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Cash Pooling: The Nordic Advantage
Rolf Särnesten Schlegel, Handelsbanken - 30 Sep 2013
The cash pooling method developed by banks in the Nordic region and widely adopted by its corporates deserves to be more widely known. This article outlines how it operates and the main benefits that it offers to treasury departments.

One of the most basic tasks of a group treasury is to ensure that the group’s liquidity is visible, readily available and earning a decent return. To that end, cash pooling is a common practice. Generally, two methods are used:

•Zero-balancing (ZB): Funds are physically moved to a master account.
•Notional: The balance of the participating accounts are notionally aggregated
In the Nordic region there is a variant, or hybrid, of these two methods developed by the local banking community. The method is called ‘Nordic cash pooling’, ‘single account pooling’, ‘group account’ (koncernkonto), or ‘central account’ (centralkonto).

This is a proven method - in both technical and legal terms - and easily the most used cash pooling technique in the Nordic region. The method has certain special features and for treasurers who are in the process of establishing a regional treasury operation or payment factory in the region, it is worth investigating this option.

Function

The method is based on a model with a real top/master account and virtual transaction accounts. However, from the user’s point of view, the sub/transaction accounts are very real. The ‘virtual’ property is primarily from a legal point of view; in practice, the accounts act as and can be used as any ordinary transaction account. Legally, the top account is the only account on the bank’s books and it holds the real, interest-earning balance. Any credit facility is also linked to the top account.

The transactions on the sub-accounts are mirrored to the top account. The balances on the sub-accounts are purely intra-group claims/liabilities between the sub-account holder (subsidiary) and the cash pool/master account owner (group treasury).

Usually, the cash pool owner can set the interest conditions to be applied to the sub-accounts, as well as internal limits. It is also possible to define levels in the account structure that can be used to reflect the organisational structure, such as summary levels for divisions, as shown in the diagram below.




This means that from the subsidiaries’ point of view, the model acts as a notional pool. They have their own bank accounts that they manage and with balances that are not swept away automatically. On the other hand, from treasury’s perspective, the model behaves as a zero-balancing (ZB) cash pool, with all actual liquidity reflected on the top account. The balance netting is done without any physical transfers being needed since, legally, all transactions are performed on the master account. Treasury has a real-time view of the net cash position and can easily access it from its own transaction account in the structure (without affecting the subsidiaries’ balances).

Thus, the functionality can be perceived as a hybrid of the ZB and notional pooling methods, providing the best features of both models.

The balances on the sub-accounts are often adjusted as part of an annual group capitalisation review, e.g. converted to internal term loans/deposits. Regular sweeping arrangements between accounts within the structure can also be set up, if there is a need for them.

Furthermore the more advanced banks in the region, including Handelsbanken, are able to connect the account structures across currencies and borders, thus scaling up the concept into a fully fledged cross-border, multi-currency solution.
 

Application

In light of the above it is easy to understand why the adoption of concepts such as in-house cash (IHC) among Nordic corporates has been somewhat slow. The need for them has simply not been as great as in environments with other cash pooling methods. The ‘Nordic cash pool’ is in effect an IHC solution - including a single (real) external bank account and the management of intra-group balances - being outsourced to the bank. The bank can calculate and book, if requested, the (internal) interest as on any bank account. It also produces statements and file-based reporting for the sub-accounts. The banks have the experience and systems to support this functionality in a cost-efficient way.

To achieve the same functionality with in-house systems, advanced structures are needed in the enterprise resource planning (ERP) systems. These solutions are often complex from both a technical and legal perspective. The set-up and maintenance of the solutions can be quite costly.

The Nordic pooling method is compatible with the payment factory concept and can reduce the need for complex payment/collection-on-behalf-of (POBO/COBO) procedures. Since the payments are made from/to the subsidiary’s own (virtual) bank account, reconciliation is facilitated. The benefits have been generally recognised and have made even non-Nordic banks introduce ‘virtual’ sub-accounts, thus mimicking the Nordic set-up.

That said, the solution is particularly suitable when a group operates in a decentralised manner; for example when the local management is also responsible for its own liquidity and working capital management, and/or when the payment processing is performed locally.

Conclusion

The objectives of new account structures and cash pooling models are usually to facilitate cash management, increase control and reduce costs. Our recommendation is that before complex internal solutions are established, the functionality of the ‘Nordic cash pool’ model should be evaluated. This can often be the most cost-efficient alternative.