Robinhood Announces 3% Checking & Savings - Major Things to Consider

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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.

Related Pages: savings accounts, checking accounts, nationwide deals

Comments
me1004
me1004   |     |   Comment #1
Whoa! SIPC CEO expressing serious concern about this office, says this offer might not actually be covered by SIPC insurance! Says the way the account is presented, your funds would not be covered by SIPC insurance.

https://www.bloomberg.com/news/articles/2018-12-14/sipc-says-it-has-serious-concerns-about-robinhood-s-new-product

https://techcrunch.com/2018/12/14/robinhood-insurance-sipc/
cryptocurrency dealers
cryptocurrency dealers   |     |   Comment #42
They deal in cryptocurrency, that should be enough for 99.99% turn off. Only the most brave should deal with them.
JimDavis
JimDavis   |     |   Comment #2
This seems to be RH's model. Too good to be true, but it it 'is'.

Free trades, financed totally by payment for order flow and margin interest.

Now an above market rate, financed as a loss leader.

But not gonna fly too well, unless they can get SIPC to bless it.
Marketing Gimmick?
Marketing Gimmick?   |     |   Comment #3
Wait list may be a way to artificially make it seem that the demand is higher than it really is. Like a long line outside of a club.
Chris
Chris   |     |   Comment #4
Also: Last time I checked Robinhood did not offer joint accounts or the ability to designate a beneficiary. If this is still true, something else to be aware of.
CapitalClimate
CapitalClimate   |     |   Comment #7
The co-CEO was interviewed on CNBC yesterday and was asked if this was too good to be true.
Video here:
Robinhood now offering checking and savings accounts, interest rates...
https://www.cnbc.com/video/2018/12/13/robinhood-offering-checking-savings-accounts-interest-rates-three-percent.html
anonymous
anonymous   |     |   Comment #8
My understanding is that SIPC protects investors when the brokerage fails; but it does not protect the investments from losing value.

Makes me wonder, why didn't Robinhood apply for a bank license and join FDIC if it wants to offer banking services? Doesn't seem too difficult if every community bank and internet bank can do this the right way. Maybe too much regulatory overhead? Reserve requirements and such?

Looks to me like another new tech company that wants to push some form of regulatory boundaries, like Uber, Bird, etc. An experiment that I'd rather not be part of.
UCLA
UCLA   |     |   Comment #9
EXCELLENT WARNINGS
WHEN I FIRST SAW THIS ON CNBC , BOTH THE LAME BRAIN PRESENTER AND MILISSA LEE CONCURRED--"WELL IF YOU HAVE SPIC, ITS AS GOOD AS FDIC"--BS
BUT, I WARN THAT BANK EMPLOYEES AND EVEN MANAGERS OF BANKS/CREDIT UNIONS DO NOT UNDERSTAND NCUA nor FDIC COVERAGES--THEY NEVER HAVE NEVER BEEN TRAINED ON THE IMPLICATIONS OF ACCOUNT TYPES (INDIVIDUAL, JOINT, POD, TRUST...)
AND FDIC/NCUA INSURANCE
EXAMPLE: YOU HAVE A BANK ACCOUNT WITH YOUR WIFE AND 5 PAY-ON-DEATH BENEFICIARIES (WITH EQUAL SHARES UPON POD)--THEY ALL WILL SAY THE FDIC INSURANCE IS JUST $250K TIMES 5--WRONG WRONG WRONG
MANY MORE EXAMPLES OF THE IGNORANCE OF ALL BANKS AND MANAGERS.
SURPRISINGLY, EVEN AN ASSISTANT MANAGER AT THE NCUA NEVER USED THEIR ONLINE COMPUTER INSURANCE CALCULATOR, NOR DID HE HAVE A CLUE HOW TO CALCULATE INSURANCE COVERAGE OF POD ACCOUNTS.
BE CAREFUL! MAKE SURE THEY HAVE PAPERWORK, AND KEEP IT UP TO DATE
RJM
RJM   |     |   Comment #18
I'm sure I speak for everyone when I say thanks for posting in ALL CAPS. It makes it SO much easier to read.

SMH
JimDavis
JimDavis   |     |   Comment #22
It IS impressive, you have to admit
Anon
Anon   |     |   Comment #50
Bank account with 5 PODs does in fact have 5*250k fdic coverage (assuming FDIC covered bank) - what's wrong with that exactly?

Please do not post in ALL CAPS.
Anonymous
Anonymous   |     |   Comment #63
Joint bank account (I assume that's what UCLA means by "with your wife") with 5 PODs actually has 2*5*250k coverage, total 2.5 million.
Carpline
Carpline   |     |   Comment #11
Beside all the troubling information given in this blog post and the comments, I'm bothered by the name "Robinhood." Depending on your point of view, Robin Hood was either a social activist who stole from the rich to give to the poor, or a gangster who just stole. Do I really want to entrust my money with Robin Hood? ;-)
UCLA
UCLA   |     |   Comment #12
I agree-Robin Hood was potentially a bad name to choose for an Financial Company.
I offer the following alternatives:
SNOW WHITE, CINDERELLA, MAID MARRION, SHREK and MADOFF
Maid Marian
Maid Marian   |     |   Comment #14
I hear the Sherwood Forest branch is managed by Friar Tuck.
deplorable 1
deplorable 1   |     |   Comment #13
I have been digging into the details of this account and it seems as if the SPIC would cover the amount in the Savings/checking if you were actually using Robinhood as a brokerage account and the savings/checking as a sweep cash account. The trading platform looks interesting in that there are no fees at all for the basic service. If this were a 3% sweep account this would be a great deal as my current sweep account only pays .22% but is FDIC insured.
From the SIPC website note the paragraph "How is my cash protected":
https://www.sipc.org/for-investors/what-sipc-protects
Now the only question that remains is how would this account be treated if you were using the brokerage account? If it would be treated as a sweep account your golden if it would be treated just as a separate savings/checking account at a non bank entity then you would have no protection.
anonymous
anonymous   |     |   Comment #15
Deplorable 1, in the case you describe (cash sweep account), from your reading would SIPC cover any cash losses in all cases, or only if the brokerage firm becomes insolvent?

Let's say, RH loses some of the invested cash (not unheard of, even with Treasuries, which can decline in value) BUT RH itself does not fail but simply refuses to make customers whole. In that case, does SIPC cover any of the cash losses?
deplorable 1
deplorable 1   |     |   Comment #17
Great question. On the SIPC website it states "SIPC does not get involved in customer disputes with a brokerage before a liquidation proceeding is started". So that tells me no. Yet they say that they cover cash assets up to $250,000? They refer you to contact FINRA or the SEC in that situation. You would think they would have a massive class action lawsuit if that happened though or be forced into bankruptcy in which case you would then be covered.
anonymous
anonymous   |     |   Comment #20
I'm sure RH will put plenty of disclaimers into their terms and conditions to shield them from any lawsuits. I already see some that might apply:
"All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. [...] . There is always the potential of losing money when you invest in securities, or other financial products. Investors should consider their investment objectives and risks carefully before investing."

They also made it clear already in their terms that the "cash management program" will not be a separate account or a bank account.
anonymous
anonymous   |     |   Comment #21
Actually, I think the first lawsuit that will probably hit them will be for deceptive advertising, if they keep calling the products "Checking" and "Savings." There will be plenty of people who won't know to check for FDIC coverage and who won't realize the risk involved in investing in this product.
UCLA
UCLA   |     |   Comment #16
SPIC ONLY COVERS FRAUD OR THEFT
NOT THE DECLINE IN VALUE, INVESTMENT LOSSES
ITS NOT A BACK STOP LIKE FDIC OR NCUA
RJM
RJM   |     |   Comment #19
That means CUSTOMERS declines in value from the securities they choose.

If the brokerage is a fraud, customers would be covered. Except for the losses on whatever they bought.
111
111   |     |   Comment #23
OK, we need a guinea pig here. Who wants to be the first to put, say, $240K into Robinhood, define it as a sweep account (assuming that categorization is available on their website), tell them "I'm just waiting for a good buying opportunity", and purchase 1 share of stock every week? Oh, and report back here regarding your results.
51hh
51hh   |     |   Comment #25
I ask myself: Is it worth it with the detailed examination, learning, hidden/unknown risk taking, etc. just for a 0.5% higher APY (comparing to EBSB)?

The answer is obviously not for me.
RJM
RJM   |     |   Comment #33
For me, even if I was interested, Id have to get & learn to operate a smart phone.

NO THANKS. I really dislike firms that require the use of one.
deplorable 1
deplorable 1   |     |   Comment #27
I might try it for the free trading platform and put my name on the wait list but $240,000 even I'm not that crazy! lol I'm sure the trading must be limited and I see they don't do IRA's just taxable accounts. I need to look into what qualified dividend stocks they allow you to trade. The crazy thing is that they actually allow options trading for free. I can't seem to find a complete list of stocks they allow you to trade anywhere.
BBBinGA
BBBinGA   |     |   Comment #24
This sounds like a an "American Greed" episode.
These are notes
These are notes   |     |   Comment #26
These are unsecured notes and in a case of a default, nobody will pay the depositors.
deplorable 1
deplorable 1   |     |   Comment #28
This has not been hashed out yet. If it is considered to be a sweep account for the brokerage it would be covered by the SIPC. That would be the most likely outcome IMO. If it was my company I would have talked to the SIPC way in advance of making any announcement. This makes me wonder about the competence of those running the show over there. Although just look at all the free publicity Robinhood just got so maybe this was planned after all.
111
111   |     |   Comment #29
Aside from the current issue regarding liquid accounts, over the past several months I've casually followed reviews of Robinhood. Two things that stuck out were: 1) for stock traders, a lack of anything approaching sophisticated analytical tools (doesn't bother me too much, because I'm mainly not a trader), and 2) very large bid-ask spreads, often much higher than other brokerages. In some cases, examples were given of trades where the adverse spread would more than eat up any savings resulting from a "no-fee" trade (assuming average discount broker fees). So thanks, but no thanks.
JimDavis
JimDavis   |     |   Comment #39
I don't trade with Rh, but I can guarantee your post is totally wrong.

You like making up stories ?
Mikey1
Mikey1   |     |   Comment #30
Rule #1 in finance: unless you a) understand the investment to the extent you could thoroughly explain it to others and b) accept the risk then don’t do it.
JimDavis
JimDavis   |     |   Comment #54
Explaining it to who? Grandma

Plenty of folks THINK they can explain their investments.

Then they find out the had no clue.
dollarsncents
dollarsncents   |     |   Comment #55
I never found a need to explain my investments to anyone.
Nothing
Nothing   |     |   Comment #56
Even your spouse? Your Fiduciary? Your accountant? Seriously!
dollarsncents
dollarsncents   |     |   Comment #57
Yes, seriously!

My wife is my (our) accountant, being she was and is now a retired CPA. We make all our financial decisions together. No further explanations necessary.
dreamer
dreamer   |     |   Comment #31
I can get over well over 4.5% if I am creative and only tying up my money for a few months.....and complete fdic coverage.......I'm not touching this. You have been warned. PS-Cherry on top is the fact that they think they are so special they make you get on a waiting list.......run.......don't walk.......away from this........Should not have even been posted on here. This webpage is for real banks I thought.
Mikey1
Mikey1   |     |   Comment #38
Of course everyone will get their money bank. Just like Enron, what could possibly go wrong?
michele
michele   |     |   Comment #61
Please give us some hints on how you get over 4.5%. I can only do that until the end of January with Freedom's 5%cash back credit card in conjunction with opening lots of CDs with the credit card at GTE.
michele
michele   |     |   Comment #62
michele to dreamer: Please give us some hints on how you get over 4.5%. I can only do that until the end of January with Freedom's 5%cash back credit card in conjunction with opening lots of CDs with the credit card at GTE.
deplorable 1
deplorable 1   |     |   Comment #64
Most likely referring to the return you can get from bank bonuses which can easily pass 5%. DCU pays 6.17% on $1,000 and Netspend cards pay 5% on $1,000(5 accounts max) I still have 6 Insight savings accounts paying 5% on about $5,500/account(sorry no longer available).
dreamer
dreamer   |     |   Comment #32
Is Bernie Madoff running this from prison?? There are so many investments that are safe and you can get pretty close to 3%.....GNMA funds come to mind although you would need to accept a bit of interest rate risk. Geez several treasury funds are at least in the 2's.....and even some bank accounts at 2.5%.
Att
Att   |     |   Comment #34
I have to dig deeper but is the 3% guaranteed for any time period? This is a risky operation that does not have the blessing of SIPC. To may questions and concerns.
dreamer
dreamer   |     |   Comment #35
Yes Att......so many other easy options out there......no reason to put a single dime in this.
Att
Att   |     |   Comment #36
Another thought.. If Robinhood defaults and IF it is covered by SIPC (who states it's not ) how long would it take before your funds would be returned and not earning I intrest while SPIC sorts things out? Also is earned intrest insured?

Maybe a 2.75% savings account will come out soon.
Mikey1
Mikey1   |     |   Comment #37
All America/Redneck Bank, $10K max pet account, requires 10 debits a month, currently 2.75%.
UCLA
UCLA   |     |   Comment #41
I repeat
SIPC only covers if there is a theft or fraud.
Not if Robinhood defaults--there is never a SIPC guarantee of anything ever.
Read what SIPC covers.
It specifically states that if the institution has an accounting mistake, theft, fraud or wiped out by natural disaster, then they will cover funds at the valuation at the time of the event. So, if Robinhood goes under, your funds are no where, they are broke, chapert 11 or 7 and SIPC says tough luck.
Its like if you held Lehman brothers bonds in Fidelity and Lehman went broke--too bad.SIPC did not back that asset. If someone in Fidelity stole your Lehman bonds then SIPC makes good on it at the value on the day it was stolen. If lehman bonds were selling for 2 cents on the dollar on that day--you get back 2 cents on the dollar, not the price you paid for Lehman bonds--trust me, I was there.
JimDavis
JimDavis   |     |   Comment #53
"It's like " you give a bad example . Irrelevant

If you had money in Lehmans sweep account, did SIPC cover it or not ???
Att
Att   |     |   Comment #43
https://www.sipc.org/for-investors/what-sipc-protects
anonymous
anonymous   |     |   Comment #44
I briefly read about the cash sweep accounts at major brokerages like Fidelity, Schwab, TDAmeritrade ... they seem to have programs where excess cash is swept into FDIC insured accounts.

So, offering deposit accounts within FDIC insurance just sounds like a very risky idea. I hope RH will be reconsidering how they will structure this offer. Otherwise, this might spark a "race to the bottom" for who can offer the highest yields with not fully insured deposits.
51hh
51hh   |     |   Comment #45
Not sure if all have seen this:

https://www.bloomberg.com/news/articles/2018-12-15/robinhood-will-retool-checking-product-following-scrutiny

RIP: 3% checking/savings from RH, now it's called "Cash Management."
anonymous
anonymous   |     |   Comment #48
Thanks, 51hh, for your comment about RH's update to this offer.

I'm not sure what I should think of this latest development ... on the one hand, great that RH realized that their product needs to change. On the other hand, they suddenly deleted all webpages and tweets about the product? Gives the impression as if they are making this up as they are going along. Which, is not something you'd expect from a financial services company.
steve_010
steve_010   |     |   Comment #49
I have a Robinhood account for trading stocks. It's currently only my "fun money." I've both deposited and withdrew funds from the account to my linked bank account without issue. Fast and free. I would use their "3% savings account" to store my stock dividends and cash in between trades.I'm looking forward to them working out the particulars and making sure it's on the up and up with the SIPC to make sure the money is insured properly. Robinhood is a young company but has been around long enough to see that they're growing and it doesn't look like they're going anywhere. I've been trading stocks with them for over a year and know people who have been using it for longer. It's a new idea and has a following including plenty of investors backing it.
deplorable 1
deplorable 1   |     |   Comment #51
@Steve: Do they have a complete list of stocks they allow you to trade? I like the idea of a SIPC insured sweep account paying 3% to hold my dividends in between trades. This way there is no big rush and you can time your buys low which is key to high yield dividend investing.
anonymous
anonymous   |     |   Comment #52
Deplorable, after thinking about it some more, I land on the opposite side on this issue. I think an SIPC protected sweep account blurs the lines too much between the purposes of SIPC and FDIC and we wouldn't have any confidence about how well such an account would be protected until an institution fails and the concept is tested. (Bank failure with FDIC insurance has been tested many times, on the other hand.)

For example, with Vanguard, I know exactly that my bond funds and money market funds are not insured against decline in value, and I understand the risk and that I need to keep an eye on such things as prospectuses (prospecti?) and what Vanguard does with my investments. I wouldn't want some false sense of security that my 'cash' is insured from declining, and later it turns out that it's not.
TheBombingRange
TheBombingRange   |     |   Comment #58
Deplorable: I don't believe there is a complete list, though I know they cover NYSE and NASDAQ, along with some ADRs. This is what I found: https://support.robinhood.com/hc/en-us/articles/360001226746-Stocks-Available-on-Robinhood

If there is a specific set of stocks you are interested in, just ask and someone can look on the app and let you know. Also, no harm in getting an account anyways, you can do all trading online if you don't want to do it on their phone app.
anonymous
anonymous   |     |   Comment #59
Dial 1 to trade stocks.
Dial 2 to trade options.
Dial 3 to trade bitcoin.
Dial 4 for $250,000 cash to be wiped out.
Dial 5 to return to main menu.
deplorable 1
deplorable 1   |     |   Comment #60
Thanks, I wasn't aware they have a web based trading platform. This is much better than using a app IMO. Now if they can just get that 3% account blessed by the SIPC plus free trades I'm not really seeing any downside to this. Most people ignore the first rule of investing which is to keep your expenses low. Those trading fees add up over time and stop you from doing small trades.

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