The Nordic region consists of Norway, Sweden, Finland, Denmark and Iceland and the autonomous territories of Greenland, the Faroe Islands and Åland. If we then add from the northern part of central Europe the three states of Estonia, Latvia and Lithuania, known collectively as the Baltics, we have a wider region of study that is both closely bound by history and yet individually distinct in culture. For the corporate treasurer, this can take some understanding.

First and foremost, one of the major challenges to efficient cash management in the Nordics and Baltics is the variety of currencies in use among the different countries. Until very recently, the majority of the Nordic and Baltic states remained outside of the single European currency. Now, following the accession of Latvia and Lithuania to the Eurozone, there is an equal split. These countries, however, look likely to be last from the Nordic and Baltic region to join the euro, for the foreseeable future at least. In this respect, the recent histories of these countries can be summarised as following:

• Denmark held a referendum in 2000, the Danes rejected the European single currency by a vote of 53.2% to 46.8%. In 2007, the country declared its intention to hold a new referendum on joining the euro by 2011. However, following the uncertainty that resulted from the sovereign debt crisis in Europe, these plans were postponed indefinitely and thus it remains today.
• Finland has been a member of the euro since its inception in 1999.
• Iceland is ineligible to join the euro because it is not a member of the EU. The country applied to become a member of the union in July 2009 and was granted candidate status in 2010. However, in September 2013, the country decided to suspend its application to join the EU until a referendum could be held on the question. A date for the referendum has yet to be confirmed.
• Norway is also ineligible to join the euro because it is not a member of the EU and it is not expected to become one in the near future. The country has twice held a referendum on membership – in 1972 and in 1994. On both occasions the proposal was defeated. The country is however part of the European Economic Area (EEA) and is a member of the European Free Trade Association (EFTA).
• Sweden is obliged to adopt the euro at some point in the future, under the terms of the Maastricht Treaty. However, the country has so far resisted and the currency is not yet within the Exchange Rate Mechanism (ERM II), which is a precursor to euro adoption. In 2003, Sweden held a referendum on joining the euro, which was defeated. Since then, public sentiment has largely been against adopting the euro for fear that businesses will be adversely affected. The country has no official target date for euro adoption.
• Estonia has been part of the EU since 2004 and became the first Baltic state to join the single currency, on 1^st January 2011.
• Latvia joined the EU alongside Estonia. It had planned to adopt the euro in 2008, but, as a result of the financial crisis, was forced to revise its expectations as inflation rose. Despite a series of additional setbacks, Latvia was able to retain its ERM II peg post-financial crisis and finally joined the euro in January 2014.
• Lithuania’s EU membership (also 2004) had originally seen it plan to adopt the single currency in 2007, but like Latvia, inflationary pressures delayed this. At the beginning of 2015, the country finally realised its ambition, becoming the 19^th member of the currency union.

Meeting SEPA

As more Nordic and Baltic states become members of the euro, the cash management landscape in the regions will become somewhat easier and cheaper. Likewise, the introduction of SEPA has had a significant effect on cash management in the region, simplifying payments and collections. Many domestic card schemes have also been replaced with SEPA-compliant cards.

Banks in all of the Nordic and Baltic countries were early adopters of SEPA and the ISO 20022 XML standard. Although Norway and Iceland do not belong to the EU, they belong to the European Economic Area (EEA) and have likewise moved to adopt SEPA and the payment services directive (PSD) and will presumably move to PSD2 when that is finally transposed by all into national law no later than January 2018. Of all the SEPA countries, Finland is the most advanced. In fact, Finland was one of the first countries to boast full SEPA compliance, becoming 100% SEPA-ready in 2011.

Indeed, given the generally advanced digital status of countries in the region, SEPA is largely viewed by the Nordic and Baltic banks as a stepping-stone to further innovation in the transaction banking space. Consolidation in the payments space has also been driven by the introduction of SEPA, with the Nordic payments group, Nets, launched in September 2010, acting as a means of connecting banks, businesses, the public sector, merchants and consumers via its network. Its corporate services activity provides a payment platform and real-time clearing for recurring bills and credit transfers, mainly in Denmark and Norway.

From a wider corporate treasury point of view, as in other regions, SEPA has facilitated central treasury management and enabled companies to consider payment factories and/or shared service centres more readily. Companies have also been able to consolidate euro bank accounts, centralising accounting and simplifying processes, thereby realising significant cost savings.

Harmonisation between the payments infrastructures of euro and non-euro countries across the Nordic region has been on the agenda in recent years. One initiative which has focused on this objective is the Nordic Payments Area (NPA), a scheme that would have involved the harmonisation of payments standards and infrastructures across Denmark, Sweden, Norway and Finland using ISO 20022 XML. The ultimate vision was to create an area, like SEPA, in which businesses and consumers could connect and make payments to one another across any NPA country, regardless of currency. To date, very little progress has been made on this initiative. However, discussions between countries around payments infrastructure standardisation and harmonisation are nevertheless continuing.

Cash pooling and concentration

Cash pooling is well-established among the larger and more sophisticated companies of the Nordic region but is not quite as common among smaller companies, or in the Baltic states. With all three Baltic states now members of the Eurozone, uptake of cash pooling is expected to accelerate amongst corporates in the years ahead.

In general, the types of pooling structure available mirror those elsewhere, with one exception, single legal account pooling, described below. Otherwise, the standard physical cash concentration structures of zero balancing, sweeping and topping are available, as well as notional pooling.

However, while notional pooling is permissible in all Nordic and Baltic countries, it is not widely offered because local restrictions prevent the banks from offsetting credit and debit balances for capital adequacy purposes. Notional pooling is therefore relatively expensive in the region because banks charge a spread on the balances offset to compensate for the cost of capital.

Due to the cost and restricted nature of notional pooling in the Nordic and Baltic regions, physical cash pooling is often a more attractive option. It is important to note however that the pooling solutions on offer will vary between banks and between corporates (depending on needs and legal set-up) the following information only provides an indication of the type of solutions available. When considering cash pooling options in the region, it is vital to research each bank’s offering thoroughly.

Be aware that the terminology surrounding cash pooling will also alter between countries and between banks. In Sweden for example, single legal account pooling is sometimes referred to as ‘KoncernKonto’. In Estonia, a cross-border cash pool is often called a ‘Group Account’. Professional advice should also be sought regarding the legal and tax implications of any cash pooling structure.

Once the company’s cash has been effectively pooled, any surplus can either be reinvested into the company to minimise external borrowing, or invested for profit.

Nordic pooling

Also known as ‘balance netting’ or ‘Nordic cash pooling,’ single legal account pooling is the solution most commonly used by Nordic companies and their subsidiaries in the region (the subsidiaries of MNCs from outside the region may prefer to use conventional zero-balancing).

In this form of cash pooling, a company opens a single master account with its bank. It also maintains ‘mirror’ accounts for the different entities within the pool, in order for them to keep their separate balances. These are not physical bank accounts with a legal existence, they are simply entries in a virtual ledger. The only legal account held by the company is the master account.

No physical transfer of funds occurs between the master and the mirror accounts. The company’s divisions use the mirror accounts as normal accounts, as if they were not part of a cash pool. The cash flows into and out of the mirror accounts which are then adjusted and recorded in the balance of the master account. Both overdrafts and interest can only apply to the master account.

Nordic cash pooling by and large remains the dominant form of cash pooling since its inception in the 1980s. However, with more and more of the large corporates using sophisticated ERP systems to do in-house reconciliations, many have implemented a zero-balancing cash pool as they can keep track of their internal debts and claims in those systems, rather than in the Nordic cash pool.

This type of pooling arrangement has its advantages. For example, since it is compatible with the payment factory concept, corporates who use a Nordic pooling solution can reduce the need to execute complex payment/collection-on-behalf-of (POBO/COBO) procedures.

Cross-border pooling

It is usual to pool a company’s cash in each country by currency initially. Once local pools have been set up, cash can then be further concentrated using a regional cash pool. Solutions across the Nordic-Baltic region are also available, usually on a case-by-case basis.

Cross-border interest compensation

As an alternative to a physical cross-border pool, companies can ask their banks to set up a cross-border interest compensation structure in order to enjoy the benefits of a cash pool without actually creating one. This is a limited form of notional pooling which allows for a partial offset of interest for balances in different countries and currencies, despite the capital adequacy rules.

In this type of arrangement, the bank takes into account the balance of all the domestic cash pools and then pays interest as if the accounts were pooled. This avoids any need to translate cash balances into a common currency, which can be very useful given the number of currencies in the Nordic and Baltic region.

Although similar to notional pooling, interest compensation differs in that a different approach is taken in calculating the interest due. The bank applies improved interest rates – higher credit rates and lower debit rates – to the participating account balances, based on the offset between the credit and debit balances of the participating accounts.

Interest compensation set-ups are generally more popular in the Baltic countries than physical cross-border pooling arrangements. Again, this may change as Latvia and Lithuania join Estonia in adopting the euro.

Cash management banks

Aside from the practicalities of cash management in the region, choosing the right bank or banks to work with is of course a major consideration. Many so-called ‘global’ banks do not have significant on-the-ground presence in the Nordics and Baltics, where local and regional banking groups (predominantly Nordic) dominate. In the early 2000s, there was a lot of focus from global banks on building a presence in the region, but their efforts diminished following the onset of the financial crisis. For this reason, companies looking to do business in the region may find that their needs are best answered through establishing a local relationship.

The major cash management banks in the region include, in alphabetical order:

• Danske Bank.
• DNB.
• Nordea.
• SEB.
• Swedbank.

Residency restrictions for cash pooling

When considering setting up a cash pool in the Nordic-Baltic region, note that the ownership of bank accounts can have an effect on the company’s cash pooling structure, for example:

• Denmark

  Both residents and non-residents are allowed to participate in cash pooling. However, restrictions apply to intercompany lending to parent companies outside the EEA.

• Estonia

  Both residents and non-residents are allowed to participate in cash pooling.

• Finland

  Finland allows both resident and non-resident accounts to participate in cash concentration but some restrictions apply when setting up arrangements that include non-resident companies. Legal advice should be sought regarding these restrictions.

• Iceland

  All transactions between resident and non-resident accounts need to be reported on a monthly basis to the central bank. Further information should be sought.

• Latvia

  Both residents and non-residents are allowed to participate in cash pooling. However, since Latvian banks are not permitted to offset net credit and debit balances on their balance sheets, notional pools can be expensive to operate.

• Lithuania

  Both residents and non-residents are allowed to participate in cash pooling. For the same reasons as cited for Latvia, notional pools can be expensive to operate.

• Norway

  The combination of resident and non-resident accounts in a domestic cash concentration structure is subject to lending rules. Restrictions apply on inter-company lending in cross-border cash concentration structures, so including non-resident accounts can be challenging.

• Sweden

  Cash pooling can involve both resident and non-resident accounts, with the approval of the central bank. There are however restrictions on intercompany lending to non-EEA parent companies

Of course, aside from residency restrictions, close attention should be paid to each country’s thin capitalisation and transfer pricing rules.

Innovation and co-operation

Given that the market is dominated by a handful of large banking groups, there is a high degree of uniformity in the cash management products and services on offer across the region. Nevertheless, the Nordic banks are always looking for new ways to assist their clients in achieving greater cash management efficiencies. For example, since the introduction of SEPA, a growing number of Nordic banks have been phasing out their current direct debit solutions in favour of an automatic e-invoice standing order, a recurring e-invoice process.

The treasury technology vendors in the Nordic and Baltic regions are largely the same vendors that capture the market across Europe and, in the case of the top two TMS vendors (SunGard and Wall Street Systems), most of the rest of the world. However, some focus on regional delivery, such as Swedish TMS provider, CRM, and Finnish IT services company, Tieto (although both of these companies do venture beyond their home markets).

The nuances of the region mean some vendors have created country-specific services – Euroclear, for example, has established national Central Securities Depositories (CSDs) in Sweden and Finland to meet domestic post-trade handling requirements.

Co-operation is a recurring theme in the Nordic and Baltic markets. This attitude is reflected in the pro-business environment that the countries embrace. According to the Doing Business 2016 ranking compiled by the World Bank, all the countries of the Nordic-Baltic region are ranked in the top 25 globally, with Denmark third and Norway, Finland and Sweden in the top ten.

In short, the Nordic and Baltic countries are linked by common cultural, historical, political and economic ties, together with common interests to ensure stability, security and welfare in the region and further afield. It is a region that may push into the furthest reaches of Northern Europe but it is clearly very much in touch with the rest of the world.