Is Robinhood’s 3% Checking and Savings account too good to be true?

Greg James
Dec 17, 2018 · 3 min read

Earlier this week, Robinhood publicized that it would offer a new feature to users: a checking and savings account that didn’t have any fees. No overdraft fees, outside ATM fees, minimum balance fees, zip, nada. Sounds great right? But after the announcement the feature received strong reproach, the company appears to have taken a step back and plans to relaunch it in the future.

The new feature, a savings and checking account, comes with a Mastercard debit card (with four creative designs) and no fees. The most prominent feature of the account? A gigantic 3 percent interest rate (that may change depending on the economy). This is huge considering the national average for interest rates is .08 percent. Robinhood also stated that the Securities Investor Protection Corporation (SIPC) would insure the feature, rather than the Federal Deposit Insurance Corporation (FDIC). The SIPC and FDIC provide protection for people who have money in securities or banks in case they fail.

The custom Mastercards that are available.

The problem this is that while the accounts look like bank accounts, they aren’t. SIPC CEO, Stephen Harbeck, told TechCrunch that “Robinhood would be buying securities for its account and sharing a part of the proceeds with their customers,”. That is not something that the SPIC covers. CNBC reported that UBS analyst, Brennan Hawken, called it a “risky ploy that is skirting very close to actual banking and thus could draw regulatory scrutiny,”. It appeared that accounts “look more like a money-market fund” rather than a bank account. Hawken also said that Robinhood is investing in treasury bonds (which currently have a 2.7 percent interest rate). Thus, the company may have agreements with ATM retailers to generate income and meet the high 3 percent interest rate that was promised.

Following the backlash, Robinhood deleted their blog post. Co-founders, Baiju Bhatt and Vlad Tenev, issued a new statement saying that they are “excited and humbled” about the response to the product. They “realize the announcement may have caused some confusion” and plan to “work closely with regulators” and plan to relaunch the feature in the future.

Co-founder Baiju Bhatt

The details of the “cash management program” are unclear. The company is now taking signups for a waiting list for the program. The fine print on the sign-up e-mail simply says that it will be an added feature to its brokerage account. The feature is not a “separate account or a bank account” and the company will “provide additional information on the cash management program once it is operational”. Hopefully, the feature is released soon because it would be a great feature to use with the existing Robinhood platform but only time will tell.

Thank you for reading, please feel free to 👏 and share to help others find it.

See you soon. 😃

Greg James

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Greg James is computer science student at the Illinois Institute of Technology.

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