A cash sweep is an automatic bank process. Through this process, funds are moved from a bank deposit account to an investment account or from an investment account to a deposit account. For a cash sweep, the funds can be transferred between accounts at the same institution or from an account at one institution to an account at another. Usually this is accomplished daily and can be arranged for a portion of the funds in either account or the entire balance of the account.
In order to automatically transfer funds from a deposit account to an interest bearing account, such as a mutual fund account, a person may set up a cash sweep. The funds in these accounts are transferred based on the customer’s specifications. This means the customer can specify that all of the funds present in either account are transferred each day or he can request the transfer of only a small portion of it. For example, a person could have the excess balance on his investment account transferred to a deposit account.
In most cases, a cash sweep happens once per day. This daily schedule applies no matter which account is involved. A bank will perform a cash sweep from its customer’s account once per day, and the investment account manager handles transfers once a day as well.
Cash sweep arrangements are often useful for account holders, including businesses, who need access to a large amount of funds without having to wait a significant amount of time. While a person or business in this situation could hold his money in a checking account, he would not typically earn as much on it as he could with an investment account. As such, a person or business in this position usually gets the best of both worlds with a cash sweep: significant interest that allows his money to grow and quick access to his funds when he needs them.
Cash sweeps were initially instituted by banks as an effort to deal with non-bank competition that paid interest and offered features similar to those available via deposit accounts. Since banks could not offer interest on checking accounts at the time, they created cash sweeps to ensure that their customers could still bank with them yet easily move their money into accounts that were interest bearing. Today, there are interest-bearing checking accounts, but they usually pay far less interest than investment accounts.