FDIC vs. SIPC: What Fintech Builders Need to Know

In 2018, with interest rates low and the meme stock saga that dismantled its reputation years away, the popular stock trading app Robinhood rolled out “Robinhood Checking & Savings”, no-fee checking and savings accounts with 3% annual yields — rates far higher than anything in the space at the time. While these new products made significant noise in the market, with some more eager proponents hailing them as the end of traditional retail banks, a wave of criticism and regulatory concern immediately erupted around how they were characterized, forcing Robinhood to withdraw the offering only a day later.

Specifically, many argued that Robinhood was presenting their new tools to the public as “banking products but avoiding the regulatory scrutiny that would go along with it” [CNBC]. Whereas conventional bank accounts fall under FDIC protection, Robinhood and its new accounts were subtly covered by SIPC, a less comprehensive form of insurance typically intended for brokerage accounts. In short, Robinhood had relied on its existing FINRA designation and the SIPC coverage it brought with it, with some fine print on the bottom of its website the only evidence of this important distinction — which ultimately drew the ire of regulatory bodies. Regulators demand absolute clarity, and the Company’s checking and savings accounts were misleading.

The breakdown here is not unique to Robinhood — companies have struggled for years at navigating the boundaries of banking and brokerage. At its core, this example is an important lesson about the complexities of deposit insurance and coverage. And with the lines between brokerage, banking, and crypto experiences increasingly blurred, these complexities will only continue to grow. For every product shipped and every piece of collateral released, it is critical that fintech builders understand the dynamics of deposit insurance and how they inform the experience and security of their end users.

Currently, as mentioned above, there are two major forms of deposit insurance in the U.S. to be aware of:

FDIC Insurance

The Federal Deposit Insurance Corporation (FDIC) is a federal agency formed in 1933 in the wake of the Great Depression that protects the deposit accounts of consumers against bank failures and, more broadly, helps maintain trust in the U.S. financial system. The agency’s mandate is twofold: it uses premiums paid by its close to 5,000 member banks to compensate consumers in the event of a bank failure, and it monitors and regulates those member institutions to ensure that they will not collapse in the first place. The most familiar form of deposit coverage to consumers, the FDIC insures single accounts (savings, checking, CDs, etc.), joint accounts, and certain retirement accounts but does not cover stocks, bonds, and other investments (we’ll get to those later). The standard coverage limit is $250,000 per account holder, per bank, per ownership category, which includes both the principal and any accrued interest.

As an example, suppose a user has $150,000 in their checking account and $200,000 in their savings account, all at the same bank. Since checking and savings accounts are classified under the same ownership category (single accounts) and these deposits are held at the same institution, the user will have surpassed the $250,000 coverage limit and $100,000 of their deposits will be uninsured. But, if the user instead decides to transfer that $100,000 to a joint account at the same bank, that portion of the deposits would now be classified under a different ownership category and would now be insured. FDIC coverage can be spread and maximized across banks and ownership categories — Robinhood effectively utilized this strategy in their relaunched cash management accounts by depositing its customers’ money across multiple partner banks, thereby achieving coverage of up to $1.25 million per user.

SIPC Insurance

Overseen by the SEC, the Securities Investor Protection Corporation (SIPC) is a non-profit organization created by a federal law in 1970 to promote public confidence in the securities markets and protect consumers against the failure of a broker-dealer and unauthorized trading. Unlike FDIC coverage, the SIPC does not protect the actual value of the relevant assets but instead protects the custody function of the broker-dealer, meaning that the Corporation replaces the missing securities and cash when possible before paying out any amount in cash. SIPC’s coverage is limited to $500,000 per customer, per bank, per account category (aka “capacity”), including a maximum of $250,000 in cash. This protection extends to stocks, bonds, mutual funds, and certain other investments, but does not cover fluctuations in the prices of securities, losses due to poor investment advice, or, as noted in Robinhood’s case, cash held solely to earn interest.

As an example of SIPC coverage, let’s say a user owns 100 shares of company ABC at $1,000 / share, for a total value of $100,000. This person also has $10,000 in cash (from a previous sale of a security) and $500,000 in an IRA at the same broker-dealer. Now let’s say the stock price of company ABC declines 50% to $500 / share, for a total of $50,000. If this broker-dealer goes bankrupt (and is unable to transfer the money to another protected broker-dealer before liquidation), the SIPC would either replace the 100 shares of ABC or, if that’s not possible, would pay the user $50,000. The SIPC would also reimburse the user for the $10,000 in cash and, because it is a “separate capacity” from the other assets and does not count toward the same limit, would protect the $500,000 in the IRA account, resulting in total coverage of up to $560,000.

Deposit Coverage in a Crypto-Crazed World

While the norms and legal frameworks around deposit coverage in the fiat world have been long-established, decentralized players are still operating relatively untouched by regulation. Blockchain and crypto offerings have the potential to redefine financial experiences for millions of consumers, but some are still wracked by fraud, insider trading, frontrunning, and extreme volatility, all without the safety nets and disclosures of traditional banking and brokerage products. And as a recent Fed report points out, those who actually use crypto as a savings and banking tool rather than just as a speculative investment are disproportionately lower-income and underbanked, elevating the risk of abuse.

Despite these divisions, the fiat and decentralized worlds can coexist. Fintech infrastructure platforms like Rize allow builders to seamlessly link deposit accounts to an existing crypto solution, creating reliable on- and off-ramps and providing a packaged, fully-compliant experience. Moreover, there are insured fiat-based alternatives to the crypto-linked passive wealth management solutions that have drawn so much scrutiny in the wake of the TerraUSD collapse: Rize’s Target Yield Account (TYA), for example, is an SIPC-protected savings-centric product backed by fiat currency that seeks to target up to 8% yield and can work alongside a conventional crypto offering.

But as the wait for crypto regulation goes on, the onus is on fintech builders to protect consumers and swim firmly within their appropriate lanes. However unlikely a bank or brokerage failure is, FDIC and SIPC coverage remain important tools that anchor any financial services offering. Platforms like Rize bridge the gap between the security and reliability of traditional banking and brokerage products with the innovation and efficiency of the crypto ecosystem, opening up a whole new universe of opportunities for builders to engage with their users.

To learn more about how we support banking, brokerage, and crypto capabilities, please contact us at partnerships@rizemoney.com.

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