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Extending theValue of BAT’s In-house Bank

By Philip Stewart, Head ofCash & Banking, BritishAmerican Tobacco plc

B ritish American Tobacco (BAT) has been engaged in a multi-year, multi-disciplinary project to create a target operating model across theorganisation. As part of this, we have undertaken a comprehensive global

treasury centralisation and in-house banking project in partnership with DeutscheBank to maximise visibility and control over liquidity and risk positions, andoptimise the operational efficiency of our transaction flows. Key to the success ofthis initiative has been the use of on behalf of (OBO) techniques and Deutsche Bankvirtual account and virtual IBAN solutions, as this article outlines.

Project backgroundA key strategic initiative over recent years has been project ‘TaO’, underpinning BAT’sglobal strategy and supporting strategic pillars of productivity and growth. TaO introduceda new target operating model enabled by one instance of SAP across all markets within thegroup.

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In the past, we had a decentralisedtreasury model with fragmented systemsand disparate processes, resulting in alack of visibility and control over cash.Through this project, however, we wereable to: centralise treasury activities morefully, migrate all transactional activity toour finance shared service centre (FSSC)in Bucharest; introduce an in-house bankfor intercompany flows; improve visibilityand control over cash /FX exposures;adopt a consistent set of treasury keyperformance indicators (KPIs), andenhance cash flow forecasting. We alsoreviewed and refined our banking paneland rationalised our bank accounts,standardised payment formatting,payment processes and bank statementprocessing.

Extending the valueHaving established the foundations of acentralised treasury and in-house bank,the logical next step was to extend thereach of the in-house bank into third partypayments and collections. This involved

POBO and COBO

POBOUnder a POBO arrangement, the SSC (or other centralised function) makes payments ‘onbehalf of’ group entities through a single account (usually per currency). Payments are thenbooked on the originating entity’s intercompany account. The entity on whose behalf apayment is made is identified in the remittance information, so the beneficiary can identifyand reconcile the payment.

POBO extends the value of an in-house bank as follows:

� Transaction fees can be significantly lower as payments can be routed domesticallyrather than cross-border;

� The total number of external bank accounts can be reduced;� By reducing the number of accounts, less administrative effort is required for bank

account management, costs may be lower through economies of scale, and thecompany achieves better control and visibility over cash;

� With fewer accounts, liquidity management is easier, avoiding the need for complexpooling structures or interbank transfers.

COBOUnder a COBO arrangement, the SSC (or other centralised function) receives incomingpayments ‘on behalf of’ group entities through a single account (usually per currency).These are reconciled centrally and booked on the beneficiary entity’s intercompanyaccount.

COBO extends the value of an in-house bank as follows:

� The number of external bank accounts can be reduced, offering the benefits outlinedabove;

� The value of COBO can be extended by introducing virtual accounts. This allows thecompany to provide local account details to a customer that resembles an externalaccount but remittances are then routed automatically to the central collectionsaccount. This provides customers with the reassurance and convenience of paying to alocal entity, whilst providing the company with the advantages of a central account;

� Virtual account numbers (which can be defined at an entity level right through toindividual customer level) can then be used to reconcile the account and post incomingflows to the relevant intercompany account and update the customer credit accountautomatically;

� By reconciling and posting flows promptly and automatically, customer credit isreleased quickly, allowing more business to be done.

In both Asia andEurope , we havereplaced physicalbank accounts with

virtualaccounts/IBANs

with comprehensivevisibility and

integration of bankaccount informationvia MT940 reporting

into SAP forreconciliation andaccount posting.

POBO COBO

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adopting payments on behalf of (POBO)and collections on behalf of (COBO)techniques (described in Box 1), with acentral treasury vehicle (BAT InternationalFinance plc) acting as agent. We selectedDeutsche Bank as our partner based onour trusted relationship and the bank’shigh quality solutions and footprint, butalso specifically due to the bank’s provenvirtual account/IBAN solutions, with largevolumes of transactions already passingthrough virtual accounts. In addition, wefound that not all banks were able toprovide MT940 reporting on virtualaccounts which was essential for us inminimising disruption to the SAP templatewhile integrating data for automaticreconciliation.

The project spans Asia and Europe witha different structure in each region toreflect different distribution models. Inboth regions, we have replaced physicalbank accounts with virtualaccounts/IBANs (see box 1) withcomprehensive visibility and integration ofbank account information via MT940reporting into SAP for reconciliation andaccount posting.

In Asia, BAT International Financeoperates on behalf of structures for groupentities in Hong Kong, Singapore, Australiaand New Zealand. In Singapore and HongKong, we have virtual accounts on ahierarchical basis in the name of bothparticipating entities and individual

customers. Each customer has a uniquevirtual bank account number. This is veryhelpful in identifying incoming flows moreprecisely and reconciling and posting thesepayments promptly.

In Europe, POBO and COBO techniqueshave been rolled out across 20 countries.We sell to a small number of distributors ineach country, so we have a virtual IBANper entity with the flexibility to introduceadditional layers to customer level asrequired.

Project outcomesWith Deutsche Bank’s help, weimplemented our POBO and COBO projectvery quickly. For example, ourimplementation in Asia began in early2016 and we completed it in August. InEurope, we started in March 2016 andwent live in November. The project hasbeen a major driver in enabling us toreduce our number of banks, and numberof bank accounts. Previously, we hadrelationships with 20-30 banks in bothEurope and Asia. Today, we have one corebank in Western Europe, and 2-3 in Asia.As a result, we have been able toconsolidate and strengthen ourrelationships with these primary bankingpartners such as Deutsche Bank, which isour sole bank in Western Europe and oneof our partners in Asia.

We have achieved high levels of

“BAT is a key strategic customer forDeutsche Bank and this project hasbeen a significant initiative at the bank.A major factor in BAT’s project success,and the significant financial benefitsthat have resulted, is Deutsche Bank’swell established, proven virtual accountand virtual IBAN solution. This includesvirtual account reporting integratedinto BAT’s SAP platform for automaticreconciliation. It has been a privilege towork with Phil and the rest of the teamon this project, and we look forward tobuilding on our partnership to deliverfurther value to the organisation andreinforce BAT’s position as a leadingtreasury function globally.”

Paul Greenhalgh, Director, Cash Management, Deutsche Bank

We have achievedhigh levels of

straight-throughprocessing foroutgoing

payments andstraight-throughreconciliation ofincoming flows.

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straight-through processing for outgoingpayments and straight-throughreconciliation of incoming flows,delivering substantial additional efficiencyto our business. Furthermore, by creatingan adaptable OBO model that alreadyencompasses diversity across markets, wehave the flexibility to expand the reach ofour in-house bank to new markets in thefuture, whilst also accommodatingchanges to the tax and legal environmentin each location.

Based on our initial calculation, we havegenerated in excess of £2m per annum inexternal cost savings alone, includingtransaction and bank accountmaintenance costs, in addition tosignificant internal efficiencies.

Overcoming challengesBAT was one of the first corporations tointroduce OBO techniques in somemarkets in which we operate, particularlyfor COBO. In addition, it represented amajor change for our business which weneeded to handle carefully:

Communication. While extending the in-house bank to operate on an OBO basis is atechnology project in some respects, thehuman aspects of the project are just asimportant. In particular, it was essential tocommunicate effectively across thebusiness to ensure cross functionalalignment and gain FSSC /participatingentities’ buy-in.

Tax and legal. Although OBO is not abouttax optimisation but process efficiency, thetax and legal implications need to be fullyassessed on a market by market basis. InAustralia, New Zealand, Singapore andHong Kong, for example, we had conductedour due diligence and first implemented thein-house bank for intercompany paymentsand then extended this to third partypayments. We adopted similar approach inWestern Europe and are now exploringadditional markets to roll out the solutionwith approval now finalised to extend toMalaysia.

Bank and market diversity. AlthoughPOBO is relatively well-known and well-established in many markets, COBO is lessfamiliar so the challenges are greater. Wewere surprised at the differing levels ofawareness and capability amongst banks,with some only now starting to put COBO

/virtual account solutions in place, andinconsistencies across markets includingSEPA zone (Single Euro Payments Area).Using virtual accounts with MT 940reporting was crucial, and as such, ourrelationship with Deutsche Bank, thatexcels in these solutions, was a majorfactor in our project success.

Project scope. It is also important to setout the scope and objectives clearlyupfront, e.g., countries, banks, currencies,payment methods, virtual accountstructure, regulatory impact. This isimportant in maintaining focus anddefining project tasks clearly.

Sharing experiencesBAT has been one of the early adopters ofPOBO and particularly COBO in many ofthe 25 markets we have implemented sofar. This took a ‘leap of faith’ in manyrespects, but the value of Deutsche Bank’ssupport in terms of advice and expertise,the quality of the bank’s solutions,integration and STP capabilities, andfootprint across our key markets cannot beoverestimated. In this situation, it isimportant not to be scared of change andcomplexity. Indeed, by implementing asolution that was arguably more complexthan it could have been, we have been ableto extend the value of our in-house bankoperating on an OBO basis to a widerrange of markets. In addition, we now havethe flexibility to extend and adapt tochanging business needs, marketdevelopments and regulatoryrequirements in the future. It was a creditto both the internal team, and our externalpartners, that we were awarded the TMICorporate Recognition Award 2016 for thisproject. �

Philip Stewart

Head of Cash and Banking, British American Tobacco plc

Phil Stewart is Head of Cash and Banking at British American Tobacco,  joining in 2013.  Heis based in London and is responsible for developing and delivering the group’s cash andbanking strategy, taking the treasury lead on working capital optimisation initiatives aswell as managing the Treasury Settlements, In House Cash and Bank AccountManagement teams that form part of Global Treasury Operations based in Bucharest. 

Before joining BAT Phil held a number of Assistant Treasurer roles most recently atEasyJet.

BAT has been oneof the early

adopters of POBOand particularlyCOBO in many ofthe 25 markets

we haveimplemented so

far.