Solving for Cash Balances over the FDIC Insurance Limit
Two of our companies had a rough weekend some weeks back due to the SVB saga. Primarily, they were keeping the majority of their cash at SVB. Still, secondarily, they knew some of their customers were using SVB and may face issues accessing their capital as well.
Up until Sunday's announcement that depositors would be made full, we engaged in analyses to understand the economic and liquidity impact on the company’s operations and cash flows. One outcome of those activities was to find potential banking solutions that swept cash into multiple banks to distribute risk.
Historically, a company would have had to open and manage 20 bank accounts to store $5 million and enjoy full FDIC coverage ($250,000 times 20). If this were done with code, the only theoretical limit to a solution like this would be a bank’s capacity to programmatically open accounts, receive and send flows, and solve reporting/compliance needs, combined with the number of banks in the US that would allow programmatic access to these features.
We are unaware of the number of banks in the US that open up their infrastructure to allow API / programmatic access to their features at this level, but we know of fintechs that have started to solve this. These types of solutions make business sense and will probably be replicated across US financial institutions. These are online banks, neobanks, and treasury management solutions within financial institutions and fintechs. Let’s list some solutions below with the maximum amount they communicate they insure:
Rho https://www.rho.co/ $75m
Brex https://www.brex.com/ $6m
Mercury https://mercury.com/ $5m
Arc https://www.arc.tech/ $2.75m
We believe that as these solutions increasingly roll out, the concept of a bank run will continue to evolve:
- Pre Internet / Mobile: bank run took weeks as people had to physically reach and enter the bank’s branches
- Internet / Mobile with human access: with a “bank branch” in a user’s pockets, a bank run takes 1-2 days
- Rules-based / programmatic access: it could take 1-2 hours to destroy a bank
The capability to move cash at higher speeds will definitely push for updated regulations, a rethinking of the acceptable leverage levels at financial institutions, and the definition of potential circuit breakers that enable/disable these features.
We are sure more solutions will pop up from different fintech companies to address the limited FDIC insurance levels. We hope this information can help with your company’s cash management needs. Please reach out to us if you are a tech services company looking to scale.