Rushing to Set Up Bank Accounts

Don't skip best practices for setting up bank accounts

This post is not really about the Silicon Valley Bank (SVB) collapse, but rather what tons of tech companies are dealing with right now: setting up new bank accounts. Even companies that don’t bank at SVB are frantically setting up a secondary bank account to have diversification and to have another bank account opened in case something like this happens again (let’s hope not!).

Based on the enormous volume of new bank accounts being set up over the last 3 days (and continuing this week), a lot of banks are rushing to set companies up with just the basics and communicating that the rest can be figured out later.

My word of caution is that when something is rushed there are opportunities for mistakes to happen or for fraudsters to take advantage. Companies need to make sure:

1. Bank account structure follows best practices

2. Proper fraud controls are implemented

3. Cash management and planning is performed

I am not an expert on this topic (have done it a few times) but wanted to provide some basic things companies should think about. As well as encourage companies to do more research on what they should do based on their specific circumstances.

1. Bank Account Structure

When companies are originally set up on a new bank they often just get a basic checking account opened. These deposit accounts are subject to the $250K FDIC insurance limit. If a company’s cash is in excess of $250K in a checking account, then the excess is subject to bank risk (like the SVB collapse situation).

A common best-practice bank account structure may look something like the one below.

Sweep Account

The purpose of the sweep account is to invest excess cash in money market funds (MMF) and provide some yield on that excess cash. What a lot of folks are finding out right now is that since the sweep account is invested in securities it *should* (do your own diligence as maybe your setup is different) be protected and not subject to the FDIC insured limit of $250K.

Concentration Account & Zero-Balance Accounts (ZBA)

In the above image, I have a ZBA for AR deposits, but companies could set up another for accounts payable (or more if they are complex). The ZBA gets swept to the concentration account first and then at the end of each day the concentration account balance gets transferred to the sweep account.  The concentration account may have a zero balance or sometimes it is given a targeted dollar balance (banks sometimes push for there to be some target balance, like $1M, in the concentration account).

At the end of each day, the following will happen as a result of the transfers between the concentration account and the sweep:

• If the balance is negative (meaning more money going out than was received), there is a “cash sweep redemption” (transfer from cash sweep to the concentration account)

• If the balance is positive (received more money than was paid), there is a cash sweep purchase (transfer from concentration to sweep)

Note: There is typically a one-day delay from when the transaction hits the concentration account to when it hits the sweep account. This could cause balances in the bank account to not reflect the true amount of cash.

Asset Management Account

This is a separate account for companies that implement a formal investment policy. Investments include things like the below:

• T-Bills

• Commercial paper

• Corporate bonds

• Money market funds

If you are familiar with SVB, this is what was referred to as a “SAM” (SVB Asset Management). Money in this account at SVB is protected because it is invested in securities, which the company owns, so it is not subject to SVB risk.

2. Fraud Controls

As bank accounts get set up at unprecedented speed fraud control implementation might be skipped, not fully implemented, or pushed until a later date when everyone has more time. This is an opportunity for fraudsters and a time for companies to be very careful. Some things companies should consider immediately:

• ACH Filters/Blocks - Controls unauthorized debits (outgoing payments) with full blocks or filters that allow a list of authorized companies to post ACH transactions to a company’s account.

  • Companies should block all requests from the AR receivables account since this account should just be for incoming customer payments.

  • Companies can create ACH filters on the concentration account to only allow authorized vendors to pull money from the account.

• Dual Administration - Enforces security controls by requiring setup and modifications to be approved by a second administrator. This mitigates the risk of internal fraud. This generally works best if you have 3 or more administrators since all changes require 2 admins to implement.

• Wire Approvals - Set this up immediately. You should have all wires that are initiated by one person require approval by another person. You can also add a 2nd approver for wires over a certain limit (e.g. CEO approves everything over $250K).

• Wire Limits: Similar to the above, but you can create $ limits for different accounts for initiating and/or approving.

• Alerts: Banks offer a range of alerting options to help companies detect fraud.

• Positive Pay - This is a control that provides early detection of fraudulent, altered, or counterfeit checks through daily verification of checks presented for payment against a company’s check register.

• Training: Make sure that the folks who initiate or approve wires have received training on best practices and how to prevent fraud. Any “urgent” wire request from the CEO is extremely suspect.

  OnlyCFO @OnlyCFO

  Before wiring any money based on an email from your CEO saying "Urgent!"... Please verbally confirm and verify everything first.

3. Cash Management & Planning

CFOs don’t get fired for not generating some extra yield on excess cash, but they will be fired if they find themselves in a liquidity crisis as a result of them chasing yield. I am sure some CFOs are finding themselves in this situation with the SVB collapse.

Always ensure there is plenty of liquidity to meet operating needs. If based on a company’s financial plan and current cash balance there is an opportunity to invest some cash to generate extra yield, then great. But always make sure there is plenty of available liquidity - what that looks like is dependent on each company’s situation and risk profile.

Concluding Thoughts

Companies die because they run out of cash. As companies rush to set up new bank accounts, make sure best practices are followed. Don’t let the urgent nature of everything happening allow you to bypass important controls to protect your assets.

The things mentioned above are not an exhaustive list or what your specific company should do. Please do your own research based on your specific circumstances.

Good luck to everyone out there dealing with this right now!