how does FDIC payout work?

FDIC is insurance that the banks pay for. So you pay for that as it comes out of bank fees.

FDIC has a kind of trust fund. Banks have to pay premiums to fund that, so the trust fund accumulates billions of dollars that can then be used to make payouts when necessary. If every bank in the country went bust the FDIC could certainly not cover all of that from the FDIC fund, but the concept is to instill enough confidence that there are not mass runs on banks in the first place.

If the FDIC does in fact blow out the whole fund and needs more, it borrows money from the US Treasury (which would simply borrow more from the bond markets for an unanticipated expense like that). Ultimately there is no limit to what the FDIC could reimburse, because if necessary the US Treasury could even borrow money from the Federal Reserve, which is allowed to create new money out of thin air. That's not how the government normally does things, but it's possible in a time of emergency.

Also, when a bank fails, not all of the money held in accounts is gone. It's more a case that the bank doesn't have quite enough money to stay going but has some. Even if there was no FDIC, after a bank failure the customers would typically get something, probably most of their money, like 70 cents on a dollar, once the bankruptcy issues were sorted out.

(Though note that part of the FDIC's role is to anticipate when a bank is about to fail, and step in to seize it and hand it over to some healthy bank before any money is lost. So for example, I had an account with Washington Mutual. It was suddenly seized by the gov't and given to Chase. No effect on my accounts at all, except a name change).

How Does The Fdic Work