Concentration Account

A concentration account is the central bank account of a business, into which money from its other accounts is gathered on a regular basis, usually every day. Store deposit accounts, regional collection accounts, card settlement accounts and subsidiary accounts all feed it, and outgoing funding for payroll or supplier payments is drawn from it. The aim is to have a single pool of cash that treasury can invest, use to repay borrowing or allocate where it is needed.

The account sits at the top of a cash structure and is sometimes called a header, master or main operating account. Where the feeder accounts are at the same bank they are often zero balance accounts (ZBAs) swept automatically; where they are at other banks, money is pulled in by ACH debit, wire or other transfers. Concentration is a practice of corporate treasury rather than a regulated product, though the transfers themselves follow payment-system rules.

Think of a chain of coffee shops. Each shop has a till and drops its takings at a nearby bank branch, which may be a different bank in each town. If the money stayed scattered, head office would never know how much it really had. So every morning a van, in effect, collects from each local account and brings everything to one big safe at head office.

The concentration account is that big safe. The local accounts are just places where money lands first. Once the money is gathered, the finance team can see the full total, pay the bills that are due and put any spare cash to work, rather than chasing dozens of small balances.

There are three common ways to move money into the concentration account:

• Internal sweeps. Accounts at the same bank are swept automatically at the end of the day. This is the cheapest and most reliable method.
• ACH concentration. In the United States, the company (or its bank) sends ACH debits to pull deposits from accounts at local banks. Nacha's CCD (Corporate Credit or Debit) entry is commonly used, and funds usually arrive the next business day, or the same day with Same Day ACH.
• Wire transfers. Large or urgent balances are moved by wire, such as over Fedwire, which is faster and final but more expensive per item.

Outside the United States the same idea is carried out with domestic credit transfers, SEPA payments in Europe or bank-to-bank sweeps between accounts held across a banking group. For accounts held at different banks, the structure becomes a form of multi-bank cash management, often coordinated through standardised bank statements and payment requests.

Concentration involves a trade-off between the cost of each transfer and the value of having the money centrally. Treasury teams usually set rules such as:

• Target balances. Leave a small working balance in each local account to cover fees and returned items, and move the rest.
• Thresholds. Only transfer when the balance exceeds a set amount, so the fee is worth paying.
• Anticipation. Some firms move expected deposits before they are fully confirmed, based on reported deposit totals, then correct the next day.

These choices interact with float management: a transfer that lands a day later than the deposit gives up a day's use of the money. Concentration also feeds the daily position used in cash forecasting, since the treasurer knows what is in the central account before deciding to invest or borrow.

Several account types are closely linked and are easy to confuse:

• Collection account. A collection account receives customer payments first, then passes money up to the concentration account.
• Disbursement account. A disbursement account makes outgoing payments and is funded from the concentration account, sometimes through controlled disbursement.
• Cash pool header. In a group cash pool, the header account plays the same role and may belong to a separate in-house finance company.

The concentration account is defined by its role, not by its legal form. It is usually an ordinary demand deposit account, though it may be linked to an investment sweep so that any overnight surplus earns interest.

Gathering all of a company's cash into one account increases the impact if that account is compromised or the bank fails. Many firms therefore keep the concentration account at a strong bank, limit who can initiate payments from it and use dual approval in the style of a maker-checker control. Deposit insurance limits in most countries are small relative to corporate balances, so counterparty risk on the bank itself is a real consideration, and large groups sometimes spread surplus cash across several institutions or money market funds after concentrating it.

Concentration across legal entities also creates intercompany balances, which need clear agreements, interest at arm's-length rates and regular reconciliation. In countries with currency controls, local balances may not be movable at all.

• Nacha
• Association for Financial Professionals