WASHINGTON — Banks are about to have another option for offering full deposit insurance coverage.
Promontory Interfinancial Network, already known for providing coverage through its certificate of deposit network, is set to announce today that it plans a May launch for a product to protect a customer's liquid funds.
Though Insured Cash Sweep is similar to Promontory's popular Certificate of Deposit Account Registry Service, company officials said it has some key differences, including that depositors can have easier access to their funds, and banks can use it to insure lower-cost deposits.
"At the end of the day I think this has the potential to overtake CDARS" in popularity, Mark Jacobsen, Promontory's president and chief executive, said in an interview. "The customer base that might be interested in this is larger."
Insured Cash Sweep customers will receive more than the Federal Deposit Insurance Corp.'s $250,000 limit by opening transaction accounts from which funds exceeding a certain amount are swept into money market deposit accounts at other banks in increments below the FDIC limit. The service will cost 10 cents per $100 of swept funds. The company is planning a pilot test of the program for April with select institutions.
Jacobsen said Promontory has mulled starting a service like ICS for years as CDARS customers have asked for a sweep product. Yet the potential demand for such services may be higher now as banks prepare to lose the FDIC's unlimited coverage for no-interest checking accounts. The voluntary Transaction Account Guarantee Program, which the FDIC developed to protect liquidity in the wake of the crisis, is set to expire June 30.
Unlike the TAG program, ICS will allow banks free rein to set their interest rates.
"This isn't the same thing" as TAG "by any means, but banks are having to consider how they're going to deal with customers that have been in that program, particularly smaller institutions," he said.
Jacobsen said banks that want to continue the unlimited protection now provided by the FDIC have several options, including placing customers in off-balance-sheet sweep accounts.
"But that doesn't help the bank that wants to keep the funding," Jacobsen said. "They can utilize the CDARS program, which is great, but typically these are accounts that people need to write checks on. … [ICS] is intended to give them another option."
Promontory is not the first company to come up with a private-sector solution for continuing the blanket coverage. At least four firms offer similar products: Anova Financial Corp. of North Carolina; Total Bank Solutions of Hackensack, N.J., which has partnered with Deutsche Bank on a service; Institutional Deposits Corp. of Miami; and Intrasweep of New York.
The ICS service will offer "dollar-for-dollar" reciprocity, Jacobsen said, meaning a bank can receive as much funding from other Promontory members as is swept outside the institution. If they choose, banks can sell off the deposits they don't need. The other services also offer reciprocity.
Jacobsen said ICS' pricing is below competitors because Promontory intends to reach a wide swath of customers. Since its founding in 2002, CDARS has gained 3,000 member banks — mostly community banks. Jacobsen said the mean asset size of participating institutions is less than $300 million.
With ICS, "it's the same mentality that we had with CDARS," he said. "We offered CDARS at a price that we thought was very low, indeed a small fraction of the price that traditional deposit brokers charge banks. Our philosophy was if you make it big enough it can be a profitable service."