Posted by Chuck on December 13, 2018
High-Yield APY Accounts

Published on December 13th, 2018 | by Chuck

82

Robinhood Introduces 3% APY Checking and Savings Account (No FDIC Insurance)

Robinhood has announced the new Robinhood Checking and Savings accounts which earn 3% APY interest and come with no fees. The checking account also has a debit card attached to it.

There are no monthly fees, no foreign transaction fees, no minimums, no card replacement fees, and no overdraft fees. Free ATM withdrawals with the linked debit card at AllPoint and Moneypass ATMs. Mobile check deposit. Bill pay. No hard pull for opening, apparently.

Join the waitlist here.

Basically, Robinhood is taking your money and investing it while giving you a steady 3% return. Funds are not FDIC insured. They are SIPC-insured, like most brokerages.

SIPC coverage provides protection to customers who hold cash and securities such as stocks, bonds or mutual funds in an account at SIPC-member brokerage firms in the event the brokerage firm fails. SIPC does not cover losses due to a decline in value of securities. SIPC coverage applies if the brokerage firm fails and customer assets are lost or misappropriated by the firm. FDIC is backed by the US government while SIPC is backed by the collective power of all member brokerage firms.

There’s some risk that in a major downturn the entire SIPC can go under. Other than that, if Robinhood goes under, the funds should be covered by the SIPC, but I’m not 100% sure due to the nature of the account.

From the information given by Robinhood, it appears they plan on investing in safe investments like US treasuries, so there may not be a huge amount of risk.

Note, there are FDIC-insured options available with rates as high as 2.50% APY, and rates continue to climb. Also worth noting that we don’t know when these new Robinhood accounts will be publicly available as they are currently rolling it out slowly via waitlist. It’s entirely possible that part of their strategy is to slowball this until interest rates rise naturally, similar to what Beam did. I’m not saying that’s the whole deal, and my guess is their rate will remain above average, but the wow factor may not be that strong by the time we can actually get in on this.

Where the Robinhood accounts shine especially is for someone who uses Robinhood anyway and has a chunk of funds sitting and waiting to invest. Could make sense to put it in the 3% account meanwhile. Another interesting usage of the account is that this is another no-foreign-transaction fee debit card available.

(Post has been updated.)

Hat tip to reader Ali and Meshilem



82
Leave a Reply

avatar
 

  Subscribe  
newest oldest most voted
Notify of
Achilles
Achilles

Quote from the post: Every Robinhood account is SIPC insured up to $250,000 in cash and protected by modern encryption so you can rest easy and save confidently.

Lrdx
Lrdx

SPIC only insures cash that is deposited for security purchase purposes. This money is obviously not that.

XD
XD

“SIPC coverage provides protection to customers who hold cash and securities”. The deposit money is “cash”, right?

Lrdx
Lrdx

Not all cash is protected. Read it here: https://www.sipc.org/for-investors/what-sipc-protects

DM
DM

Not an expert on this but funds are SIPC-insured.
“SIPC coverage provides protection to customers who hold cash and securities such as stocks, bonds or mutual funds in an account at SIPC-member brokerage firms in the event the brokerage firm fails. SIPC does not cover losses due to a decline in value of securities. SIPC coverage applies if the brokerage firm fails and customer assets are lost or misappropriated by the firm (e.g., if your assets can’t be transferred to another brokerage firm because they were used in the operation of the failed firm).”
I’m sure there are more nuances to the SIPC/FDIC-insured dynamic, but first thought would be that for a cash deposit, you might be covered

AL
AL

It is my understanding that deposits up to $250k are insured by SIPC.

MoreSun
MoreSun

I’m thinking the same. Still, I think I’ll be passing.

Danno
Danno

SIPC only covers you if the brokerage closes. If the underlying investments go bust, that’s a different situation. First they started pushing cryptocurrencies hard, now they’re passing this “savings” account off as comparable to FDIC-insured accounts but with higher interest (which this isn’t without actual FDIC insurance). Robinhood is starting so seem like one of those companies that go down in history if the market does anything that they hadn’t planned on.

Mello
Mello

Sign up here… [deleted]

Beefer
Beefer

Chuck William Charles Referral spam

Debit
Debit

Yup. Really bad deal. You take market risk and get only 3% for it.

Jay
Jay

You only get .5% for the risk (difference between 2.5% accounts available nationwide with FDIC insurance and this account at 3%).

Mike M.
Mike M.

Came here to share this information and it was already up lol. You guys are fast.

Stephen Kimball
Stephen Kimball

https://www.schwabmoneywise.com/public/moneywise/essentials/understanding_fdic_and_sipc_insurance

Robinhood is SIPC insured, which protects ALL accounts at the institution. In some cases even higher than FDIC it would seem.

Syam Karimojju
Syam Karimojju

Agreed

Mjs
Mjs

But SIPC isn’t backstopped by the federal government like FDIC is, correct?

The risk I’d be concerned about is a systemic failure (brought on by a massive market decline) that would potentially result in SIPC failing.

Fred
Fred

.

Wilson
Wilson

Don’t think the government has a legal obligation to carry the FDIC either. Since the wealthy own most of the stocks it wouldn’t be surprising if the government bailed out investors before depositors anyway, look at how they’ve been trying to make it normal to have “negative interest” on bank deposits, can’t imagine the government mandating a negative stock market return

Max
Max

incorrect, the government does have a legal obligation to cover FDIC in the event the market crashes, that’s the main appeal of FDIC in that the government has never missed a payment and has a 100% track rate on anything they have guaranteed to pay.

More Info
More Info

SIPC fails in a crisis and America fails financially, so I wouldn’t invest with this in mind, but I’m sure the US Government would backstop the SIPC just like they would the FDIC, just as they did for AIG, GM and Bank of America in 2008.

Separately, most people using Robinhood were likely not adults during 2008 or 2001 and therefore won’t run for the hills as fast as those who have lived through past crises. But that’s my belief watching history and I don’t have the facts to prove it.

Dennis
Dennis

Looks good enough for me! Will be switching all my money to this account for the 3% rate. Leaving $3K with T-Mobile Money for the 4% rate.

86
86

.

bax
bax

Do NOT do business with Robinhood. They would retroactively decide your prior ACH transfers are “suspicious” and freeze your funds you transfer in *afterwards* and *without* any notice. You wouldn’t get to find out until you try to transfer out many months later.

max
max

Really, how come? And how was it resolved?

MoreSun
MoreSun

Passing

DM
DM

I’ll add a little more detail from my other comments that I dug up (mostly bc I was just interested in the difference between FDIC and SIPC) that might be helpful to some.

Fidelity and Schwab both have features (not sure if you have to opt-in to them) where they take the un-invested cash in your brokerage account and sweep them into FDIC-backed accounts. Also, the Schwab high-yield checkings and savings accounts I believe are, by default, FDIC-insured.

This does not appear to have the same kind of cash sweep feature, so you are relying on the SIPC insurance for your cash. To the extent that RobinHood folds (they are constantly trying to figure out how to make a sustainable business model out of offering free trades, which is an entire separate discussion but something to be aware of), you would be covered by SIPC insurance, but subject to the ability of SIPC to cover it. SIPC does not appear to be backed by the US government, so again, not sure the strength of that coverage.

Same thing with a broad market downturn. SIPC coverage would be there, but the risk of them being able to back this account and all other accounts under SIPC coverage would be heightened for sure.

Whether this added risk is worth an extra 0.5-0.75% interest on your deposits is really a personal choice. Again, this is just helpful info and not financial advice.

CreditHunter
CreditHunter

What I’m concerned about is whether this is just a 3 month ploy to attract assets followed by a rate dump back down to average. Cause they didn’t write anywhere that the 3% is guaranteed for any sort of time period.

test
test

RH just crashed this week as a broker.

Sam
Sam

No FDIC insurance is a bit messed up. Thanks for that call out doc.

cnsza
cnsza

I’m someone who works in investments at one of the big 4 US banks. There is only a small amount of information on how this account is earning money, but using that I believe the below is how it works. It looks like what they are doing is making a true money market account that is usually only available to large institutional investors (An example of this is Vanguard Prime Money Market Fund Admiral Shares – VMRXX). This account likely invests in short term (likely less than 6 months) government securities in order to create this interest. It looks like it does mostly US treasuries/related investments. Short term US treasuries are considered risk free and “cash-equivalents” due to their low risk. This type of investment exists because financial/investment companies attempt to earn interest on every single dollar that is held. Robinhood is passing on the interest to you + a little extra that they receive via interchange fees. From the Robinhood support page “Insurance”: “How does Robinhood earn interest to pay 3%? Similar to a bank, Robinhood keeps your cash in interest-earning assets. Because we’re a brokerage, we only use the safest assets, such as U.S. treasuries that are backed by the full faith and credit of the U.S. government. These assets yield interest, and we pass those earnings back to you. We base our 3% interest rate off of the U.S treasuries yield, which is determined by the Federal Funds Rate. These rates change depending on the strength of the economy. As these rates change over time, we may have to adjust our 3% rate. Regardless, our goal is to offer our customers as much return on their money as possible.” In addition from the “Frequently Asked Questions” page: “How does Robinhood make money from Checking & Savings? …With Checking & Savings, Robinhood earns revenue in two major ways: collecting interchange (see below) from Mastercard and through earning interest on assets held at Robinhood.” So in summary, it looks like they are attemping to bring a type of account that is usually reserved for very large investors to the consumer. Technically, they are investing your money but it appears to be in cash equivalents/government securites that investors would consider to be risk free. It is not FDIC insured, but is SIPC insured. The interest rate earned appears to be tied to the US treasury rate and will likely move… Read more »

Superman
Superman

I’m getting close to 2-1/2% from non-FDIC insured Vanguard money market fund. (And I use that only to hold funds immediately before and after trades.) Why does Robinhood get to compare themselves to 0.01% – 0.06% bank accounts w/ FDIC insurance? How are they different than money market funds? Must they maintain a stable value of $1 per share in order to payout 3%?

cnsza
cnsza

Hey Superman,

The Robinhood account does not state that it is a money market fund (although they do state that you will start earning interest at 1 dollar). There is a difference between a money market mutual fund like the one from Vanguard and a money market deposit account (FDIC insured), like a Capital One 360 Money Market account. You make a good point, hopefully more details from Robinhood will follow shortly. It is a poor decision by Robinhood to announce a banking product without explicit detail.

calwatch
calwatch

I look at it as a MMA, maybe they are thinking that they can lend out Robinhood customers stock for income (which ruins their qualified dividend status but is fine for the growth stocks favored by their clientele) and run some derivatives or guaranteed insurance contracts for extra revenue. The question is if some of the derivatives fail – will Robinhood break the buck or will they just drop interest rates down to 0.10%?

Max
Max

Hi,

I’m a registered RIA. In the event that Robinhood failed, SIPC would act almost the same as FDIC in this regard, and would cover everyone’s cash up to $250,000. The main difference between SIPC and FDIC is that SIPC is funded by membership dues of anyone who is a broker dealer (Aka JPMorgan, Merrill Lynch. Goldman)…as opposed to the federal government. but it has a significant storage of funds as well as some of the best insurance in the world built up to cover losses, in the event that robinhood failed on it’s own. The main concern would come, if there was another great depression like 1940(not 2008). But the chances of another great depression are quite slim.

cnsza
cnsza

Good information on FDIC vs SIPC Max. I’d like to add that the US government also has the ability to ask any healthy bank to purchase an unhealthy bank. This was done in the 2008 financial crisis with Bank of America being asked to buy Merrill Lynch, JP Morgan Chase being asked to buy Bear Sterns and so on. This is the method that the US government uses first before any insurance is used.

Spektical
Spektical

I agree with what you said, but I don’t think broker dealers are allowed to invest customer funds like. I don’t know if this would fall under the broker dealer protections under SIPC, etc; I am willing to bet in the T&C you opt out of SIPC

Ann
Ann

Minor quibble, the Great Depression is officially considered to have been 1929-1939. 🙂

Back to Top ↑