UPDATE 12/17/18: Robinhood is no longer listing its Checking & Savings products. The founders provided a letter on Robinhood's blog explaining this change. Here's an excerpt:
We’re excited and humbled by the response to yesterday’s announcement of Robinhood’s cash management program launching in 2019. However, we realize the announcement may have caused some confusion.
As a licensed broker-dealer, we’re highly regulated and take clear communication very seriously. We plan to work closely with regulators as we prepare to launch our cash management program, and we’re revamping our marketing materials, including the name.
The brokerage firm Robinhood has started promoting its new “Checking & Savings” with a 3% interest rate. News of these accounts has been grabbing savers’ attention with what appears to be checking and savings accounts that offer 3%.
It’s Not a Bank Account
The first important thing to note is that these are brokerage accounts and not bank accounts. There is no FDIC coverage. One of Robinhood’s FAQs states the following:
Is Robinhood a bank?
No. Robinhood offers Checking & Savings through a brokerage account and it offers the Robinhood debit card in partnership with Sutton Bank.
Questions About SIPC Coverage
Another Robinhood FAQ states:
Is my money insured?
Your cash in Robinhood is insured up to $250,000 by the Securities Investor Protection Corporation (SIPC). SIPC protects cash deposits in your account in the unlikely event that Robinhood fails.
If your brokerage firm is a SIPC member and the brokerage firm fails, your cash and securities held by the brokerage firm may be protected up to $500,000, including a $250,000 limit for cash. However, there are questions about whether the Robinhood Checking and Savings are covered by SIPC. Today Bloomberg published concerns from Stephen Harbeck, the president and CEO of SIPC. Harbeck was quoted as saying that he “disagree[d] with the statement that these funds are protected by SIPC.”
In my opinion, this latest news is a big red flag. I also don’t like it when institutions that are neither a bank nor a credit union market a product as a “checking” or “savings” account. An important part of the definition of a checking or savings account is that the deposits in those account are held by a bank or credit union, and those deposits are insured by the FDIC or NCUA.
Is 3% Too Good To Be True?
The Robinhood Checking & Savings appear to be more like a brokerage money market fund, but that comparison may be too generous. One big advantage of the Robinhood Checking & Savings is a 3% interest rate. Current yields of money market funds aren’t close to 3%. For example, Vanguard Prime Money Market Fund has a compound yield of 2.37%. How can Robinhood offer such a high yield?
In an interview with Forbes, the Robinhood cofounder and co-CEO Baiju Bhatt described how Robinhood will be able to pay 3%. Bhatt said the company “will invest customers’ deposits into other securities like Treasurys.” As you can see with current Treasury yields, this doesn’t get you close to 3%. Even the 10-year Treasury yield is below 3%. According to the Forbes article, “Robinhood will initially take a loss on that spread.” The company will make some money from customer debit card usage, and that will help pay for the high yield (similar to how debit card usage helps pay for the high yields of reward checking accounts). However, according to the Forbes article, “the program likely won’t be profitable in the short term.” Bhatt claims that that the 3% isn’t a “teaser rate.” He told Forbes that they chose 3% by “looking at what was the highest possible amount we could pay and still have a long-term sustainable business.”
No Immediate Availability - Waitlist Only
Another important thing about the Robinhood Checking & Savings is that it’s currently not available as of December 14, 2018. There’s a waitlist. Below is an excerpt of the Robinhood FAQ explaining why there’s a waitlist:
Access to Checking & Savings in your existing Robinhood brokerage account is currently limited. Roll out begins in the order of the waitlist in January 2019. The best way to get access is to join the waitlist as quickly as possible and then invite your friends to move up in line. We promise it’s worth the wait.
Is It Worth the Risk?
When Robinhood Checking & Savings become available, is it worth the risk? In today’s rate environment, it’s easy to get an online savings account from an FDIC-insured bank with yields between 2.25% and 2.50%. In another month, we may see even higher yields. Even if the SIPC eventually confirms SIPC coverage of the Robinhood Checking & Savings, these accounts will still seem to me to be more risky than money market funds. As a general rule, when you’re yield chasing, be very careful when you are considering institutions that are not federally-insured banks or credit unions. It makes sense to first consider all possible ways to maximize yield with federally-insured deposit accounts.