Corporate Cash Management in the Nordic Region
Cash management in the Nordic countries is complicated by a number of factors, principally that only Finland has adopted the euro and each of the region’s five states (Denmark, Finland, Iceland, Norway and Sweden) has a different currency and varying degrees of currency stability. In addition, they also have differing regulations on issues such as taxation, reporting and intercompany lending. Yet though these countries are culturally distinct, they share deep economic ties and continue to have close relationships. It is for these reasons that – in terms of banking and finance – the region is often considered distinct from the rest of the Europe.
Even though only Finland has so far adopted the euro; many large Nordic corporates conduct the majority of their business in western Europe, which means the euro will often drive much of their decision-making. Indeed, many corporates are now starting to group Finland with the other eurozone countries and treat the rest of the region separately. And as the nearby Baltic states, which are currently often grouped with their Nordic neighbours, begin to adopt the euro, viewing the region in this way will very likely become the norm. However, the Nordic countries – with a combined population of 25 million – represent a relatively small market (excluding Norway, less than 5% of EU GDP). This means that banks offer solutions that simplify cash management across the entire region rather than particular markets.
The Nordic banking sector is one of the most technologically advanced in the world, and the countries lead the way in electronic processing and e-invoicing. Indeed, cheques are rarely used, with most payments being made by bank giro or card. Smaller volumes in the region mean that new technologies and approaches can sometimes be pioneered there with the result that Nordic corporates are often able to gain cost-savings more quickly than their counterparts based in larger markets.
Despite the banking sector’s high level of sophistication, however, it is still largely dominated by a very competitive group of local and regional institutions. Given the importance of trading relationships between the Nordic countries and the EU, EEA, Asia and the Americas, the Nordic area is of great strategic importance to global banks.
The advent of the single euro payments area (SEPA) has been driving developments in European cash management for some time, with the Nordic region being no exception. Although Norway and Iceland are not EU members, they are both participants in the European Economic Area (EEA) and will therefore be adopting SEPA and the Payment Services Directive (PSD).
While SEPA only affects euro payments, the paying and receiving accounts can both be denominated in any of the currencies of the countries participating in the initiative. Even though Norway, Denmark, Sweden and Iceland remain outside of the euro, transferring money across the region has become more efficient – making cash management techniques such as cash pooling more effective. And the SEPA Direct Debit (SDD) – due to be introduced in 2009 – will also enhance the efficiency of collections across the region, expanding the potential functionality of shared service centres and other initiatives designed to centralise and consolidate treasury functions. As in any region, however, each of the countries has its own specific practices and legal restrictions that need consideration when reviewing cash management arrangements.
For example, Sweden has elected not to participate in Target2 – the joint gross clearing system of the European System of Central Bank (ESCB) – while Norway and Iceland are ineligible because they are not members of the EU. The practice of cash pooling is another difficulty. Notional pooling is permissible in all of the Nordic countries, yet it is not widely offered due to local restrictions preventing banks from offsetting balances for capital adequacy purposes. Due to these issues, physical cash pooling is often a much more attractive option for both banks and their clients in the region. Central bank reporting requirements also vary between countries with some requiring that all foreign currency and cross-border payments are reported on a monthly basis.
Whatever the difficulties, the mutual dependence between these countries means that efficient cash management across the region is imperative. This means choosing a cash management bank in a medium-term partnership at the very least. For these reasons, Nordic corporates – and others wishing to access these markets – should ensure they deal with an institution that can deliver the full range of transaction banking solutions and concomitant levels of service.