Cash sweep is an automated banking process that transfers funds between deposit and investment accounts on a daily basis. It allows clients to earn significant interest while having quick access to their funds. It was created by banks to compete with nonbank institutions that offered similar features.
A cash sweep is an automated banking process. Through this process, funds are transferred from a bank deposit account to an investment account or from an investment account to a deposit account. For a cash sweep, funds can be transferred between accounts at the same institution or from an account at one institution to an account at another. This is typically accomplished on a daily basis and can be arranged for a portion of the funds in any account or the entire account balance.
To automatically transfer funds from a deposit account to an interest-bearing account, such as a mutual fund account, a person can set up a cash sweep. Funds in these accounts are transferred according to the client’s specifications. This means that the client can specify that all the funds present in any of the accounts are transferred each day or can request the transfer of only a small part of it. For example, a person could transfer the excess balance of his investment account to a deposit account.
In most cases, a cash sweep occurs once a day. This daily schedule applies no matter which account is involved. A bank will perform a sweep of cash from its client’s account once a day, and the investment account manager will also handle the transfers once a day.
Cash sweep arrangements are often useful for account holders, including businesses, who need to access a large amount of funds without having to wait a significant amount of time. While a person or business in this situation could keep their money in a checking account, they typically wouldn’t earn as much from an investment account. As such, a person or business in this role typically gets the best of both worlds with a cash sweep: significant interest that allows your money to grow, and quick access to your funds when you need them.
Cash banks were initially instituted by banks in an effort to deal with nonbank competition that paid interest and offered features similar to those available through deposit accounts. Since banks couldn’t offer interest on checking accounts at the time, they created cash sweeps to make sure their customers could still bank with them and easily transfer their money to interest-bearing accounts. Interest-bearing checking accounts exist today, but they generally pay much less interest than investment accounts.
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