What is FDIC insurance and how does it work?

Though the Federal Deposit Insurance Corporation (FDIC) has been around for nearly a century, few depositors know what it actually guarantees. But when an individual or business is deciding where to place a large amount of cash, it becomes far more important to understand the program and how it actually works.

The FDIC was instituted in 1933, in large part due to the bank runs that characterized the early Great Depression. As part of a broader plan to restore faith in the banking system, the FDIC provides a financial guarantee that up to a certain amount, depositors’ money is safe no matter what happens to the bank. The benefits are twofold: bank runs are less likely to occur if depositors aren't incentivized to withdraw all their money before everyone else, decreasing the likelihood a bank runs out of cash in the first place. And if a bank does fail, the FDIC compensates depositors and halts collateral damage before it spreads.

Today, the FDIC will insure up to $250,000 per “ownership category,” or type of account.

• Single accounts (accounts not falling into any other category)
• Certain retirement accounts (including Individual Retirement Accounts)
• Joint accounts (accounts with more than one owner with equal rights to withdraw)
• Trust accounts
• Employee Benefit Plan accounts (deposits of a pension plan)
• Corporation / Partnership / Unincorporated Association accounts
• Government accounts
  

Funds enrolled at eligible institutions are automatically insured; there is no application process or fee as premiums for the program are paid by banks. Should a bank fail, the FDIC steps in to assist members in moving their insured funds to another bank, or in some cases, reimbursing them directly for the insured amount. In the last ten years, the program has protected over $35bn in assets across 122 failed banks.

How it works

The FDIC insures to $250,000 of principal and accrued interest per depositor, per banking institution, per ownership category. This means that a single individual might enjoy insurance for more than $250,000 if their insured amount is distributed into two or more of the above categories at a single institution or, more commonly, into the same category at multiple banks.

There are no limitations, assuming you qualify for them, to the number of different categories you may deposit money into, or the number of banks at which you may have the same category of account, in order to extend FDIC coverage to more than $250,000 of funds.

Note that banks must be unaffiliated in order to qualify for separate allotments of the $250,000 minimum; talk to a financial advisor if you're unsure if you would qualify for additional FDIC insurance before making deposits with the intention of protecting them through the FDIC.

Benefits for businesses

While FDIC insurance is traditionally thought of as a protection for consumer banking, it holds strong appeal for businesses looking to safeguard cash reserves. Companies frequently park their cash reserves in traditional corporate accounts where they earn a modicum of interest and qualify for FDIC insurance protection.

But when other semi-liquid investments, like money market funds or bonds, offer yield returns that are sometimes 20x better than a bank's offered interest rate, it's tempting to put your firm's cash to work in a “safe” investment versus a bank account. For some firms, especially startups with excess cash and efficient burn rates, even a percentage point increase on yield could be the equivalent of an employee's salary or several additional months of runway.

The downside, of course, is taking on additional risk: bonds, even federal T-bills, lock up your cash for a minimum of weeks. And money market funds have suffered numerous “runs” in the last two decades which can leave assets temporarily frozen when a firm needs cash most.

Fortunately, there are options that offer liquidity, FDIC insurance eligibility as well as high rates.  Mayfair’s cash account provides yields superior to money market funds or T-bills while retaining the liquidity of cash and FDIC insurance eligibility.

Are Mayfair products FDIC insured?

Mayfair places your cash exclusively in FDIC insurance-eligible accounts, meaning that they are covered via our partner Evolve Bank & Trust, Member FDIC—the same partner bank used by companies like Mercury, Stripe, and Transferwise. You receive the best of both worlds: our industry-leading APY powered by our no-effort money management software, plus the same FDIC protection that has insured banks for just under a century.

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