Structuring Your Deposit Accounts
3/20/23 | Michael Baum, Director of Treasury Management, SVP
Recent events in the banking world have caused businesses to question whether their deposits are safe and accessible. The FDIC has taken steps to ensure businesses have access to funds, alleviating immediate concerns. Now businesses are questioning how to protect themselves from similar risks, so their funds are available when they need them.
At Altabank, we are taking this opportunity to talk with businesses about how to structure their deposit accounts to protect operating capability while minimizing risk.
When thinking about structuring deposits, businesses should consider three kinds of accounts:
- An operating account, which has funds to run the business day to day.
- A treasury management account, which provides more managed services for increased efficiency.
- An interest-earning account, which builds additional value.
The basic operating account is a business checking account into which a business deposits money and then pays expenses. Business checking accounts typically offer checks and debit cards, and access to an ATM network for cash. Most are accessible online and via a mobile application. Accounts vary in terms of minimum amount required to open, annual fees, and if and how much interest or earnings credit they offer.
The primary purpose of the operating account is to have money available to run the business. However, sometimes a company does not need frequent access to funds. In those cases, a business can look at savings options including money market accounts and certificates of deposit. These accounts generate interest income. Funds are accessible but there are limits on the number of transactions allowed in a money market account each month, and fees may be assessed for going over the transaction limit.
Business checking and savings accounts are insured by the FDIC. For additional information regarding FDIC insurance coverage, including amounts of coverage, please see the FDIC’s website.
Treasury Management Account
Treasury management accounts (also referred to as cash management accounts) are similar to checking and savings accounts but offer more features and services that help a business operate more efficiently and manage risk effectively. A good way to think about a treasury management account is what business activity it facilitates, and how.
Managing and automating payments is a core competency of many cash management accounts. ACH payments for sending money from one financial institution to another and wire transfers, both domestic and foreign, are often utilized. Payment services also include business credit card programs, commercial card programs, and debit cards.
Altabank offers a business bill pay solution that lets companies pay bills online to pre-approved payees.
Of course, if a business is making payments, it needs a way to manage receivables as well. As with payments, receiving money via ACH is an efficient way to take incoming funds and direct them to the right account.
Credit cards have been steadily replacing checks for the past few years. Merchant services allow a business to take and process these payments from customers online and in person. Businesses that receive checks as payment can use a remote deposit capture solution that makes it easy to deposit checks into the right account using a mobile device or small desktop scanner, saving a trip to a branch.
Cash Flow Management
Treasury account customers have access to online and mobile banking tools that provide a complete overview of the company’s cash flow and financial position.
A different type of deposit account for cash flow management is a sweep account. With a sweep account the business sets a limit on the amount of money held in the account. Each night any excess funds are “swept” into an interest-bearing account or can be applied to paying down a line of credit or loan obligation, saving interest expense.
Fraud is a real issue that all businesses face. Preventing fraud is a core component of a treasury management account. Altabank’s positive pay solutions for checks and ACH are proven to prevent many fraud attempts before they happen.
Using check positive pay, a business generates a file of parties to whom the business writes checks. The file is uploaded to Altabank and issued checks are matched against the file when they come into the bank to clear. Checks that do not match the information in the file are flagged for action by the customer, who can OK the payment or have it rejected as fraudulent.
ACH positive pay is used to review incoming ACH payments before they post, reducing the risk of accepting unauthorized funds. Parties who are approved to send ACH payments will have their payments automatically posted; alerts will be issued for any unapproved transactions so the company can take the appropriate action.
One of the concerns from large depositors in the recently failed banks focused on the risk of deposits above the FDIC limits. Depositors with account balances above the insurance limit run the risk of not recouping all of their money if their only insurance was the standard FDIC program.
Altabank bankers understand FDIC insurance and will take the time to understand your needs and how to best limit the risk that large deposits can create.
Similarly, companies with large deposit balances want to maximize their opportunity to earn interest. There are solutions to that need as well.
An Insured Cash Sweep (ICS®) account is one way to limit risk and optimize insurance coverage for large deposits. With an ICS account the business signs an ICS agreement and places their deposit with Altabank. The money in the account is then divided among other ICS program banks in amounts below the $250,000 FDIC deposit insurance threshold. All accounting of transfers to obtain FDIC coverage at other institutions is handled by the bank to make your record keeping simple. Funds are available for daily transactions and withdrawal as needed, and the business still deals directly with Altabank. The ICS account ensures the entire deposit amount is FDIC insured.
Altabank is the leading community bank in Utah offering an ICS account.
A similar program for businesses that want to maximize interest earnings and minimize risk but do not need frequent access to funds is the Certificate of Deposit Account Registry Service (CDARS®). CDARS is a program for purchasing large CDs and distributing the total amount among member institutions. The CDs generally have a higher interest rate and have varying maturity rates ranging from 4 weeks to 3 years.*
Another deposit account designed to maximize earnings is a Business Repurchase (REPO) account. A REPO account is a special sweep account where excess funds are swept at the end of each day and invested in short term securities overnight. The next morning the securities are sold, and the cash balances are available for use as usual. During the day, the funds stay in the business deposit account and can be used to conduct normal business transactions while providing additional security for deposits at the close of business each day.
The recent bank failures brought to light issues that businesses should be discussing with their banker, but often don’t. It is an unfortunate way to prompt the conversation. Altabank encourages all business customers to discuss an account structure strategy with their banker.
About the author
Mike Baum is Sr. Vice President and Director of Treasury Management at Altabank. He has spent his career helping businesses improve efficiency and reduce risk. In his free time, Mike enjoys playing golf and a good game of basketball.
*Placement of your funds through the ICS or CDARS service is subject to the terms, conditions, and disclosures set forth in the agreements, including the ICS or CDARS Deposit Placement Agreement, you enter into with us. Limits and customer eligibility criteria may apply. Program withdrawals vary by account.