Pass-Through Deposit Insurance

Pass-through deposit insurance is the way US deposit insurance applies when money is placed at a bank by a custodian, agent or other third party on behalf of its customers. Instead of insuring the account holder of record, such as a fintech company or broker, up to a single limit, the FDIC treats each underlying owner as if they had deposited the money directly, so each can be insured up to the standard limit. Coverage "passes through" the intermediary to the real owners.

Pass-through coverage matters most for pooled accounts used by fintech apps, prepaid card programmes, brokerage deposit sweep programs, escrow agents and trustees. These accounts are typically titled "for the benefit of" customers and hold many people's money together. The coverage protects owners against the failure of the bank, but not against the failure of the intermediary, a distinction that became painfully clear in 2024.

Imagine a club treasurer who keeps every member's savings in one bank account under the club's name. If deposit insurance only looked at the name on the account, the whole club would be insured as if it were one person, and most of the members' money would be unprotected.

Pass-through insurance looks through the club to the members. As long as the bank knows the account holds other people's money and the treasurer keeps an accurate list of who owns how much, each member is insured separately. If the list is missing or wrong, that protection can fail.

FDIC regulations set three main conditions:

• Disclosed relationship. The bank's account records must show that the account is held in a custodial, agency or fiduciary capacity, for example through the account title.
• Identifiable owners. The identities and interests of the actual owners must be ascertainable, either from the bank's records or from records kept by the intermediary in good faith and in the regular course of business.
• Genuine ownership. The funds must actually belong to the underlying owners under the agreements between them and the intermediary, not to the intermediary itself.

If these are met, each owner is insured up to 250,000 dollars at that bank for each ownership category, as of November 2026, aggregated with any other deposits they hold at the same bank in the same category.

Aggregation catches many people out. Suppose a customer holds 200,000 dollars in a fintech app whose funds sit at Bank A, and also has a personal savings account at Bank A with 100,000 dollars, both in single ownership. The two balances are added together, giving 300,000 dollars, so 50,000 dollars is above the limit and becomes one of the bank's uninsured deposits if Bank A fails. Claims that are covered are paid from the Deposit Insurance Fund.

Many neobanks and payment apps are not banks. They partner with a sponsor bank, hold customer money in an FBO or omnibus account there, and keep the detailed customer balances in their own ledger, sometimes through a middleware provider. Marketing that money as "FDIC insured" depends on pass-through coverage. Some apps spread funds across several banks to offer coverage above the single-bank limit. The arrangement is a central feature of banking-as-a-service.

Pass-through insurance only pays when an insured bank fails. It does not cover the bankruptcy, fraud or poor record-keeping of the fintech or middleware company, and it does not cover non-deposit products. That limit was exposed when Synapse Financial Technologies, a middleware firm linking fintech apps to partner banks, filed for bankruptcy in April 2024. Records of who owned what in the pooled accounts proved inconsistent, there was a shortfall between funds at the banks and balances shown to users, and many end users were unable to access their money for months. Because no bank had failed, deposit insurance did not apply.

In 2024 the FDIC tightened its rules on how its name and official sign may be used, including in digital channels and by non-bank partners, and on misrepresenting deposit insurance. In September 2024 it proposed a rule requiring banks that hold custodial accounts with transactional features to keep, or have direct access to, accurate records of each beneficial owner and to reconcile them regularly. Bank supervisors have also issued enforcement orders against several sponsor banks over third-party risk management. These steps aim to make sure that, if a bank fails, pass-through claims can be paid quickly, and that customers understand the difference between insured deposits and money held by a non-bank. Related protections in the UK and EU work differently and rely on safeguarding rules for payment firms.

• FDIC: Deposit Insurance