A method of cash concentration known as nominal pooling allows cash to remain in local hands while still being recorded at the bank as though it had been centralized. If a bank provides notional pooling, it simply adds the ending balances of each account held by a corporation to determine the total net balance. The bank normally invests the money automatically and pays the business interest income on the amount invested if the outcome is a positive cash balance. The bank assesses interest on the net negative amount if the outcome is a negative cash balance.
Notional pooling offers corporations a number of significant benefits. The following list includes a few of these drawbacks:
Lower Costs: Comparing nominal pooling systems to other similar liquidity management setups, there is unquestionably a cost advantage. For instance, compared to alternative arrangements, notional pooling systems have cheaper fees. Furthermore, notional pooling greatly lowers the cost of overdraft payments for a business.
Even if some of a company's ten accounts have a negative balance, it won't be assessed overdraft penalties and charges if the company maintains a positive net balance. Companies with multiple bank accounts can now accept a wide range of charges and fees thanks to this arrangement.
Convenience: For the treasury division of large organizations, the notional pooling method is highly helpful. This is as a result of businesses not being compelled to make sure that each amount has the necessary balance.
The business will not be required to pay interest fees, even if the overall net balance is positive. As a result, there is no longer any internal administrative work needed to make sure all bank accounts have the necessary cash. This is why many corporations find notional pooling appealing.
Cross-Currency Pooling: Even notional pooling across different currencies is offered by some banks. The company is able to save a lot of money under these circumstances. This is due to the fact that they are not obligated to exchange the money in person. Hence, the corporation is not required to pay any transaction fees. Currently, currency exchange fees might be fairly costly. So, the opportunity to avoid these fees is very beneficial to the business.
The aforementioned arguments can lead one to believe that notional pooling is the best option. That might not be the case, though. Moreover, notional pooling has some drawbacks. The following list includes some of the most significant drawbacks:
Regulatory Hurdles: Notional pooling has an issue because it must pass through regulatory barriers in various regions of the world. For instance, the regulatory organizations in Europe permit notional pooling. But, the American regulatory authority does not permit it. This is due to the fact that the United States has stronger regulations against the mixing of funds among multiple corporations.
Notional pooling is frequently regarded as a way to combine funds from multiple different legal organizations. Notional pooling isn't totally forbidden anywhere in the world. It is only limited to subsidiaries that are fully owned, though.
Single Bank Network: Notional pooling also has the drawback of being possible only if a corporation has all of its accounts with the same bank. The bank won't have access to the monies used by different accounts until all the accounts are in the same bank.
Nowadays, businesses want to have their bank accounts dispersed across several banks. They do this because they do not want to rely too heavily on the assistance of a single bank. As a result, notional pooling is not a workable strategy for many businesses.
Complex Calculations: The complicated computations needed to allocate accrued interest back to the subsidiary companies are another issue with notional pooling. Also, there are a number of legal procedures that must be followed while paying this interest. Otherwise, it can result in local tax authorities auditing you. Not many banks have the necessary software to carry out such intricate calculations. So, once it is put into practice, notional pooling becomes a difficult problem.
As no transactions are required to transfer money between accounts, notional pooling is less expensive than cash sweeps. Also, manual fund transfers by the treasury personnel are no longer necessary. Finally, since the debit and credit positions in all accounts are combined through notional pooling, the bank overdraft fee that may otherwise be assessed on accounts with negative balances is abolished. Ideally, credit positions will be greater than any debit account balances.