Multi Bank Cash Concentration

In the previous article, we studied about the concept of sweeping. We are now aware that commercial banks provide their clients with the facility to sweep additional balances into a centralized account. However, we are also aware that such facilities are generally provided to corporations that use the commercial bank as their main or primary bank.

However, in real life, it is not possible for corporations to rely on a single bank in order to execute all their business. In real life, corporations have to transact business across various geographies. As such, they are required to maintain bank accounts with many local banks. This is done in order to improve the speed and efficiency of local transaction processing. However, this creates problems for the corporation as far as its liquidity management strategies are concerned.

The presence of these local accounts in several different banks has proved to be a deterrent for organizations wanting to concentrate their cash in a single account. However, over the years, technology has evolved and it is now possible for corporations to concentrate their cash holdings across several banks. This facility is provided by almost all leading commercial banks and is called a multi-bank cash concentration strategy.

In this article, we will have a closer look at what multi-bank cash concentration is, how it works and what are the various benefits that it provides to corporations.

What is Multi-Bank Cash Concentration?

Multi-bank cash concentration is a type of sweeping facility which is offered by commercial banks. Just like a sweeping facility, all the additional money above a certain threshold is periodically transferred to another bank account. However, here the transaction is happening between different banks, and sometimes these banks can be located in different countries hence the transactions can be denominated in different currencies as well.

The typical process followed during the execution of a multi-bank cash concentration program has been listed below:

1. Corporations enroll for the multi-bank cash concentration facility by choosing a primary commercial bank. This primary commercial bank will hold the account where the money from all the various banks will be pooled in. This bank account is either held near the head office of the corporation or it is held at a location, where there are fewer taxes on earning and distributing income.

2. Corporations also provide a list of other bank accounts to the main bank. They authorize the bank to have the rights to debit the accounts and electronically transfer funds to the main bank account. This list can be modified periodically to add or remove accounts as and when the corporate wants to modify the same. Also, the corporation and the bank have to decide on a frequency when the account will be debited. Some corporations want to debit their account on a daily basis whereas others want to do so on a weekly or monthly basis.

3. At the designated date and time, the primary commercial bank debits the secondary bank accounts and transfers all cash above a certain threshold to a centralized bank account. This threshold can be zero or the firm can decide to maintain some minimum balance depending upon their policy. It needs to be noted that such a quick and instant transfer of funds is made possible thanks to the SWIFT messaging interface. The development of the SWIFT messaging system has played a pivotal role in the creation and development of multibank cash concentration systems.

4. It is important to note that since different local accounts are held in different local currencies, the currency has to be exchanged when the funds are transferred to the main account. Now, since the currency has to be converted, there is obviously a currency conversion charge which is associated with the same. Commercial banks try to provide the best conversion rates with the lowest spreads to their corporate clients. This is because such clients provide repeat business to the bank.

Benefits of Multi Bank Cash Concentration

There are many corporations across the world that are enrolled in multi-bank cash concentration schemes. This is because there are several advantages to this scheme. Some of these advantages have been mentioned below:

1. Corporations are able to have a better view of the cash that they have on hand because of the consolidation of cash. This visibility is very important for corporations who find it difficult to track the amount of cash that they have on hand. Also, since the cash balance is converted to a single currency, it becomes easier to manage.

2. Primary commercial banks provide higher yields to their loyal clients. This is because they are able to generate bulk deposits from such clients. Hence, even if the corporations have to face transaction charges to move funds between accounts, they are still able to earn a higher return because of the additional yield offered by the primary commercial bank.

3. Companies are able to better manage the cash situation within their subsidiaries. Once all the cash is centralized, loans are made from the holding corporation to subsidiaries that require them.

The bottom line is that multi-bank cash concentration systems allow corporations to access all the benefits of sweeping even if their bank accounts are scattered across banks, regions, and currencies. This helps companies streamline their cash flow, reduce their working capital and even earn a higher return on their spare cash.