Appetite for expanded FDIC insurance is strong. Will it last?


First Internet Bancorp has been extending federal deposit insurance above the standard limit to its commercial customers for more than six years. These include municipalities or nonprofits that are conservative in nature and want to ensure their entire balance is insured.

The Fishers, Indiana, institution uses IntraFi for its mechanisms that take excess deposits from a single customer and divide them in $250,000 chunks among other banks in IntraFi's network, such that the customer's entire balance is covered by the Federal Deposit Insurance Corp. After Silicon Valley Bank collapsed in March, First Internet ratcheted up its relationship with IntraFi.  Now the $4.5 billion-asset bank offers the same service to consumers and small businesses.

"It became clear we had something that might have broader appeal," said Nicole Lorch, president and chief operating officer of First Internet Bank. "We've had more conversations about FDIC insurance in the last month than in all 24 years of my banking experience."

Call them balance sheet management or deposit placement companies. IntraFi, R&T Deposit Solutions, StoneCastle Cash Management and newcomer ModernFi act behind the scenes to allocate deposits among the banks in their networks, typically as a one-way buy or sell or a reciprocal arrangement. Business is booming for these under-the-radar solutions after the fall of SVB, and their appeal is edging beyond asset-liability committees at banks.

"The public attention that has been generated on whether or not your deposits are insured, and whether the $250,000 deposit cap is a hard cap, is causing this issue to move from something that used to be primarily of concern to the management of small banks to where substantial depositors are looking at their relationships with their bank and saying, 'I need to ask questions,'" said Leo D'Acierno, senior advisor at Simon-Kucher & Partners. "Now the relevant market for these deposit networks is bigger than the banks themselves."

All four companies report recent, heavy interest in their services. Some of the fervor is surely triggered by the urgency and confusion following SVB's failure, before the FDIC announced that it would cover all uninsured deposits. But the expectation for elevated levels of deposit protection are likely to stay high now that depositors are more attuned to the risks.

These capabilities are especially important for community and regional banks.

"If you are a small institution, a large and rapid increase in deposits means that you have to figure out how to change your balance sheet to accommodate that," said D'Acierno.

Moreover, neobanks such as Brex and Mercury have been touting their abilities to hold balances above FDIC limits using these sweep programs and through money market funds.

"If you're a bank, you're essentially going to have to do the same thing or you look like you have less functionality and less value added than a fintech," said D'Acierno.

There is also the question of customer confidence.

"Banking is inherently a business of trust," said Tony DeSanctis, senior director at Cornerstone Advisors.

IntraFi is recognized as the pioneer of reciprocal deposits. It has about 2,800 banks in its network.

"It is the 800-pound gorilla in this space," said DeSanctis.

The company, which rebranded from Promontory Interfinancial Network in 2020, reports that it has recently been adding billions of dollars per day in its reciprocal program.

"Within the past three weeks [as of March 30] we've grown as much as we expected to grow for the duration of this year," said Mark Jacobsen, co-founder and CEO of IntraFi.

The company has added more than 125 new bank customers since SVB collapsed, compared to the 175 to 220 the company normally onboards in a year.

R&T Deposit Solutions, formerly known as Reich & Tang, bills itself as a financial technology company providing liquidity management solutions. It has more than 350 banks in its network. R&T says it has seen a significant increase in balances post-SVB and a record number of new contracts.

"Instead of being priority number four or five, it's become one or two," said Kevin Bannerton, head of wealth management at R&T. "Anytime you have a crisis event like this it reminds people or re-emphasizes an appreciation for different types of risk."

StoneCastle differs from the others in that it doesn't reciprocate deposits. Depositors open a Federally Insured Cash Account, or FICA, through StoneCastle's custodian bank, U.S. Bancorp. As administrator, StoneCastle's operations platform directs these deposits to its network of more than 900 banks to provide high levels of FDIC insurance while ensuring each depositor's balance stays below FDIC limits in each institution. The company also sells deposits to banks, which it sources from institutional clients and high-net worth individuals making deposits into its FICA program.

The company has seen the weekly volume of new accounts roughly double since SVB failed.

"This served as a wakeup call to the market that hey, there is such a thing as uninsured deposits, and [the FDIC] is bailing it out this time, but maybe one time they're not going to do it," said Frank Bonanno, head of marketing at StoneCastle.

ModernFi is the newest entrant; it launched in January 2022 and arranges for one-way and reciprocal deposits. Founder and CEO Paolo Bertolotti declined to name the number of banks in its network, but said ModernFi's smallest customer has $40 million of assets and the largest has about $200 billion of assets. Bertolotti says ModernFi's software allows banks to analyze their balance sheets, sweep deposits off-book, reciprocate deposits and more largely on their own.

By using one of these services, banks can maintain relationships with their clients who want to deposit more than $250,000, and customers can avoid finding clunky solutions to insuring large balances, such as managing multiple accounts at multiple banks. Customers are typically businesses, nonprofits, and public entities, but high-net worth individuals may also want extended FDIC insurance, as well as older individuals who have shifted most of their investments to cash.

"Banks probably never talked about this before with their middle market customers," said D'Acierno. "Now it's going to be a core part of the discussion."

First Internet Bank contacted its deposit customers to spread the word about this new option — and the opportunity to consolidate their funds at one institution while maintaining full FDIC insurance. Lorch estimates the bank received 50 inquiries the week of March 13 alone.

"Many people know that FDIC insurance goes up to $250,000. It's been a great conversation starter to say it doesn't have to stop there, we have other options," said Lorch. Customers do not pay a fee for this service, but there is a rate reduction to cover First Internet's administrative costs.

There are other benefits to banks beyond strengthening relationships with depositors who want to store more than $250,000 at one institution. Small banks may want to move excess deposits off their balance sheets to temper their growth; others may want to acquire deposits to fund loans. Sending money into a deposit network can generate fee income. Reciprocal deposits may be attractive to municipal customers, as they are a convenient way for them to invest and remain in compliance with investment policies that require their deposits to be FDIC-insured or fully collateralized.

If an underlying bank in the network fails, there are protocols for retrieving customer funds. For example, IntraFi says that its custodian files a claim on behalf of each depositor with the FDIC on the evening a bank fails. The FDIC pays the insured amounts through the custodian, which relays the funds to the depositor's relationship bank. StoneCastle says that in most cases, the bank's obligations will be absorbed by another healthy bank and there will be no disruption to the depositor. When that is not the case, StoneCastle would provide recordkeeping to the FDIC so the depositor would be properly identified and receive their funds within one to two business days.

A lingering question is what customer appetite will look like when the recent bank failures are no longer fresh in people's minds. Observers believe the need for extended FDIC insurance will stick.

"The bottom line is, everybody is going to be doing it," said D'Acierno.

At IntraFi, customer attrition is low, as depositors rarely opt out of elevated levels of protection once they have it.

"We will return to a more reasonable growth path," predicted Jacobsen, "no doubt elevated from the prior growth path, but not to the extent you see in the immediate aftermath of a crisis."

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