Robinhood Announces Cash Management, Another Try at a Savings Account
Last December Robinhood tried to launch a cash management account that offered a 3% APY. That attracted a lot of publicity and scrutiny. After a few days, it turned into bad publicity when the SIPC president challenged Robinhood’s claims that the account offered SIPC insurance protection. This forced Robinhood to “start over from scratch” on a cash management account.
Robinhood has finally announced its new Cash Management. Like in December, there’s currently only a waiting list. However, it appears they’ve done their homework to make sure their cash management account will comply with SIPC rules. It follows the standard cash management model that we’ve seen at other brokerage firms like Wealthfront and Betterment. Robinhood has made arrangements with several banks to be the program banks for the Cash Management. Deposits made into the cash management account will be swept into the program banks where FDIC insurance is provided. Deposits that are in the process of being swept are eligible for SIPC insurance coverage. I’ll have more on this later.
Robinhood Cash Management Yield
Since the interest is paid by the program banks, the interest rate is based on what the banks are willing to pay. Thus, we probably won’t be seeing any rate that’s well above the competition like we saw in December. According to Robinhood’s small print “APY might change at any time and at the program banks’ discretion.” Currently, the cash management account pays 2.05% APY on all balances.
Robinhood Cash Management Features
Many of the features that Robinhood lists for its Cash Management are similar to what you expect with a bank checking account.
I don’t see any promotion by Robinhood that Cash Management allows an unlimited number of withdrawals. Other brokerage firms have promoted an unlimited number of withdrawals as an advantage over the standard limitation of bank savings accounts which limit most types of withdrawals to a maximum of six per statement period. Even though Robinhood doesn’t appear to promote unlimited withdrawals, I don’t see any restrictions or fees for an excessive number of withdrawals.
I also don’t see any mention of paper checks. However, Robinhood does describe other ways that bills can be paid by using “Apple Pay, Samsung Pay, or Google Pay.”
Below is a list of important features that are based on my review of several pages of Robinhood’s website:
- No fees to open, close, or maintain a brokerage account
- No fee for transferring money between a bank and your brokerage account
- There’s no dollar minimum to open or maintain a brokerage account
- Use your debit card anywhere Mastercard is accepted and spend directly from your brokerage account
- No fees at more than 75,000 in-network ATMs (ATMs in the Allpoint or MoneyPass networks)
- You can also pay bills, and use Apple Pay, Samsung Pay, or Google Pay
- Customers have access to ACH account number and routing number
- You can link a bank account to your app and fund your account by transferring funds from your bank account (withdraw up to $50,000 per business day)
- Use the ACH account number and routing number to move funds from an external bank account
As you can see, Cash Management does appear to provide checking account features with a yield of online savings accounts.
Robinhood has currently partnered with six banks which form their program bank network. Deposits into Cash Management will be swept into one of these FDIC-member banks. According to Robinhood’s insurance page:
Through Cash Management, cash deposited at these banks is eligible for FDIC insurance up to a total maximum of $1.25 million (up to $250,000 per program bank, inclusive of deposits you may already hold at the bank in the same ownership capacity).
Robinhood’s page on its deposit sweep program lists the current six program banks:
- Goldman Sachs Bank USA
- HSBC Bank USA, N.A.
- Wells Fargo Bank, N.A.
- Citibank, N.A.
- Bank of Baroda
- U.S. Bank N.A.
Robinhood utilizes the deposit sweep program called the Insured Network Deposits service, or IND that’s operated by the Promontory Interfinancial Network. This is the same company that operates CDARS. Robinhood’s deposit sweep program page describes their use of IND:
Brokerage customers who opt in to Cash Management elect to participate in a deposit sweep program (the Insured Network Deposit (IND) Sweep Service), and will have their uninvested cash automatically “swept,” or moved, into deposits at a network of program banks.
This Promontory Interfinancial Network page offers more details on IND and how it’s intended for brokerage firms. According to this page:
The Insured Network Deposits service, or IND, is the #1 FDIC-insured deposit sweep service. It enables brokerage firms to provide a superior sweep alternative for their customers’ cash balances. For banks, it provides an attractive purchase funding option.
Robinhood’s deposit sweep page also describes how SIPC coverage applies when funds are in transit between program banks and Robinhood:
Robinhood Financial LLC is a member of SIPC, which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash).
Please note that until funds are swept to a program bank, they are covered by SIPC protection. They are not covered by SIPC protection when on deposit at a program bank.
Robinhood announced the Cash Management this week in its blog post, and the post described deposits in the Cash Management as “uninvested cash”:
With Cash Management, your uninvested cash is moved to program banks that pay you 2.05% APY as of October 8, 2019. Uninvested cash is money you have in your brokerage account that you plan to invest, but haven’t yet invested or spent.
This description of the deposits as “uninvested cash” appears important so that the cash can qualify for SIPC insurance protection. One problem in December was that Robinhood described cash in the Checking & Savings as deposits that were intended for saving and spending rather than for investing. In this December Bloomberg article, here’s how the president and CEO of SIPC, Stephen Harbeck, described why Robinhood’s Checking & Savings would not be covered by SIPC insurance:
“The statute that we administer says that we protect money with a brokerage firm that is used for the purchase of securities,” he added. “On Robinhood’s help page, it says that you don’t need to invest to use Robinhood checking and savings, that statement is wrong. If you deposit money for any other purpose, it is not protected.”
After these comments, Robinhood stopped promoting its “Checking & Savings” account, and replaced the mention of this account with the message “Cash management, coming soon.”
It should be noted that there’s no guarantee that SIPC will cover a cash management account if the SIPC determines that it’s being used for banking purposes. Below is a relevant excerpt from the SIPC FAQs:
I have a securities account. Isn’t everything in my securities account protected by SIPC?
Not necessarily. In general, SIPC protection is determined on an asset-by-asset basis and extends only to: (1) cash in a customer’s account that is on deposit for the purchase of securities; [...]
My Take on the Safety of Robinhood’s New Cash Management
It appears that the announced Cash Management from Robinhood will be just as safe as the cash management accounts from other brokerage firms such as Wealthfront and Betterment. I appreciate that Robinhood described how its cash management account is using the IND service from Promontory Interfinancial Network. As I mentioned above, the Promontory Interfinancial Network is the same company that operates CDARS which has allowed depositors to receive multi-million dollar FDIC insurance coverage for many years. I have not heard about any safety issues with CDARS.
My primary concern with cash management accounts is the period when funds are moved between the brokerage firm and the program banks. This is the time when SIPC is supposed to provide protection. As described above, there appears to be a slight risk that SIPC could decide that deposits in a cash management account aren’t being used “for the purchase of securities.” Also, customers should be aware that SIPC protection “protects securities customers of its members up to $500,000 (including $250,000 for claims for cash).” So if there is more than $250,000 in cash outside the program banks that is in the process of being deposited or withdrawn, some of that cash may not be protected by SIPC.
I would consider these risks to be very small. Sudden and complete failures of well-established brokerage firms appear unlikely. However, in these rare cases, I see the potential that cash in transit would require SIPC protection to be safe, and I don’t know if that’s a 100% guarantee.
My Take on the Yield of Robinhood’s Cash Management
Besides the safety question, there’s also the question of how long these cash management accounts can maintain the high yields. Since the program banks govern the yields, I have doubts that the cash management yields will be able to consistently beat the yields of online savings accounts at online-only banks.
As an example, Fidelity has long offered a cash management account. The Fidelity Cash Management Account has an FDIC-Insured Deposit Sweep option, and the interest rate that it pays is only 0.94% as of 10/10/2019.
As the cash management accounts at Robinhood and other brokerage firms mature, I have my doubts that the interest rates will stay competitive with the online savings accounts at the online-only banks.
If cash management accounts can maintain their high yields with the features of a checking account, and if they can be proven to be as safe as bank accounts with the added benefit of more FDIC coverage, banks and credit unions may have very tough competition. Time will tell if cash management accounts can provide all of these features over the long run.
“The statute that we administer says that we protect money with a brokerage firm that is used for the purchase of securities,”
Ken, you pointed out that there was a risk that when funds are in transit between the brokerage firm and the banks, there is a risk that the SIPC will deem the funds not to be covered by SIPC insurance Based on the above statement from the SIPC president and CEO, I'd say that's a pretty good bet. Funds in transit from the brokerage to a bank are not funds being applied to purchasing securities.
I think your conclusion that "It appears that the announced Cash Management from Robinhood will be just as safe as the cash management accounts from other brokerage firms such as Wealthfront and Betterment." sounds reasonable given currently available information about this account that hasn't even become available yet.
But the question is how safe are any of them considering that they all rely on SIPC coverage under conditions which have yet to be tested?
Based on that point, I assess the risk may be more than many people expect. For my own money, I'll leave the bleeding edge legal tests for someone else to explore.
The federal government's OCC and state governments regulate financial institutions. These accounts are specifically designed to skirt those regulations. That in fact is their only apparent potential benefit. Whether the regulations make sense or not, they were put in place by the government, an institution considerably more powerful than all the brokerage firms combined. If push came to shove I have a little confidence that the government would have much sympathy for these financial institutions. I prefer not to be on that side of the equation, especially for a dubious investment advantage.
Your mileage may vary.
As to cash in transit, Robinhood is required to segregate funds of retail customers. This, someone would have to be committing a crime for the funds to be lost. I've traded professionally as a partner in a firm that had both retail and proprietary traders. One of the proprietary traders lost $20 million , wiping out a very large percentage of the firm member-traders accounts, but retail accounts were protected.
Another aspect of SIPC coverage is that most people keep cash in a money-market fund account. For example Fidelity's or Schwab's higher yielding money market funds.
These funds, while maintaining a stable dollar, are considered securities and are covered as such by SIPC.
That being said, mu understanding is the trader , without fully understanding the security (who reads prospectuses?) ,was long one of the VIX products when the VIX expanded massively over a few days. The terms of the product required liquidation of the security by the trustee on a date certain, in the event a certain volatility level was pierced. I'm not sure which security it was , but he was obviously betting volatility would decline. The firm should have required liquidation before he had burned through his own capital, much less the other members' capital. https://www.cnbc.com/2018/02/06/the-obscure-volatility-security-thats-become-the-focus-of-this-sell-off-is-halted-after-an-80-percent-plunge.html
I would think the trader is personally liable, but you can't get blood from a stone. Frankly, I'd get a judgment just in case he gets money, inherits it , etc.
I didn't lose any money in the debacle.
I never feel comfortable. What if you give them 1 million dollars and it doesn't really get swept to the other banks immediately. What if 24 hours later the money is still all sitting in the bank where you have the account. And then that bank goes under?
You would have zero recourse.
I'm not sure how CDARS works, but when I looked into using it, the rates were really low.
Yes, this is correct and I wasn't clear either but I was simply pointing out in the event of a bank failure depositors are the last to lose money. It does take time to sell assets,
but depositors are priority creditors. I doubt this reassures Jennifer very much.
To much risks and to many ifs and buts working in the grey area for my blood, pass.
Perhaps I'm misunderstanding what you intended to say
when you deposit money they open accounts on your behalf at the program bank
"When funds in your Account are first available for deposit, Robinhood, as your agent, will open either two TAs or an MMDA and a linked TA on your behalf at one or more of the Program Banks on the then-current Priority List in the order set forth in your Deposit Sequence"
And only Robinhood, as your agent, can directly withdraw funds from those accounts:
"You cannot draw directly against the Deposit Accounts established for you at the Program Banks, whether by check, debit card, funds transfer or otherwise."
By comparison, Alliant CU is paying 1.8% APY on its savings. The Vanguard Money Market is paying a 7-day yield now of 1.97% -- but of course, headed down. (I don't think that has any insurance coverage, but I would have to know more about this SIPC coverage, I guess. that's new to me. I have a Vanguard MM, but not under a brokerage account. And Vanguard money market is set up to provide for writing checks, and it has some connections to an FDIC bank.) Robin Hood is offering more right now, but not a lot more. But its a lot more questionable. And you better expect all the problems that manage to materialize for many startups.
I see nothing about the time frames for things like moving money you deposit over to the banks. Is that same-day, or two days, or what? I'm presuming you do not start collecting interest until it is in the bank -- otherwise there would be no SIPC discussion. Same for getting it back. I don't see any method to get it back other than perhaps them sending it via the ACH, but maybe only via a mailed check. Re the ACH, it says "from" the bank to the brokerage, it does not say the other way around. Any lost interest from delays makes your effective yield less.
And re the FDIC coverage, is your money automatically distributed to multiple banks to assure you have no more than $250,000 in any one bank at any time? If so, then I don't understand why you can be covered for $1.5 million instead of only $1.25 million. (Not that I have a million to deposit here.)
I also think the issue with the SIPC money would be considered in an overall context -- as in, the money in that Robin Hood account ALWAYS goes to the bank, is it even required under the agreement. You can call it "uninvested cash," but if it is so clear the agreement calls for it to go to the bank, I would not be surprised to see that status is rejected. Then again, I suppose while it will go to the banks, that might be a matter of"unless": unless you choose to invest it elsewhere first, but if not, it goes to the bank.
What happens if Robin Hood goes under, but not the banks? How do we deal with the banks to get our money? Robin Hood is the one likely to go under.
Too many questions here, and seems too limited a banking operation even if all is fine and dandy.
But this is worth watching over time.
Purportedly yes. Six banks times $250k per bank equals $1.5m.
BTW, I see I had a type. I meant: I don't understand why you can't be covered for $1.5 million."
"your funds generally will be swept into Deposit Accounts at up to 5 banks, your funds will be eligible for at least $1.25 million in deposit insurance coverage by the FDIC, subject to applicable limitations"
so 5 banks @ 250k = 1.25million
However "Once $248,000 has been deposited in each Program Bank on the Priority List, any additional funds will be deposited in a designated "Excess Bank" without limit and without regard to maximum available FDIC insurance coverage." and "An Excess Bank may be a Program Bank on the Priority List that has received funds up to the Applicable Deposit Limit, or a Program Bank that acts solely as an Excess Bank."
so, If I understand correctly, the if the Excess bank you choose is one of the 5, well you're only covered up to 1.25million (your "excess" will be uninsured), if the excess bank is not one of the 5, then that's another 250k or a total of 1.5million (up to 250k of your excess will be insured in addition to the 1.25million in the 5 program banks). So basically it depends on your choice of program banks and excess bank.
Their business model is to sell the "order flow" to hedge funds and market makers who pay them for the orders. Other firms were making money on both sides of the trade before going to $0 commission-getting $ from the account holder and the company to which they sell the orders.
Firms like Fidelity are large enough they can internalize order flow.