What is Zero Balance Cash Pooling?

By Paul Buck

23/09/2024


In this five-part series, Paul will guide you through everything you need to know about Zero Balance Cash Pooling within the context of In-House Banking.

Zero Balance Cash Pooling (often abbreviated as ZBA) is a technique offered by several banks whereby automated multiple bank accounts are periodically (generally daily) or:

  • The positive balance of those connected bank accounts is transferred to a central bank account
  • The negative balance of connected bank accounts is cleared from a central bank account.

The end goal is to have the balance of all connected accounts at zero; hence the name ‘Zero Balance’ Cash Pooling.

Zero Balance Cash Pool systems are often ‘started’ at the end of the day after all transactions have taken place during the day and the end-of-day balance is known to the bank. As a result, each connected bank account starts the day with a zero balance and effectively the money of all connected bank accounts is in the central bank account. As a rule, that central bank account belongs to either Treasury or Holding.

A common comment then is that the money in affiliated bank accounts is gone. Especially in an environment where subsidiaries have a certain degree of independence, AND generally have (a lot of) money in the account, this can be sensitive. Of course, the money is not gone from the company because it is now in the central account within the company.

However, the holder of that central account now has a debt position to the owners of the bank accounts that ended the day with a positive bank balance. Vice versa, the owners of the bank accounts that ended the day with a negative bank balance have a debt position to the holder of the central bank account.

I sometimes compare this mechanism to a process where you look at your current bank account balance at the end of the day. If there is a positive balance, you book this balance away to a savings account you have at another bank. But if you see that your current account balance is negative, then you transfer an amount from your savings account to that other bank to replenish your current account balance.

So what is achieved with a Zero Balance Cash Pool?

  1. There is no more fragmentation of funds of the company.

  2. After all, all funds from the affiliated bank accounts are in the central bank account every day

  3. Active cash management is minimised as this mechanism inherently has automatic funding for those accounts that have an end-of-day overdraft.

What are the important points to consider in a Zero Balance Cash Pool?

  1. ZBA structure works most optimally when all affiliated bank accounts are with the same bank. The larger international banks also generally offer this service cross-border. Zero Balance Cash Pooling with multiple banks is technically possible through so-called MT101 agreements between the cash pool bank and the other banks. Such an agreement then states that the other bank sends a daily MT940 electronic statement to the cash pool bank. The latter in turn acts on the end-of-day balance by either generating a transaction from the central bank account to the third bank account to clear a negative balance or sending an MT101 payment instruction to the third bank to transfer the end-of-day balance to the central bank account. The disadvantage of this construction is that both types of transactions are not executed until the next business day. As a result, a third bank account is always one day behind in the Zero Balance Cash Pool balance.

  2. In the multi-bank cash pooling situation, as a rule, a third bank will want to set up something of a credit facility to cover the ‘overnight’ overdraft, despite the fact that the next day the central cash pool mechanism clears this negative balance. After all, this third bank is not guaranteed by the central cash pool bank.

  3. Such a credit limit is also applied mutatis mutandis to the central cash pool bank, but for a slightly different reason and in a different form, and generally not hedged by a formal credit facility. See also point (c) below.

  4. Because a ZBA structure is an inherently automatic funding mechanism, in principle a single bank account can drain the entire cash pool by having (large) overdrafts every day. This is generally dealt with by allowing cash pool banks to set a so-called day-light overdraft facility per bank account. In consultation with the cash pool master, the normal payment traffic pattern of the connected bank accounts is analyzed for each account. These bank accounts are then allowed to carry out transactions during the day up to the maximum of this day-light overdraft. If more comes in on a day than goes out, there is no problem and the positive balance is transferred (swiped) to the central account at the end of the day. However, if more is spent on an account than comes in, this can be up to the daily limit. If transactions are still generated above this daily limit, the bank will pause the transaction. The cash pool holder is then notified of this and asked whether or not they should carry out this excessive transaction.

What are the variants of the Zero Balance Cash Pool?

  • Actually, a Zero Balance Cash Pool is a special form of Target Balance Cash Pooling.

  • In a Target Balance Cash pool, action is taken by the cash pool bank only when the balance (the Target) in the participating bank accounts reaches a certain level. In a Zero Balance Cash Pool, that target is infinite (or too all balances).

  • With a Target Balance Cash Pool, it can also be set what action the cash pool bank should take when the target is reached: should the entire balance of the bank account be swiped to the central account? Or only the excess of balances above the target. In the latter case, a base balance is always left in the participating bank account. Again, the Zero Balance Cash Pool is the special variant: the target is infinite and the action for the cash pool bank is always sweep to zero.

Setting up a Target Balance Cash Pool where a predetermined balance is always left behind is often used in cross-bank cash pooling. Especially when no credit facility has been set up at the other bank. Thus, the participating bank account at that other bank will operationally have ‘sufficient’ balances to carry out daily payment transactions. Only significant credit balances (above the target) will then be skimmed off to Treasury.

Next time, Paul will tell us all on the differences between Zero Balancing and Notional Cash Pooling! Stay tuned…

Paul Buck

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