What Is a Zero Balance Account?

What is a Zero Balance Account (ZBA)?

As you can guess from the name, a zero-balance account is an account that always has a balance of zero. Businesses maintain these accounts by “sweeping” the account balance into another one at the end of the business day to maintain an empty account. The money in the account goes into the master account. Each master account can serve several zero balance accounts, also known as sub-accounts. If the account needs money for any reason, the money is transferred into the account and then taken back out to keep the balance at zero as much as possible.

These accounts are used solely for the purpose of processing payments. They aren’t for holding balances in the long term or generating interest on a deposited amount.

How Do Zero Balance Accounts Work?

A zero-balance account combines a sub-account and master account. The master account offers a centralized hub to manage the money held by an organization. Whenever they must put money into the account to cover a transaction or charge, the exact amount of money needed is taken from the master account. The process is also wholly automatic, meaning it happens in an instant without having to involve an employee.

Concentrating the money into a master account opens more money for investments than having small dollar amounts sitting idly in several different subaccounts. The master account also has other benefits, such as a better interest rate compared to subaccounts. The master account isn’t a checking account either. These accounts are another more profitable form of a bank account. A zero-balance account maximizes the amount of money available for investment while minimizing the risk of overdraft fees.

A zero-balance account is only for processing payments and isn’t used to hold a running balance for a business.

Using the zero-balance account to fund debit cards issued by an organization helps ensure all the card activity is pre-approved before going through. Given that the accounts never hold any idle funds. The debit card transaction can’t go through until the account has money put into it. Maintaining a system like this helps businesses manage their expenses by reducing the number of unapproved transactions and activities happening with their cards. These accounts give you more control over what company-issued debit cards are used for.

Using a zero-balance account to control spending is particularly helpful for large organizations managing incidental charges. While it’s often easier to predict and pay operational charges for businesses, incidental charges vary and are more difficult to track. By limiting how much access people must debit cards, cardholders will likely follow the appropriate approval procedure before completing their purchases and using company money. This system makes it easy to track transfers and reconciliations across multiple accounts without getting overwhelmed.

Zero Balance Account Example

Let’s look at an example of a zero-balance account to get a good idea of how they work. Company A maintains a master account with $2,000 in it. They have three zero balance subaccounts with nothing in them at the start of the day. As the day goes on, each subaccount receives several cheques and payments, leaving them with $40, $60, and $100, respectively. The money is swept from the subaccounts and put into the master accounts at the end of the business day. The master account starts the new day with $2,200 while the subaccounts are back to $0. The process repeats each day.

What is the Purpose of a Zero Balance Account?

Maintaining a ZBA account sounds like a lot of work, so why do businesses do it? They do it for several reasons. Here are the purposes of a zero balance account:

1. More Control Over Departmental Funds

Instead of having multiple accounts for every department where funds are allocated, a zero-balance account means the exact amount of money is moved exactly when it needs to be. This prevents excess money from being left in the account, which leads to inefficient spending.

2. Improved Inefficiency

Zero balance accounts are fully automated. That means they run themselves without the need for a human staff member to empty the account at the end of the day. They are also free from time zones, meaning money is taken out at the same time at the end of the day, even if offices are spread across the world. The bank has systems in place to ensure that the accounts are swept clear at the end of the business day, no matter where the office is. If the account receives a check, the zero-balance account removes the amount necessary to clear the check without staff intervention.

3. Higher Interest Rates

The master account in the system typically has a better interest rate than the subaccounts. Subaccounts aren’t intended as checking accounts. It’s best to keep the money in a centralized location where it can earn more interest.

4. Ensure Due Process is Followed

Zero balance accounts hold no money, meaning that departments must lodge requests whenever they want money. By insisting on a formal request for funding each time, you ensure that everyone follows proper procedures. This helps you to avoid overspending on projects.

5. Prevent Money Misuse

Businesses must approve fund withdrawal from the master account into the subaccount. This means there is no risk of unauthorized spending. If someone uses a company card for something they don’t have approval for, it won’t go through. This system is the perfect defense against fraud.

What is a Zero Balance Savings Account?

A savings account is an account where people keep their savings to generate interest and be kept separate from their main finances. Banks typically offer these accounts on the understanding you’ll hold a minimum balance in the account, or you’ll have to pay a fee. However, some savings accounts don’t require a minimum balance. Those are called zero balance savings account.

A zero balance savings account works like a regular zero balance account. You have an account, but you don’t need to keep a minimum balance there. These accounts are great for hassle-free saving, but they have some drawbacks. Most notably, they offer limited investment options and a limited number of transactions. Banks typically allow for just four withdrawals from a zero balance savings account.

What is a Zero Balance Confirmation?

When auditors examine a company’s accounting records, a confirmation letter is the main way they do it. This is a letter signed by someone at the company to customers chosen by the auditors. The letter requests that the recipient(s) contact the auditors and verify that the account activity at the time of writing. As the information comes from a third party, it is considered more reliable than information taken from internal records that could be altered in some way.

Critical Points of Implementation

Given there are a few different ways to approach a ZBA, implementing such an account requires a deep analysis of your underlying needs and what your bank has to offer. Having to include other countries in the mix also complicates matters. Developing markets are more difficult to establish ZBAs in compared to European and American markets.

ZBA implementations are typically done alongside cash management RfPs, suggesting it could be a major project. Using multi-bank sweeping can make the process much easier but means the accounts might not be completely empty.

Questioning why you want to implement such an account is another key point of implementation. You should know why you’re doing what you are. Companies adopt a ZBA to ensure 100% end-of-day zero balancing, which you can do with one bank and one treasury book.

You should also analyze the payment and collection trends for the operating accounts that are going to have a zero balance. This is vital to ensure that the intra-day credit limits are in place. Without this, there’s a risk that accounts won’t have enough to make payments, meaning you have to spend more time monitoring the accounts and ensuring urgent fund requests go through.

Final Thoughts

Zero balance accounts are bank accounts with zero money in them. Any money in the account is swept into a master account at the end of the day. These accounts help businesses manage expenses and stay on top of finances. There are plenty of reasons to consider opening a zero-balance account for your business. They are particularly helpful if you have credit and debit cards tied to your business and want to avoid fraud.