Fintechs tout ways to invest business clients' cash above FDIC limits

Businesses that want to safely stash sums of cash above Federal Deposit Insurance Corp. limits have options that don’t involve juggling multiple accounts at multiple banks.

They can invest directly in government money market funds or Treasury bills. They can inquire about programs within their bank, such as deposit networks and reciprocal arrangements engineered by IntraFi and the like, or automatic sweeps of amounts exceeding $250,000 into money market mutual funds.

Or they can turn to fintechs that offer a tech-forward version or combination of the above.

The disconnect between the size of accounts that enterprises typically maintain and deposit insurance levels has existed for a long time, said Brian Graham, a partner at Klaros Group. But the three days between Silicon Valley Bank’s failure and the FDIC’s assurance that it would cover uninsured deposits jolted people into action.

“There has been a lot of scurrying around in the last several weeks as these organizations figure out what they want to do,” said Graham in a March interview.

Fintechs such as Meow or Vesto, and business-oriented neobanks such as Brex and Mercury, have mechanisms that let business customers invest idle cash in Treasuries or money market funds. Some companies began turning to Meow and Vesto well before the recent bank collapses, particularly for easy investing in low-risk, high-yield instruments. As such, the reasons they have to stay are likely to persist even if the FDIC elevates levels of deposit insurance for businesses.

“The fintechs are moving faster” than banks, said Graham. “They are piecing things together to come up with solutions that they expect will appeal to customers, and they are not wed to a single set of tools.”

The safety of each investment product varies.

“There are lots of flavors of money market mutual funds and lots of flavors of government securities,” said Graham. “U.S. Treasury is a different credit risk than some local sewer authority in a muni bond.”

Mercantile, which partners with organizations to create custom branded cards, has been holding excess cash at Vesto the past six-plus months. Vesto defines itself as a cash management platform for venture capital-backed startups and mid-market businesses. It builds customized portfolios for its customers according to their risk tolerance, liquidity needs and more, typically investing in Treasury bills, money market funds, corporate bonds and certificates of deposit. The back-end custodian is BNY Mellon Pershing.

“With the market changing and Treasuries being a little more interesting, we wanted something that was very easy to use and exposes us to a high-yield Treasury option without endangering cash at hand,” said Samuel Poirier, CEO and founder of Mercantile. “Vesto understood the need to take cash out on a monthly basis to fund the company.”

He chose Vesto, which launched in 2022, because of its simplicity and its understanding that companies such as his will withdraw funds on a regular basis. He only invests in U.S. Treasuries through Vesto.

Benjamin Döpfner, founder and CEO at Vesto, says he has seen an influx of new customers since SVB collapsed. 

“There has been a desire to diversify their holdings and cash,” he said. “We found a lot of companies have almost all their cash sitting in one bank account.” He says his customers choose Vesto to find a secure home for their cash and to earn high yields.

“Oftentimes founders and CEOs don’t have the capital markets experience to do this themselves,” said Döpfner.

Döpfner describes the company’s investment style as “incredibly conservative.”

“We take the viewpoint that safety and liquidity are priority number one and yield is priority thereafter when managing corporate cash,” he said. “We only work with highly liquid ‘ultra-low risk’ investment products like U.S. Treasuries.”

Stocktwits, a social network for traders, began investing in Treasury bills through Meow well before SVB and Signature Bank collapsed in March. Meow is a banking platform that lets businesses purchase Treasury bills using partner registered investment advisors and broker-dealers.

“As the Fed started to raise rates, we saw an inverse yield curve, so it made sense to put some of the firm’s capital to work in addition to diversifying credit risk,” said Philip Picariello, vice president of finance and operations at Stocktwits.

He considers the firm’s capital as being divided among three buckets: immediate liquidity for payroll and accounts payable, near term liquidity to fund product development and core capital. Like Poirier, he wanted to earn yield in a low-risk way.

“When I started digging into Meow I liked the team and the way they built it,” said Picariello. “I was sold on the fact that BNY Mellon Pershing is in the back end. It’s very seamless to move money over, allocate it, and ladder it out.” Stocktwits uses an insured deposit sweep program at its bank to protect funds that should stay liquid in the near term. He allocates the rest to Treasuries through Meow based on what the company needs in the next month, three months or six months.

As suggested by Stocktwits’ strategy, these accounts are not meant to hold operating cash.

“When you want to get your money, it takes some time,” said Graham. The success of this strategy “depends on your ability to look ahead and know when you need the cash.”

Picariello is not concerned.

“If a corporate treasurer or chief financial officer has a good handle on upcoming liabilities, you should never have to worry about it taking a day or two to get your money,” said Picariello.

Döpfner said almost all the investment products his company works with are highly liquid, and customers can usually access their cash within one to two business days. Brandon Arvanaghi, CEO of Meow, said in a March interview that it would take customers one to two business days to receive their funds after selling their T-bills.

Business-oriented neobanks have developed their own products they hope will entice customers to park large amounts there instead of at regular banks. Brex has increased its deposit insurance from $1 million to $6 million since SVB’s failure by using a sweep network. Customers can choose to store funds above that limit in a BNY Mellon money market fund. Mercury has increased the amount of cash it can protect per customer to $5 million in a product called Vault. Deposits exceeding $5 million are placed in a money market fund that is almost entirely invested in U.S. government-backed securities.

Brex and Mercury touted thousands of new customers since the bank failures in March, although it’s an open question as to how many they will keep over the long term. Döpfner of Vesto and Arvanaghi of Meow also report a wave of new customers in the wake of those disasters.

“These kinds of alternatives tend to be really effective if you know you won’t need the money for X period of time and you’ll get a heads up when you need it,” said Graham.