What is Client Cash pooling

Cash pooling is a well-established treasury technique used by large corporations and financial institutions to optimise the management of cash across multiple accounts and entities. But what exactly is it, how does it work, and is it the right approach for TCSPs managing client funds? In this article, we take a closer look at cash pooling — its mechanics, its benefits, and the very real challenges that come with implementing it in a TCSP context.

How It Works

At its core, cash pooling is about aggregating cash balances from multiple accounts into a single pool to achieve better overall returns and more efficient liquidity management. There are several variations, but the fundamental principles remain the same.

Centralisation

The first step in any cash pooling arrangement is centralisation. Cash balances from individual client accounts — which may be spread across multiple banks and jurisdictions — are consolidated into a central pool. This can be done physically, where funds are actually transferred into a master account, or notionally, where balances are aggregated on paper for interest calculation purposes while the funds remain in their original accounts.

Physical pooling provides the greatest control and the best interest optimisation, but it requires robust infrastructure and careful management. Notional pooling is less operationally complex but may offer fewer benefits and is subject to regulatory restrictions in some jurisdictions.

Improved Liquidity

By pooling cash together, the overall liquidity position is significantly improved. Individual accounts that might hold small, relatively unproductive balances suddenly become part of a much larger pool. This larger pool can be deployed more effectively — whether that means reducing borrowing costs, funding short-term investments, or simply ensuring that surplus cash is never sitting idle.

For TCSPs, improved liquidity means being able to offer clients better outcomes. Instead of each client’s cash sitting independently in a current account earning minimal interest, the pooled funds can be placed in higher-yielding products that would not be accessible to individual smaller balances.

Interest Optimisation

This is where the real financial benefit of cash pooling becomes apparent. Banks typically offer tiered interest rates — the larger the deposit, the better the rate. By pooling client cash together, the aggregate balance qualifies for significantly higher interest rates than any individual client balance would achieve on its own.

The interest earned on the pool is then allocated back to individual clients based on their contribution to the pool. This creates a win-win situation: clients earn better returns on their cash, and the TCSP can generate revenue by taking a margin on the improved yield.

Challenges

While the benefits of cash pooling are attractive, the challenges — particularly for TCSPs — are significant and should not be underestimated.

Sizeable Investment

Implementing a cash pooling arrangement requires substantial upfront investment. The technology infrastructure needed to track individual client contributions, calculate interest allocations, manage fund movements, and produce accurate reporting is complex and expensive.

Beyond technology, there are legal costs for structuring the pooling arrangement, compliance costs for ensuring regulatory requirements are met, and operational costs for the additional staff needed to manage the pool on an ongoing basis. For many TCSPs, particularly smaller firms, this investment can be prohibitive.

Treasury Management System

A cash pooling arrangement cannot be managed with spreadsheets and manual processes. It requires a robust Treasury Management System (TMS) capable of handling real-time balance tracking, automated fund movements, interest calculations, and comprehensive reporting.

Selecting, implementing, and maintaining a TMS is a significant undertaking. The system must integrate with multiple banking platforms, handle multi-currency positions, and provide the auditability and transparency that regulators and clients demand. This is not a plug-and-play solution — it requires careful planning, expert implementation, and ongoing management.

Client Risk Profiles

One of the most complex challenges in client cash pooling is managing the different risk profiles of the clients whose cash is being pooled. When funds are physically pooled, the cash of a low-risk client is effectively co-mingled with the cash of higher-risk clients. This raises fundamental questions about segregation, fiduciary duty, and risk allocation.

If a banking partner raises concerns about a particular client, and that client’s funds are part of a pool, the consequences can extend beyond that individual client. Account freezes, enhanced due diligence requests, or even account closures can affect the entire pool, impacting innocent clients whose funds happen to be in the same structure.

Managing these risks requires sophisticated client segmentation, careful structuring, and clear legal agreements that define the rights and obligations of all parties.

Banking Partner Impact

Cash pooling fundamentally changes the nature of your relationship with banking partners. Banks view pooled deposits differently from individual client deposits. The concentration risk is different, the regulatory treatment may be different, and the bank’s own balance sheet considerations come into play.

Some banks welcome large pooled deposits because they provide a stable funding source. Others are cautious because the deposit could be withdrawn at short notice if the pooling arrangement changes. Understanding how each banking partner views pooled deposits — and ensuring they are comfortable with the arrangement — is critical.

There is also the competitive dynamic to consider. If you are pooling cash with one bank, your other banking partners may feel they are losing out. Managing these relationships requires diplomacy and transparency.

Regulation and Restrictions

Cash pooling is subject to regulatory scrutiny in many jurisdictions. Some regulators have specific rules about the co-mingling of client funds, particularly where the TCSP has a fiduciary duty to individual clients. In certain jurisdictions, physical cash pooling may be restricted or prohibited altogether.

Even where cash pooling is permitted, there are typically strict requirements around disclosure, client consent, fund segregation, and reporting. Navigating this regulatory landscape requires specialist legal advice and a thorough understanding of the rules in every jurisdiction where you operate.

An Alternative Approach with Flinq

Given the challenges outlined above, many TCSPs are looking for ways to achieve the benefits of cash pooling — improved yields, better liquidity management, and enhanced client outcomes — without the complexity, cost, and risk of a traditional pooling arrangement.

This is where Flinq offers an innovative alternative. Rather than physically pooling client funds, Flinq’s platform enables TCSPs to optimise cash placement across their banking partners on a per-client basis. The platform provides real-time visibility of cash positions across all banks, automated placement recommendations based on each client’s risk profile and cash flow needs, and seamless execution of fund movements.

The result is that clients benefit from improved yields and optimised cash management, while their funds remain individually segregated and clearly identifiable. There is no co-mingling, no complex pooling structures, and no additional regulatory burden.

Flinq delivers the benefits of cash pooling without the challenges. If you are a TCSP looking to enhance your cash management capabilities, we would love to show you how. Get in touch with our team to learn more.