Corporates Are Spoiled for Choice When It Comes to Cash Pooling

Cash pools are arrangements mostly used by multinational groups to optimise cash and liquidity management and reduce reliance on external funding and associated funding costs.

There are two basic types of cash pooling arrangements:

• Physical cash pooling, where all accounts of cash pool participants are managed on a daily basis.
• Notional cash pooling, where the bank assesses the individual balances of each participant and pays or charges interest depending on the net balance.

According to Stephen Randall, the Global Head of Liquidity Management, Treasury and Trade Solutions at Citi, it not a simple question of using either one option or the other.

“Cash is usually physically pooled by currency to a single entity using intercompany loans, often on a cross-border basis,” he explained. “Notional pooling can then best be used to help optimise the use of cash supporting mismatches in cash flows between currencies. Our client benchmarking tool shows this is best practice in driving efficiency and control.”

Since both solutions are popular with corporates as they deliver on the centralisation of cash and help unlock and optimise working capital, client preferences tend to be driven by factors, such as company structure, scale, and geographic presence.

“The majority of corporates with a global footprint use a hybrid structure of both physical and notional, typically concentrating on physical pooling to a central location for visibility and control, and then wrapping a notional pool around these balances to achieve both self-funding and interest optimisation,” says Adnan Ahmad, the Head of Liquidity Products Europe and Global Payments Solutions at HSBC.

While treasuries implementing notional cash pooling are searching for interest optimisation at every level of their organisation, physical cash pooling enables them to concentrate their liquidity into a single master account.

Notional pooling allows subsidiaries to keep control over their cash and can be a good first step towards centralisation observes Laurent Chenain, the Global Head of International Trade and Transaction Banking at Credit Agricole CIB.

"However, it has more restrictions in terms of feasibility from a legal and bank capability perspective,” he said. “Physical cash pooling is instead used by centralised organisations which need, or want, to have a better grip over their cash.”

Supply chain disruption and geopolitical uncertainty have caused significant market volatility and with high interest rates significantly increasing the cost of capital, corporates have been restructuring their group liquidity to ensure continued access to cash and the flexibility to deploy it.

Tesy Mathew, the Head of Cash Management Institutional Banking at DBS agrees that corporate customers typically favour physical pooling as a more straightforward solution.

“Using virtual accounts to centralise liquidity is another way through which clients ensure better access to liquidity,” Mathew stated. “Increasingly corporates want to centralise liquidity to drive more efficiency and physical pooling allows scattered liquidity to be effectively centralised. Notional pooling also requires more onerous documentation and may involve additional charges.”

Corporates with a smaller or domestic-only footprint, or those with no borrowing requirement, tend to use physical pooling. Notional pooling (and specifically, multi-currency notional pooling) is a more bespoke solution and intended for corporates with activities in various currencies, an operational centralised treasury, and the right working capital pattern.

It is particularly relevant for corporates that are long in several currencies and have operational or investment strategy needs in one or more currencies, and who want to optimise their cash without the need to perform daily FX transactions.

This reduces costs and allows companies to assess their hedging strategy on an annual or seasonal basis explains Philippe Penichou, the Managing Director and Global Head of Sales, Wholesale Payments & Cash Management at Societe Generale.

“A notional pool enables treasurers to reach their target of running a highly efficient worldwide treasury with a small team – two or three highly qualified treasurers or cash managers can run it for an entire group,” Penichou added.

Mariya Tretyak, the Head of Liquidity Solutions for Corporates at BNP Paribas refers to increased interest from clients in new functionality, such as automated links between cash centralisation and investments, and the impact these changes can have on this liquidity solution.

On the question of whether corporates that use pooling are getting a worthwhile return on their cash now that interest rates have risen from their historic lows, Tretyak mentioned that cash pooling has always been appreciated by corporates thanks to its capacity to automatically consolidate cash and thus decrease the credit-debit spread that would be paid on individual accounts without a pooling solution in place.

The value proposition of pooling has strengthened amid higher interest rates, by enabling customers to use internal cash positions to offset high borrowing costs, or even gain better returns through cash centralisation.

“We see pooling as an effective tool to help customers hedge liquidity risk by consolidating and optimising cash positions from internal sources before accessing external sources of liquidity, minimising the need for short term financing and improving overall interest expenses,” Mathew mentioned. “The integration of digital tools has also made physical pooling a more seamless experience, enabling customers to track and monitor cash pools in real time along with intercompany loan administration and transfer pricing, which allows central treasury to ensure they get better returns on internal liquidity.”

Third party vendors can provide cash pooling services such as ‘smart’ reports and initiation of zero balance account transactions. But, when it concerns multiple countries and/or entities, Penichou reckons corporates will still want to have their overlay accounts maintained with their bank.

Mathew stated that there are pros and cons to third party pooling services. On the plus side, treasury management systems allow large corporates to develop solutions that are bank agnostic, enabling companies to switch from one bank to another by integrating the treasury management system with the bank’s platforms through standardised channels such as Swift Score.

“But while such systems allow companies to set rules to move funds, they still require integration into a bank’s systems to execute fund transfers,” she continued. “Corporates can instead choose to leverage a bank’s own liquidity management solution and we see this as a growing trend, especially as banks are enhancing their offerings through liquidity dashboards, analytics and other features such as transfer pricing calculations. If the bank is a strong counterparty, this further mitigates liquidity risks that corporates face.”