Checking Accounts

SIPC Crushes Robinhood’s Checking & Savings Account

After making a name for themselves with a successful online trading platform, Robinhood offered its customers a no-fee Robinhood Checking and Savings account. Well, it did for a couple of days before the Securities Investor Protection Corporation, SIPC, stepped in. Invitations were to be sent out beginning in January 2019 to open these accounts but now there is hardly any evidence the product ever existed. The product is now being rebranded as a cash management program that will be launched in the future.

The bottom line is that Robinhood was trying to use the SIPC’s guarantee on money placed in accounts that will be used for investments to provide insurance for a new type of checking & savings account. It turns out that doing first and asking questions later doesn’t always work well in finance.

Robinhood promised a 3% APY and no overdraft or monthly fees. The accounts also offered a Mastercard debit card and free access to 75,000 ATM’s around the U.S. That’s access to more ATMs than the biggest five banks combined.

How did Robinhood plan to keep costs so low?

Robinhood sticks to a small base of 300 employees and makes a profit by investing your funds in U.S. Treasuries, as well as through Mastercard interchange fees (charged to merchants when you use your debit card) The trade-off for the customer here is the choice of no bank fees over access to a physical bank. The customer does, however, have access to 24/7 live text chat support.

With Robinhood you earn 3 % off all of your money. Mental math is hard, so if you look at the median U.S. household that has about $8,000 in liquid robinhood-checking-accountsavings, they’d earn $240 a year.”

Robinhood co-CEO Baiju Bhatt

Robinhood co-CEO Baiju Bhatt explains: “Brick-and-mortar locations are costly. Our goal with this product was to build a completely digital experience so we can reduce our overhead so we can pass more of the value back to customers.”

3% interest on Robinhood Checking and Savings

Both checking and savings accounts earn 3% on every dollar. Bhatt explains how they expect this to benefit the average customer:

“Saving accounts in the U.S. pay on average 0.09 % and we all know the banks are making far more than that from the deposits. With Robinhood you earn 3 % off all of your money. Mental math is hard, so if you look at the median U.S. household that has about $8,000 in liquid savings, they’d earn $240 a year.”

It was good while it lasted

Robinhood claimed their checking and savings accounts were insured by the SIPC rather than the FDIC or NCUA like registered banks. Their reasoning is that the money deposited into Robinhood checking and savings accounts would fall under the same protection that the SIPC provides for their investment services. There are currently a few issues with this. As for being able to offer insurance through the SIPC, the president and CEO of the SIPC, Stephen Harbeck, responded by saying:

Robinhood-Checking-Account-SIPCSIPC does not protect checking and savings accounts since the money has not been deposited for a protected purpose. SIPC protects cash that is deposited with a brokerage firm for one limited purpose … the purpose of purchasing securities.”

President and CEO of the SIPC, Stephen Harbeck

Even if the SIPC were to offer protection for other accounts, Harbeck explained, “Insurance doesn’t appear in our name. There is a reason for that. When people see that word they believe they can never lose money.” The SIPC does not offer the same protection as the FDIC. Clearly, as of now, they claim that the protection they do offer does not extend to checking and savings accounts anyway.r

Enough said. Robinhood has since taken the checking and savings account site down. It is too early to give up on Robinhood’s virtual bank aspirations. They have rebranded the checking account as a cash management account for investors. It is not clear what features and services it will offer. However, it might be as good as a checking account for investors looking for a short-term account with a decent APY.