Cash pools and in-house bank – Everything you need to know

In challenging business environments, certain questions take priority. “How can we optimize the use of our cash resources?" “How can we ensure that all subsidiaries have access to necessary funds without holding excessive cash reserves?” and “How can we reduce banking fees and transaction costs?” or “What strategies can we use to hedge against currency risks?” are just a few examples. Similarly important are questions about the best strategies to minimize interest expenses on external borrowings and maximize interest income on surplus cash. 

Corporate treasurers, cash managers, and even, in some cases, CFOs are thinking about what methods they can use to reduce interest expenses on deficits and how they can streamline intercompany loans and settlements or centralize foreign exchange transactions. 

These are questions of visibility over global cash positions and questions of control over cash movements within the enterprise. Questions cash pooling and in-house banking can easily settle. 

Luckily, I had the opportunity to bend the ear of Nomentia’s top expert on the topic and got some answers: 

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.

What is cash pooling? 

So, what is cash pooling? Cash pooling is a liquidity management strategy where funds from multiple accounts within a corporation are consolidated, often daily, into a central account. This arrangement is designed to optimize cash utilization across subsidiaries, reduce the need for external financing, and maximize interest income.  

“By pooling cash, companies can manage surplus and deficit positions within different business units and enhance overall liquidity. Through effective cash pooling, companies can utilize excess balances in one entity to cover deficits in another, thus lowering borrowing costs, improving cash visibility, and centralizing cash management.” – Jouni Kirjola, Head of Solutions & Presales

As an example, imagine a multinational company with a head office in the U.S. and subsidiaries in the U.K. and Germany. The German subsidiary has a cash surplus of $500,000, while the U.K. subsidiary has a $200,000 shortfall. Through cash pooling, funds from the German account are used to cover the U.K. deficit by transferring the needed amount into a central account. This setup means the U.K. entity doesn’t need external funding, saving on borrowing costs. Instead, the surplus covers the deficit, and the head office can manage cash flow more efficiently from a central account. 

In-house cash pooling vs. bank-management cash pooling 

There are only a limited number of strategies companies can adopt to pool their cash, and choosing the right one depends on what the business aims to get out of it. They can opt for a bank-managed cash pooling or choose a cash management to do the job. Let’s compare: 

Types of cash pooling

1. Physical pooling: Physical cash pooling consolidates actual funds from different accounts into a single master account. Physical transfers occur daily, providing centralized access to cash and facilitating efficient allocation within the corporation. 
   • ZBA (Zero-Balance Account) Cash Pooling: ZBA cash pooling is a structure where each subsidiary maintains its own bank account, but at the end of each day, the balance is automatically swept to or from a master account (typically the parent company's account). The subsidiary accounts are "zeroed out," with only the necessary balance left to cover daily transactions. This setup ensures efficient liquidity management by centralizing funds. 
   • TBA (Target Balance Account) Cash Pooling: TBA cash pooling involves setting a target balance for each subsidiary’s account. At the end of the day, the pool master account adjusts the subsidiary's balance to reach the target level, either by transferring funds in or out. This approach provides flexibility by maintaining an optimal balance in each subsidiary's account for operational needs while still centralizing excess cash. 
   • FBA (Fixed Balance Account) Cash Pooling: FBA cash pooling requires each subsidiary to maintain a fixed minimum balance in its account. Excess funds above this balance are transferred to the master account, while any shortfalls are covered by the parent company’s account. This method allows subsidiaries to have working capital for their daily operations while centralizing surplus liquidity. 
2. Notional Pooling: Here, balances are “pooled” virtually without moving funds. Accounts are grouped so that positive and negative balances offset each other, enabling net interest optimization without physical transfers. 
3. Hybrid pooling: A combination of physical and notional pooling, hybrid pooling allows both actual transfers and notional offsetting. This approach is used when companies want flexibility, balancing physical cash movement with notional interest optimization. 

International cash pooling 

When considering international cash pooling, companies must account for several critical complexities that arise from cross-border transactions, diverse regulatory environments, and multi-currency management. Here’s what companies should be mindful of: 

Key considerations for international cash pooling 

• Cross-border transaction complications: International cash pooling involves transferring funds across subsidiaries in different countries, and each of these transactions is subject to the legal, regulatory, and tax requirements of the countries involved. “This can create additional complexity, as tax treaties, intercompany loan regulations, and compliance with currency control laws vary significantly across jurisdictions.” - Jouni Kirjola 
• Legal and regulatory compliance: To maintain compliance, companies must navigate local regulations that impact international fund transfers. Some countries have strict capital control measures, limiting the free movement of funds out of the country. This can influence the structure and feasibility of a pooling arrangement. Legal documentation, particularly for intercompany loans, must meet each country’s standards, as failure to do so could lead to regulatory penalties or tax complications. 
• Banking relationships: Managing a cash pool across multiple countries typically involves partnerships with different banks. Depending on the subsidiaries’ locations, companies may need to either work with one international bank that operates in each relevant country or coordinate between various local banks. Strong banking relationships are essential for seamless transactions and currency management across borders. 
• Currency management and FX Risk: When cash pools include subsidiaries in different countries with distinct currencies, companies must account for currency conversion rates and foreign exchange (FX) risks. “Exchange rate fluctuations can impact the net position of the pool, so it’s crucial to implement FX management strategies, like hedging, to protect against unfavorable currency movements.” – Jouni Kirjola, Head of Solutions & Presales

Compared with single-country cash pooling 

In contrast, in a single-country cash pool, entities operate under one jurisdiction's regulatory, legal, and tax framework, and typically, there is no need to manage multiple currencies. This makes single-country pooling more straightforward in terms of regulatory compliance and simplifies banking relationships since one bank is usually sufficient for transactions within a single jurisdiction. 

International cash pooling, on the other hand, demands more extensive planning and coordination due to its cross-border nature. In particular, companies must be diligent about staying compliant with multiple countries’ tax laws and regulatory frameworks while mitigating currency risks and maintaining efficient cash flow management across all subsidiaries. 

International cash pooling can be highly effective for optimizing global liquidity, but it requires a comprehensive understanding of each country’s regulations, tax implications, and currency considerations. Of which we talk next: 

Multi-currency cash pooling 

When managing multi-currency cash pooling, companies face specific challenges that stem from the need to consolidate and manage cash across different currencies. Here's what’s essential for companies to be aware of: 

• Currency consolidation: A major challenge in multi-currency pooling is handling cash held in different currencies by various subsidiaries. Companies either physically pool the cash in multiple currencies or establish a notional pool, where funds are centralized for liquidity management without physically transferring them. “This requires an efficient system to consolidate currency balances accurately and manage cash in multiple denominations.” – Jouni Kirjola, Head of Solutions & Presales
• FX (Foreign Exchange) Management: Currency fluctuations can impact cash balances in multi-currency pooling, making FX risk management crucial. Companies often use hedging strategies to minimize the financial impact of exchange rate fluctuations on their pooled funds. Close monitoring of FX exposure is essential to protect the value of cash balances in different currencies and to forecast potential gains or losses accurately. 
• Flexibility in currency usage: Multi-currency pooling offers the flexibility to meet currency needs across subsidiaries without converting funds unless necessary. This reduces conversion fees and allows companies to leverage pooled funds to meet currency-specific liquidity requirements as they arise. This can be especially useful when companies need to make payments or investments in particular currencies. 

How multi-currency pooling differs from single-currency cash pooling: 

• Single-currency cash pooling: This involves pooling funds within a single currency, which greatly simplifies liquidity management. With no need for currency conversion or FX hedging, the system is more straightforward and operates within a single currency zone, like USD or EUR. 
• Multi-currency cash pooling: Requires sophisticated FX management tools and processes, as well as policies for currency conversion, cross-border payments, and handling exchange rate risks. Unlike single-currency pooling, multi-currency pooling involves navigating the complexities of currency exchange rates and managing risk across a mix of currencies. 

What is an in-house bank?

An in-house bank is an internal financial structure that performs banking functions for a corporation’s subsidiaries, acting as a centralized treasury. As Jouni puts it: “Rather than relying on external banks for intercompany transactions, financing, and liquidity management, subsidiaries interact with the in-house bank, which manages funds and centralizes cash flow.” This internal “bank” provides loans to subsidiaries, sets internal interest rates, manages FX transactions, and consolidates cash, creating efficiency and cost savings. 

By offering centralized services like payments, collections, and cash forecasting, an in-house bank simplifies intercompany transactions, reduces banking fees, enhances visibility, and mitigates financial risk. It’s especially valuable for multinational corporations as it creates an efficient, controlled environment for managing global liquidity. With oversight over all transactions, the in-house bank can use surplus funds across the corporation to meet deficits in specific subsidiaries, optimizing the group’s overall liquidity and reducing dependency on external financing. 

An in-house bank's key functions include liquidity management, where the in-house bank allocates internal funds efficiently; cash flow forecasting, which enhances cash predictability; and FX management, centralizing currency trading to minimize exchange rate risk. 

An in-house bank also manages cash concentration, consolidating excess cash from subsidiaries into a central account to cover shortfalls or invest funds strategically. This arrangement allows the corporation to streamline cash usage across entities. 

How do cash pooling and in-house banking work together to increase global cash control? 

“Cash pooling and in-house banking are powerful tools that complement each other in optimizing a corporation's global cash management and treasury functions. Together, they provide a centralized approach to liquidity management, reduce external borrowing costs, and improve operational efficiency.” – Jouni Kirjola, Head of Solutions & Presales

An in-house bank acts as a financial intermediary between a company’s subsidiaries, managing internal funding, cash concentration, and FX transactions. By centralizing treasury functions, the in-house bank provides a unified view of cash flows, making it easier to forecast liquidity needs and distribute funds where required. Cash pooling then directly supports the in-house bank by consolidating funds across different accounts or subsidiaries. Through cash pooling, subsidiaries with excess cash automatically lend to those with deficits, minimizing the need for external financing. 

For example, consider a global company where Subsidiary A has a $2 million surplus, and Subsidiary B faces a $1 million deficit. Through cash pooling, the in-house bank consolidates Subsidiary A’s surplus and allocates part of it to cover Subsidiary B’s deficit. This arrangement avoids the need for Subsidiary B to borrow externally, saving on interest expenses and reducing banking fees. Moreover, the in-house bank can set an internal interest rate, allowing the surplus funds to earn returns within the company rather than relying on low-interest accounts in traditional banks. 

Another scenario could involve managing FX risk. For instance, subsidiaries in different countries may deal in multiple currencies. The in-house bank, using notional cash pooling, can virtually offset currency imbalances without moving funds, reducing the impact of FX fluctuations on each subsidiary. This way, the in-house bank acts as a centralized point for managing currency exposure, providing subsidiaries with the necessary funds without incurring external FX transaction fees. 

“Operational efficiency also improves significantly. With a centralized view of all accounts, treasury teams can quickly identify cash positions, manage intra-company loans, and optimize daily cash movements. Cash pooling minimizes redundant transactions, while the in-house bank consolidates cash management into a single function, reducing administrative workloads and enhancing cash flow accuracy.”  – Jouni Kirjola, Head of Solutions & Presales

Benefits of cash pools and an in-house bank 

• Centralized cash and liquidity management: Centralizing cash and liquidity management through an in-house bank provides global companies with a unified view of all available cash across subsidiaries, enabling them to allocate funds where needed most. This central oversight simplifies cash flow forecasting and allows for quick adjustments, such as reallocating funds from surplus areas to cover shortfalls. For companies with multiple subsidiaries in different regions, centralized control means improved cash utilization and easier management of daily liquidity needs, ensuring that each part of the organization operates efficiently without holding excess idle cash. 
• Improved interest and cost efficiency: By using cash pooling and an in-house bank, companies can create internal loans between subsidiaries, which reduces reliance on external financing. Instead of borrowing from external banks at market rates, subsidiaries can borrow from the in-house bank, keeping interest payments within the corporate group. This setup lowers overall financing costs and allows the company to earn internal interest on excess funds, improving cash utilization across the organization. Additionally, subsidiaries with surpluses can support those with deficits, creating a self-sufficient internal funding mechanism. 
• Reduced FX risk: For multinational corporations, currency volatility presents a significant financial risk. Cash pooling consolidates FX exposures from various subsidiaries, allowing the in-house bank to centrally manage currency requirements across the organization. This reduces the need for individual subsidiaries to perform frequent currency exchanges, which lowers FX transaction costs. By concentrating currency transactions in the in-house bank, the company can use hedging strategies effectively to mitigate risks from fluctuating exchange rates, improving financial stability and predictability in foreign operations. 
• Lower Transactional Costs and Fees: An in-house bank minimizes the need for multiple external bank accounts across subsidiaries, centralizing payments and collections within the organization. By consolidating these transactions, the company reduces the number of fees associated with international transfers, account maintenance, and currency exchanges. Instead, payments and collections are managed internally, reducing bank dependency and allowing for lower overall transaction costs while enhancing control over cash movement. 
• Enhanced control and reporting: Cash pooling and in-house banking provide greater control over financial operations, as all cash movements and transactions are tracked within a centralized system. This setup improves data accuracy, simplifies compliance reporting, and facilitates more precise cash flow forecasting. The in-house bank can generate consolidated reports for regulatory compliance, offering a clearer picture of global liquidity. Additionally, streamlined reporting enhances decision-making, as executives and treasury teams have access to timely, accurate insights into the company’s financial health and performance across regions. 

How to set up cash pools and an in-house bank? 

Setting up cash pools 

1. Assess your needs: 
   • Determine the cash flow requirements of your subsidiaries. 
   • Identify the currencies involved and decide if you need single or multi-currency pools. 
2. Choose the type of cash pool: 
   • Physical cash pooling: Funds are physically transferred between accounts. 
   • Notional cash pooling: Balances are aggregated without physical transfers. 
3. Select a bank: 
   • Choose a bank that offers cash pooling services and has a strong presence in the regions where your subsidiaries operate.  
4. Set up master and sub-accounts:
   • Create a master account for the central treasury. 
   • Open sub-accounts for each subsidiary. 
5. Implement sweeping mechanisms: 
   • Set up automatic sweeps to transfer excess funds from sub-accounts to the master account at the end of each day. 
6. Monitor and adjust: 
   • Regularly review the cash pool to ensure it meets your liquidity needs. 
   • Adjust the pooling structure as necessary. 

Establishing an in-house bank 

1. Define the scope:
   • Decide which financial services your in-house bank will offer (e.g., intercompany loans, FX management). 
2. Set up the legal structure: 
   • Establish the in-house bank as a separate legal entity if required by local regulations.
3. Implement the right technology: 
   • Use a cash and treasury management system to manage transactions and reporting. 
4. Develop policies and procedures: 
   • Create guidelines for intercompany transactions, interest rates, and risk management.
5. Monitor performance: 
   • Regularly review the performance of the in-house bank and make adjustments to improve efficiency. 

Best in-house bank features 

1. Payment Hub: 
   • Centralized payment control: Improved visibility and compliance by managing all outgoing payments from a single point. 
   • POBO (Payment-on-Behalf-Of): Consolidated payments across subsidiaries, streamlining cash management. 
   • Payment fraud detection: Smart payment control rules to flag suspicious transactions. 
   • Reconciliation: Automated payment matching with accounting entries for accuracy and fast issue resolution. 
2. Collection Hub: 
   • Automated receivables collection: Enhances cash flow and speeds up revenue recognition. 
   • COBO (Collection-on-Behalf-Of): Centralized receivables across subsidiaries, simplified tracking, and error reduction. 
   • Incoming payment fraud prevention: Monitoring incoming payments for suspicious activity. 
   • Reconciliation & accounting: Automatically matches and records payments in ERP systems. 
3. Liquidity management: 
   • Internal statements & real-time visibility: Tracks internal cash movements for an up-to-date view of liquidity. 
   • Forecasting: Analyzes data to predict future cash needs, aiding proactive planning. 
   • Centralized FX trading: Consolidated FX transactions to manage currency risks. 
4. Intercompany financing: 
   • Internal loans: Simplified lending between subsidiaries with transparent tracking and accounting. 
   • Automated interest calculations: Support for various loan terms and automates interest. 
5. FX Risk Management: 
   • FX Hedging: Using hedging instruments to stabilize budgets against currency fluctuations. 
   • Internal interest rate hedging: Reduces exposure to variable interest rates, stabilizing interest-related expenses. 

Conclusion: Everything you need to know about cash pools and in-house bank 

Utilizing cash pools and in-house banking can be a foundational strategy for global cash control and visibility. In this article, we’ve provided a comprehensive look into cash pooling and in-house banking and covered why companies use these strategic cash management and treasury tools, how they function, and the challenges they present. If you're interested in learning more about Nomentia's tools for centralized cash management and the benefits of cash pooling, you can reach out here.