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What is a sweep network and how does it work?

What is a sweep network and how does it work?

An effective business bank account is one that ensures your money is safe while balancing that security with readily available cash funds and a smooth banking experience. Naturally, there’s a lot of work that has to happen behind the scenes in order for a checking account to check all the right boxes. A sweep network is just one example of this system at play.
Tim Harper
May 24, 2024

What is a sweep network?

Sweep networks are a way for customer deposits to be spread across a network of banks. Sweep networks aren’t investment funds — accounts held across the network are treated no differently than money in a typical bank account, where the funds are held as deposits and all accounts are in your name.

In Institution's case, rather than deposits being held with a single banking partner, we give you the choice to opt into our partner bank's sweep program, which then spreads your deposits across a network of established FDIC-insured program banks.

So for example, if the partner bank on your Institution account is Evolve Bank & Trust and you’re opted into Evolve’s sweep program, less than 10% of your Institution deposits are actually held at Evolve. Instead, the majority are held at Goldman Sachs and a few other FDIC-insured banks in the sweep network.

Why do banks set up sweep networks?

Sweep networks are an effective way for banks to create additional value to their customers through increased FDIC insurance on deposits, while simultaneously solving for their own operational needs.

Essentially, sweep networks help balance cash flow between banks. Some banks have more deposits than they want to hold, while others want more to support lending, so the sweep network helps ensure that each institution has the cash it needs on hand at any given time.

At the same time, because the sweep network holds customer funds across different program bank accounts, it allows them to tap into additional FDIC insurance benefits beyond each account’s individual maximum coverage.

How does the sweep network increase insurance coverage on deposits?

One of the biggest benefits of a sweep network is that it can provide more FDIC insurance. The FDIC offers up to $250K of insurance for each client at a bank regardless of the amount of money held in that account. For most personal accounts, this amount more than covers the dollars an individual has in their checking and savings. However, when businesses are dealing with large sums of cash and hefty deposits, it’s easy to max out the insurance protection available through a single bank account.

In order to get more insurance, you need to open more bank accounts. Sweep networks allow your bank to open those additional accounts on your behalf, so you can get that additional coverage without the headache of balancing multiple accounts yourself. Your bank can do the legwork of negotiating with partner banks to increase the maximum coverage that you’re eligible for through relationships with program banks across the sweep network — the more program bank accounts you have access to through your bank’s agreement with a partner bank, the greater your maximum coverage will be.

For example, if you have $500K in deposits sitting in a single FDIC-insured account, that sum will generally only be insured up to the FDIC insurance maximum of $250K, which is only half of your funds. However, a sweep network unlocks the option to spread that $500K across two accounts, each of which insures your money up to $250K — raising your total insured cash amount to $500K, or 100% of your deposit.

In the case of Institution, customers who opt into the sweep network can currently qualify for up to $500K of coverage, but we’re working to expand that maximum coverage across our trusted partner banks to $4M in the near future.

What are other benefits of a sweep network?

While accessing more insurance coverage is the primary advantage of using a sweep network, a subsequent benefit is that founders don’t have to juggle a handful of different banking relationships. Instead, you’re reaping the insurance benefits of multiple accounts while continuing to deal directly with a banking provider that you know and trust.

For example, to get $10M of insurance on deposits, you'd need to open and manage 40 bank accounts, and likely pay fees to transfer funds between those various accounts. A sweep program, however, takes that operational burden off your plate — your company saves time and money, while still getting the insurance benefit.

The sweep network also bakes redundancy into your business through account diversification. Because your funds are held across a network of trusted, FDIC-insured banks, you never have to worry about a single point of failure should an issue arise. You also continue to have access to all of your funds, even though they are held at multiple institutions.

How do you know that your bank uses a sweep network?

Before participating in a sweep network, your bank or banking provider will have you sign a disclosure agreement confirming your decision to opt into the network with your designated partner bank.

You will also see a list of the banks where your funds were FDIC insured on your monthly account statement.

How does opting into a sweep network change the way you bank?

Rest assured — you can reap the rewards of a sweep network without making changes to your regular banking routine. Your primary bank or banking provider will remain your main point of contact, and you’ll still be able to conduct business as usual with every dollar in your account, regardless of where those dollars are held. The sweep network also doesn’t impact how quickly you can transact or withdraw money from your account.

In the case of Institution, regardless of whether you opt in or out of the sweep program, your account functionality, features, and fees will remain the same, and your funds will continue to be held at FDIC-insured partner banks. The main difference will be the maximum insurance that your funds are eligible for.

Are there risks associated with the sweep network?

For the most part, the role of the sweep network is to help alleviate risk for businesses rather than create more of it. By allowing customers to increase the FDIC insurance on large deposits, the sweep program model helps ensure that as much of your funds are protected as possible.

Even in the unlikely event of a bank failure — which, according to FDIC’s historical analysis, has become exceedingly rare — a sweep network can further protect customers’ funds because of their placement across multiple FDIC-insured banks. Ultimately, the failure of a single bank wouldn’t impact the funds held at other banks across the network, so customers would be able to recover most if not all of their funds. Though there could be some delay due to FDIC intervention in such an event, customers would be able to recover all of their funds from the banks that haven’t failed, even in excess of FDIC insurance limits.

At Institution, our goal is always to provide a trusted banking experience that exceeds customer expectations — and that includes doing everything we can behind the scenes to protect your funds, engage with trusted partners, and pass on meaningful benefits for your business through those partner relationships.

Not sure if Institution is right for your business? Give our demo a spin to see it in action.

*Institution is a financial technology company, not a bank. Banking services provided and debit cards issued by Institution’s bank partner(s).

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