Optimized liquidity with cash pools and in-house banking

Making smarter financial moves 

Cash pooling and in-house banking are powerful tools for managing liquidity and boosting efficiency, but what business problems do they solve? How can a central in-house bank, or IHB, help corporations gain control over global cash flows, cut borrowing costs, and navigate the challenges of cash shortages in one region and surpluses in another? Cash pooling, combined with an IHB, offers a way to consolidate balances and optimize internal funds across subsidiaries, and reduce reliance on external financing and enhancing cash visibility. But when does this strategy truly pay off, and how can companies best set up cash pools within an IHB structure? Let’s look at the practicalities, benefits, and strategic questions to consider when using an in-house bank for cash pooling, helping businesses make smarter financial moves.  

Meet the expert 

Meet Jouni Kirjola

Jouni Kirjola is the Head of Solutions and Presales at Nomentia, bringing nearly 20 years of expertise to the role. Specializing in payments, cash forecasting, in-house banking, and reconciliation, his extensive experience and deep knowledge of financial solutions make him a key expert in delivering tailored solutions.

Jouni Kirjola is the Head of Solutions and Presales at Nomentia. Specializing in payments, cash forecasting, in-house banking, and reconciliation, Jouni brings nearly 20 years of expertise to delivering tailored solutions for cash and treasury management needs.  

Cash pooling and in-house banking – What’s that?  

Cash pooling is a treasury management technique that consolidates cash balances from multiple accounts, often across different subsidiaries or regions, into a single, centrally managed account. This helps corporations to optimize their liquidity, reduce external borrowing, and minimize interest expenses.  

“Companies use cash pooling to ensure that funds are available where they are needed most, balancing surplus and deficit positions across their entities, and thereby improving the overall efficiency of their cash management processes. “ - Jouni Kirjola, Head of Solutions & Presales 

An in-house bank (IHB) is a corporate treasury function that acts as a bank for the company’s subsidiaries, managing intercompany cash flows, financing, and foreign exchange activities. In-house banks simplify cash pooling by acting as the central point of contact for all subsidiaries, eliminating the need for external financial institutions for day-to-day operations. This centralized setup allows the corporation to streamline cash management, reduces costs and enhances control over global cash balances.  

Real-world cash pooling 

Let’s look at a global corporation, a multinational with subsidiaries in 20 countries that operates in various currencies, each with unique cash flow cycles. While some regions consistently have surplus cash, others face frequent cash shortages, forcing them to borrow externally at high interest rates. Managing cash in this environment is a balancing act, as excess funds in one location can’t easily offset deficits elsewhere. 

“Without a centralized cash management structure, each subsidiary relies on local banks, paying fees for transactions, currency conversions, and loans. This setup costs the corporation not just in fees and interest but in missed opportunities to optimize cash flow globally.” - Jouni Kirjola, Head of Solutions & Presales 

Faced with these inefficiencies, the company’s treasury team starts exploring the concept of cash pooling. They quickly discover that while cash pooling can help balance cash flows across subsidiaries, setting up an in-house bank to manage it would allow even more flexibility, control, and cost savings. 

Types of cash pools and their functions  

Choosing between zero-balancing and target-balancing pooling 

Zero-Balancing is ideal for corporate structures prioritizing full cash centralization and strict control over cash across entities. It suits environments where daily cash sweeps can be done cost-effectively, and regulatory restrictions on intercompany transfers are manageable.  

Target-Balancing is often preferred when subsidiaries need day-to-day liquidity while still optimizing group cash flow. It’s suited to diverse operations with varied cash flow needs, where flexibility in cash allocation across entities is strategic.  

Strategic considerations for multi-currency pools  

“Multi-currency cash pools offer global corporations the ability to manage liquidity seamlessly across various currencies, enhancing cash optimization without the need for constant currency conversions. This helps manage cash flows more efficiently across different regions." - Jouni Kirjola, Head of Solutions & Presales 

Multi-currency cash pools allow corporate treasury to manage liquidity across various currencies within a single cash pool, helping global corporations optimize cash without needing to convert to a base currency continually.  

Benefits of multi-currency cash pools  

• Enhanced liquidity optimization across currencies: Multi-currency pools enable centralized access to the cash available in different currencies. Companies can utilize these pools to manage cash flow needs across regions.  
• Reduced FX transaction costs: By keeping balances in local currencies without frequent conversions, companies can reduce foreign exchange (FX) transaction costs. Balances in different currencies are offset notionally, which minimizes the need for continuous currency exchanges to cover shortages in specific currencies. 
• Interest expense reduction: Through notional offsetting of credit and debit balances across currencies, a corporation can reduce overall interest expenses. Positive balances in one currency can help offset negative balances in another. 
• Improved cash flow visibility and control: Multi-currency pooling gives corporate treasury a consolidated view of all available funds globally.  
• Simplified cash management across borders: With a multi-currency pool, companies can manage liquidity for international subsidiaries without the need for each entity to hold substantial reserves.  

Challenges of multi-currency cash pools  

• Foreign exchange (FX) risk exposure: Multi-currency pools inherently involve FX risks, as currency fluctuations impact the value of balances across the pool. Treasury must closely manage this exposure, particularly if there is a high reliance on offsetting balances across volatile currencies.
• Complexity in setting up and maintaining the pool: Multi-currency pools require robust systems and processes to manage and monitor multiple currencies in real-time.   
• Jurisdictional and regulatory constraints: Certain countries have restrictions on intercompany fund transfers or pooling, especially when it involves cross-border currency flows. Additionally, tax authorities in different jurisdictions may impose withholding taxes or other regulatory requirements on cross-border cash movements. 
• Impact on tax and intercompany loan regulations: For multi-currency pools, intercompany transactions and potential “deemed loans” between subsidiaries in different countries can trigger tax implications.  
• Interest rate differentials across currencies: Each currency pool will likely have different interest rates, complicating the interest calculations for pooled balances. When interest rates vary significantly across currencies, it can impact the overall efficiency of the pool and make interest offsetting more challenging.  

Multi-currency pools offer substantial benefits for companies with global operations, but they require sophisticated treasury management strategies and technology to mitigate the associated FX and regulatory risks. Here’s a summary of when multi-currency pools may be particularly advantageous or challenging:  

• Advantageous for large, multinational corporations with operations across several currencies, as it allows for centralized control, reduced transaction costs, and optimized liquidity without excessive FX conversions.  
• Challenging in regions with restrictive currency regulations or for companies lacking the necessary FX risk management infrastructure. 

The case for an in-house bank 

"An in-house bank acts as a central financial hub, streamlining cash pooling, intercompany loans, and foreign exchange management. With a centralized approach, companies can reduce their reliance on external banking services, lower transaction costs, and gain better control over their global cash flows." - Jouni Kirjola, Head of Solutions & Presales 

Cash pooling alone can help, but without a centralized way to manage intercompany flows, the process remains inefficient. This is where an in-house bank comes into play. Acting as a central financial hub, an IHB consolidates cash pooling, intercompany loans, and foreign exchange management within the organization. 

For our global corporation, setting up an IHB means:

• Centralized control: The treasury team gains visibility and authority over all global cash flows.
• Reduced dependence on external banks: Internal intercompany loans and FX transactions replace costly external services.
• Optimized FX management: The IHB can centralize currency conversions, reduce exposure to FX volatility, and manage internal hedging. 

Designing the ideal in-house bank for a global business 

To handle cash pooling efficiently and in-house bank needs specific capabilities. As Jouni puts it: “These tools ensure that liquidity is efficiently managed across subsidiaries, helping companies reduce costs and improve financial control “. Here listed a few essential functionalities: 

1. A payment hub centralizes all payments across the organization, allowing companies to streamline and control the entire payment process. It reduces costs, minimizes errors, and ensures compliance with internal policies and regulations by consolidating payments into a single, efficient workflow. 
2. POBO (Payments On Behalf Of) and COBO (Collections On Behalf Of) allow a company’s in-house bank to handle payments and collections for its subsidiaries, eliminating the need for each subsidiary to manage separate bank accounts.  
3. Global cash and liquidity visibility: Having global cash and liquidity visibility means that the in-house bank provides a centralized view of cash balances across all subsidiaries.  
4. Risk management: An in-house bank helps manage financial risks by providing better control over cash flows, currency fluctuations, and interest rates. Through effective risk management, like centralized hedging strategies, the organization can mitigate risks associated with foreign exchange, interest rates, and counterparty exposure. 
5. Bank and system connectivity ensures seamless communication between the in-house bank and external financial institutions, as well as internal systems. This is essential for real-time data sharing, efficient transaction processing, and the smooth integration of treasury, ERP, and other business systems. 
6. Accurate cash flow forecasting and scenario analysis allow the in-house bank to predict future cash needs, plan for contingencies, and optimize liquidity management. Reporting tools provide visibility into cash positions and financial performance. 
7. Cash pooling capabilities enable the in-house bank to consolidate funds from different subsidiaries into one central account, optimizing liquidity across the organization.  
8. Intercompany financing, loans and lending through an in-house bank enables subsidiaries to borrow funds from the parent company or other subsidiaries at competitive internal rates.  
9. Automated multi-currency management allows the in-house bank to manage currency conversions and foreign exchange risks across subsidiaries in different countries without manual intervention. This automation ensures that funds are efficiently pooled across currencies, minimizing the risk of currency fluctuations and reducing the cost of foreign exchange transactions. By automating the process, the company gains better control over its global liquidity, reduces errors, and ensures more timely and efficient management of foreign currencies. 

How to transform global cash management with cash pooling and an in-house bank solution? 

"Robust IHB software is essential for automating daily cash management tasks and enabling real-time financial insights. With centralized data and automated processes, treasury teams can make informed decisions, forecast cash needs more accurately, and maintain compliance with global regulations." - Jouni Kirjola, Head of Solutions & Presales 

Having a robust IHB software is critical to the success of their cash pooling and liquidity strategy. Here’s how the IHB software directly impacts global cash management: 

1. Daily operations and efficiency: 
   • The in-house bank software automates daily cash pooling, removing the need for manual transfers and freeing treasury staff to focus on strategic planning. 
   • Intercompany accounts are automatically adjusted, which minimizes transaction fees and makes cross-entity funding simple. 
2. Enhanced decision-making with real-time data: 
   • With centralized data, the treasury team can quickly see cash positions, project liquidity needs, and make informed decisions. 
   • Cash flow forecasting tools in the in-house bank software allow treasury to prepare for future cash requirements, which helps to avoid unexpected shortages.
3. Financial control and compliance: 
   • Compliance tools within the in-house bank software ensure all intercompany transactions meet regulatory standards, which reduces the risk of penalties. 
   • By tracking intercompany loans, interest rates, and terms, the software keeps the company compliant with both local and international regulations. 
4. Cost savings and risk reduction: 
   • Cash pooling and in-house FX management lower transaction and borrowing costs significantly, allowing the business to maximize returns on positive balances. 
   • With advanced FX features, the IHB software allows the company to minimize currency risks, improving its financial stability. 

Conclusion: Why should you set up cash pools in an in-house bank 

Creating cash pools with an in-house bank is a smart strategy for businesses aiming to streamline cash management, reduce borrowing costs, and boost liquidity control across subsidiaries. By centralizing funds and using flexible pooling methods—such as zero-balance, target-balance, or notional pools—companies can align cash flow with business needs, whether handling multi-currency challenges, optimizing interest, or maintaining regional liquidity. This approach doesn’t just enhance visibility over cash; it equips companies to make proactive financial moves and manage risks more effectively. When tailored to fit a company’s unique structure and goals, cash pooling within an in-house bank can transform treasury into a key driver of financial resilience and strategic growth. As companies face more complex financial environments, those equipped with a strong pooling framework and an in-house bank will find themselves positioned for greater agility, efficiency, and financial strength.