In the wake of the SVB crisis, founders who work with us are asking about ways to protect the full amount of their venture funding, since the FDIC insurance limit is $250,000 per depositor. It’s really tough to run any sort of business with only $250,000 in the bank, so most small businesses, including many of our startup clients, far exceed this limit. One option is Demand Deposit Marketplace Sweep accounts, which allocates large deposits in increments of $250,000 among a network of FDIC-insured banks to maximize the insurance protection.
Demand Deposit Marketplace® (DDM) is the name of a specific network of banks that work together to extend FDIC coverage. There are other banking networks that do the same thing, and some banks refer to their programs as Insured Cash Sweeps (ICS). Both provide a similar service, and we publish a list of banks with sweep accounts..
How does Demand Deposit Marketplace work?
A simple example is when a startup deposits a million dollars into a DDM sweep account, your custodial bank will hold on to $250,000. Your bank will then distribute the other $750,000 among three FDIC-insured banks, completely covering your deposit. Administration is handled through your main bank, which provides you with access to your funds, a single consolidated statement, and other services like online banking.
DDM sweep accounts provide smaller, regional banks with a tool to compete with large mega-banks. With startups feeling uncertain about deposits, many are looking at larger banks that have much greater capitalization, making them ostensibly “too big to fail.” However, mega-banks aren’t known for their customer service and may not have a deep understanding of the startup ecosystem. A sweep account could allow early-stage companies to get greater deposit security from a regional bank that provides a better customer experience.
What is the difference between a Demand Deposit Marketplace and an ICS?
Insured Cash Sweeps (ICS) and the Demand Deposit Marketplace are two types of cash sweep accounts that distribute cash over the FDIC limit to other FDIC insured institutions. This should provide FDIC insurance for more than the base $250,000 traditionally insured by the FDIC.
Make sure your financial institution meets your startup’s needs
It’s important to remember that while most smaller and regional banks are offering an account sweep service, these products have not been validated by the FDIC. With the heightened interest in deposit protection now, we’re hoping that the FDIC will release some guidance on these types of accounts. With any banking relationship, we encourage you to talk to your bankers, do your due diligence, and make sure their products match your startup’s needs, runway, and other goals. If you have questions about establishing a banking relationship or startup accounting, please contact us. You’ll also find more information about startup accounting on our YouTube channel and our blog.