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As well as Fidelity's checking account, Cash Management Account, is FDIC insured. This definitely feels like a case of Robinhood ignoring some advice.

whitepoplar 8y ago
Not quite. Fidelity CMA accounts are brokerage accounts and thus cannot offer FDIC insurance because Fidelity is not a bank. Fidelity accounts offer SIPC insurance. However, Fidelity's trick is to sweep all cash into third-party FDIC-insured bank accounts behind the scenes. This yields several benefits: 1) Practically speaking, it offers the exact same FDIC insurance as a real bank account, because your money is being held in a real bank account. 2) Since cash is deposited into FDIC-insured accounts behind the scenes, Fidelity can seamlessly split money up so that each sub-account holds no more than $250k (the limit of FDIC coverage). This is how they can offer $1.25M of FDIC insurance (split between 5 accounts). The customer never deals with this complexity, as it's completely abstracted away, behind the scenes. The result is a cash management account that offers $1.25M FDIC insurance on cash balances.
- dawnerd 8y ago
  I would be interested to see how they and others go about setting up mass numbers of accounts. I imagine it’s probably something boring like a partnership.
  - elliekelly 8y ago
    https://en.wikipedia.org/wiki/Promontory_Interfinancial_Network https://en.wikipedia.org/wiki/Promontory_Interfinancial_Netw... On any given night your dollars are spread out at banks all over the country. Likely at tiny little community banks that you've never even heard of. It's pretty impressive how banks manage to maximize FDIC insurance.
    - latch 8y ago
      Maybe it's because I don't understand how deposit insurance works. Maybe it's because I live in a country where there are relatively few banks. But is this insurance actually meaningful? For example, if RBC "failed" in Canada, woulnd't the payout largely come from the Bank of Canada printing more money and all this could essentially happen without CIDC existing? You might get your money back, but now a loaf of bread costs $1000. Again, maybe I don't understand how it works. Maybe it makes more sense in the US where there are many smaller banks. Insight?
      - whitepoplar 8y ago
        The insurance is meaningful in that its mere existence can prevent financial institutions from collapsing in the first place. If everyone knows that FDIC/CDIC will keep their balances safe and sound, they're less likely to make a run on the bank in times of uncertainty. Bank runs can turn a bank insolvent very quickly, especially when depositors don't need to wait in lines, but can instead tap on their banking apps. Also keep in mind that the financial system is in many ways quite fragile: the failure of one bank makes other bank failures more likely. FDIC/CDIC helps prevent the dominos from falling as easily as would otherwise happen if deposits weren't guaranteed. As for where the funding comes from...the FDIC requires payment into the insurance pool by member institutions, so it's not the government bailing out the depositors each time a bank fails. But if the FDIC pot of money is exhausted, the U.S. Government will still guarantee it by act of Congress. I'm not sure how this works in Canada, however.
      - astura 8y ago
        "Insurance" is the key word here, "insurance" and "promise of a no questions asked unlimited government handout" is not the same thing. Just like auto insurance, everyone pays premiums to the FDIC which pools the money and claims are paid for using that pool.
        roywiggins 8y ago
        In a really really bad situation, there's always the risk that the insurer also runs out of money. The FDIC would run out of money if its pool of money collected from premiums ran out. It's never happened, though they had to finesse it a bit during the 2008 crisis (they required banks to prepay premiums, which recapitalized it in the short term). If the FDIC fund ran out of money the insurance would have to be backed by... the US Treasury, basically? The government would have to open up a money spigot somewhere: either borrow it or print it. It looks like the FDIC has a $100 billion line of credit with the Treasury, so it could use that, but that is just moving money around inside the government.
- astura 8y ago
  It's sorta abstracted in a way, but they are very clear about what's happening behind the scenes; they even show you which banks hold your deposits, which banks are available to hold your deposits, and they even let you request to exclude some banks from holding your deposits. (I don't remember if it was a priority system or an include/exclude system) There's no hand waving going on.
  - whitepoplar 8y ago
    Yup, it's completely transparent and customizable for those folks who want to mess around with it, but it's abstracted away so that 99.9% of people will never have to think about it as something other than a single money bucket.
pytyper2 8y ago
Probably correct, they also might be far less leveraged than your average deposit taking institution.

whitepoplar 8y ago

Not quite. Fidelity CMA accounts are brokerage accounts and thus cannot offer FDIC insurance because Fidelity is not a bank. Fidelity accounts offer SIPC insurance. However, Fidelity's trick is to sweep all cash into third-party FDIC-insured bank accounts behind the scenes. This yields several benefits: 1) Practically speaking, it offers the exact same FDIC insurance as a real bank account, because your money is being held in a real bank account. 2) Since cash is deposited into FDIC-insured accounts behind the scenes, Fidelity can seamlessly split money up so that each sub-account holds no more than $250k (the limit of FDIC coverage). This is how they can offer $1.25M of FDIC insurance (split between 5 accounts). The customer never deals with this complexity, as it's completely abstracted away, behind the scenes. The result is a cash management account that offers $1.25M FDIC insurance on cash balances.

dawnerd 8y ago
I would be interested to see how they and others go about setting up mass numbers of accounts. I imagine it’s probably something boring like a partnership.
- elliekelly 8y ago
  https://en.wikipedia.org/wiki/Promontory_Interfinancial_Network https://en.wikipedia.org/wiki/Promontory_Interfinancial_Netw... On any given night your dollars are spread out at banks all over the country. Likely at tiny little community banks that you've never even heard of. It's pretty impressive how banks manage to maximize FDIC insurance.
  - latch 8y ago
    Maybe it's because I don't understand how deposit insurance works. Maybe it's because I live in a country where there are relatively few banks. But is this insurance actually meaningful? For example, if RBC "failed" in Canada, woulnd't the payout largely come from the Bank of Canada printing more money and all this could essentially happen without CIDC existing? You might get your money back, but now a loaf of bread costs $1000. Again, maybe I don't understand how it works. Maybe it makes more sense in the US where there are many smaller banks. Insight?
    - whitepoplar 8y ago
      The insurance is meaningful in that its mere existence can prevent financial institutions from collapsing in the first place. If everyone knows that FDIC/CDIC will keep their balances safe and sound, they're less likely to make a run on the bank in times of uncertainty. Bank runs can turn a bank insolvent very quickly, especially when depositors don't need to wait in lines, but can instead tap on their banking apps. Also keep in mind that the financial system is in many ways quite fragile: the failure of one bank makes other bank failures more likely. FDIC/CDIC helps prevent the dominos from falling as easily as would otherwise happen if deposits weren't guaranteed. As for where the funding comes from...the FDIC requires payment into the insurance pool by member institutions, so it's not the government bailing out the depositors each time a bank fails. But if the FDIC pot of money is exhausted, the U.S. Government will still guarantee it by act of Congress. I'm not sure how this works in Canada, however.
    - astura 8y ago
      "Insurance" is the key word here, "insurance" and "promise of a no questions asked unlimited government handout" is not the same thing. Just like auto insurance, everyone pays premiums to the FDIC which pools the money and claims are paid for using that pool.
      - roywiggins 8y ago
        In a really really bad situation, there's always the risk that the insurer also runs out of money. The FDIC would run out of money if its pool of money collected from premiums ran out. It's never happened, though they had to finesse it a bit during the 2008 crisis (they required banks to prepay premiums, which recapitalized it in the short term). If the FDIC fund ran out of money the insurance would have to be backed by... the US Treasury, basically? The government would have to open up a money spigot somewhere: either borrow it or print it. It looks like the FDIC has a $100 billion line of credit with the Treasury, so it could use that, but that is just moving money around inside the government.
astura 8y ago
It's sorta abstracted in a way, but they are very clear about what's happening behind the scenes; they even show you which banks hold your deposits, which banks are available to hold your deposits, and they even let you request to exclude some banks from holding your deposits. (I don't remember if it was a priority system or an include/exclude system) There's no hand waving going on.
- whitepoplar 8y ago
  Yup, it's completely transparent and customizable for those folks who want to mess around with it, but it's abstracted away so that 99.9% of people will never have to think about it as something other than a single money bucket.

pytyper2 8y ago

Probably correct, they also might be far less leveraged than your average deposit taking institution.