What Is a Concentration Account?

A concentration account is a central location for holding funds. Such accounts allow money to be deposited and disbursements made without each transaction involving immediate access to other accounts. They may be used by banks, generally for internal transactions, or by clients to help manage certain types of other accounts. Many who support the use of concentration accounts argue that they make cash management more efficient. There are critics, however, who argue that these accounts can facilitate illicit activity.

To understand a concentration account, it may help to think about a joint checking account. Funds can be deposited and withdrawn by all account holders without considering whose money is involved in each transaction. Similarly, concentration accounts are pools of funds that are often used by financial institutions to process internal transactions, such as fund transfers.

In the banking industry, speed and convenience tend be important factors. Supporters often highlight those characteristics as features of concentration accounts, insisting that they make cash management simpler and more efficient. Some banking clients also use concentration accounts to help manage their individual accounts. This is often seen with companies that have zero balance accounts.

As the name suggests, a zero balance account is one in which the account holder normally does not wish to retain a balance. By way of a feature known as sweeping, often at the end of the day, money that remains in such an account is moved into a concentration account. If debits are made between sweeps that leave the account underfunded, funds may be moved from the concentration account into the zero balance account.

In some cases, this type of system is established with those who have account targets. When a client sets a target, he or she determines how much money he or she would like to maintain in a given account. The concentration account is then used to maintain that balance, which acts as a source of funding or a location for holding funds, depending upon the need.

Concentration accounts are sometimes subject to criticism due to the risk that they may be used to facilitate illicit activities, such as money laundering. The processing of a financial transaction generally leaves a trail. After the transaction is conducted, at a later time, if reviewed, information such as the authorizing party or the client's account number can be determined. There are concerns, however, that aggregating funds in a concentration account involves the risk of separating important information from particular funds or transactions.