments-on-behalf-of (POBO) and receivable-on-behalf-of (ROBO).
4. Netting Centre: Netting is a practice that’s common in finance and other industries. Automated clearing house payment systems, for example, use netting to settle between banks. For companies, netting can reduce the number of intercompany payments to one or two per month per legal entity within the netting structure.
5. Re-invoicing Centre: This builds on the netting centre with an arrangement whereby all intercompany transactions, billed in multiple currencies, are centralised. Foreign currency payables and receivables are netted with a single settlement to the re-invoicing centre, essentially moving the invoice exposure to a single collection point – the netting centre.

The right banking partner

Creating and operating a centralised treasury function in a region can have many benefits for your company, but it is also a sophisticated operation that can bring challenges to doing business across different regions and countries. Working closely with you, HSBC uses our extensive experience to help you establish the right solution for your individual business, ensuring the right level of complexity and scale for your needs.

Our team of on-the-ground experts know how to navigate the complexities of banking in different regions, with specialised knowledge and skills in your geography of choice. We can help you bank like a local and find the hidden opportunities that each market offers.

Further insights