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Implementing a multi-bank strategy is vital for companies looking to reduce risk exposure. In this article we explain how to reduce financial risk by implementing bank redundancy.
A common risk for businesses of all sizes is bank dependency. Several factors can affect a bank’s ability to give customers access to deposits and process payments programmatically. In a more routine fashion, this can take the form of sporadic gaps in support and coverage, borne out of the internal errors, system downtime, or maintenance. This often gets manifested in delayed payments, missed cutoff windows, or delayed notifications.
In some situations, however, interruption in service can also be caused by crises in the banking sector, liquidity issues, or the FDIC intervening to avoid widespread damage to the financial ecosystem.
In either case, it is important that businesses implement measures to reduce the likelihood and impact of such interruptions in service, whether to assure access to deposited funds, or prevent issues associated with the interruption of programmatic payments. If your product or service runs on a bank integration, redundancy becomes even more important.
Here are a few elements to consider to achieve bank redundancy:
What Are Your Cash Needs?
Start by identifying your business-critical processes and how you can ensure access to funds to meet them. Most businesses cannot afford to miss payroll or payouts to suppliers. It’s important to keep overall cash reserves in multiple banks in case there are interruptions in service.
Putting aside a reserve for two or three payroll cycles is wise. And while there is yield to be gained in putting such reserves in money market funds or bonds, there’s value in assuring liquidity by using simple FDIC-insured accounts, at least for a subset of funds.
Where Do You Hold Deposits?
Having accounts in banks of different sizes is another way to achieve bank redundancy. Smaller companies often have an easier time working with smaller and medium sized banks. They can be great partners by offering necessary services at affordable rates. That said, many larger banks also work with smaller businesses. Mixing large and small banks can prove a successful strategy to ensure reliable access to funds while having access to the best services.
What Are Your Product Needs?
Products that move money programmatically require a different kind of reliability. If you run a marketplace moving money between suppliers and customers, for instance, you need to ensure your bank operates at a service level that is correspondent to your scale, as even small gaps in service can be detrimental to your customer experience.
If your business relies on a high volume of programmatically initiated ACH or wire transfers, having failsafes on payment processing and bank infrastructure can ensure your product keeps running during incidents. The more integrated your product is to real-time money flows, the more important is bank redundancy.
Which Banks Are You Integrated With For Programmatic Payment Processing?
Depending on your scale you may already be using multiple banks: no bank partner offers the entire suite of services a business needs. If not, there is value in creating redundancy: integrating with multiple banks decreases the chance of interruption in case one bank is affected.
Moreover, different banks offer different services that can unlock new use cases and payment flows. For companies that need programmatic access to a bank account, Modern Treasury can help by providing access to multiple banks at once. Learn more here and reach out if we can be helpful.
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Bank accounts are monetary repositories maintained by a financial institution.
- 1Clearing Account
- 2What are Lockboxes?
- 3What are Virtual Accounts?
- 4What is Bank Redundancy?
- 5What is FDIC Deposit Insurance?
- 6What is FDIC Receivership?
- 7What is a Client Money Account (CMA)?
- 8What is a Deposit Account Control Agreement?
- 9What is a Penny Test?
- 10What is a Sweep Account?
- 11What is an FBO account?
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