Last week, stock trading Robinhood app announced checking and savings accounts with a whopping 3% interest rate, zero fees, and a Mastercard debit card with no overdraft/transaction fees. Within hours of a waitlist becoming available, over a hundred thousand users signed up. However, Robinhood announced it was revamping the marketing and communications of the product following criticism from regulators.
Robinhood said that the accounts were insured by Securities Investor Protection Corporation (SIPC). Regular checking and savings accounts are usually FDIC backed, which means that it could handle bank failures.
SIPC president and CEO Stephen Harbeck said that Robinhood did not contact him or the SEC before launching this product. And Harbeck pointed out that Robinhood accounts were not insured the same way. For example, the SIPC protects brokerage accounts, which are meant for the purpose of investing in securities. And cash in those accounts that are not being used to invest in stocks would not likely be protected.
Photo Credit: Robinhood
“I understand that people want to be innovative and things change, but I have to work within a certain statute,” said Harbeck in an interview with CNBC. “The statutes we work with can only protect certain funds.”
On Friday evening, the company issued a statement about how it was going to rebrand the product:
“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,” wrote Robinhood co-founders and co-CEOs Baiju Bhatt and Vlad Tenev in a statement on December 14th. “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.”
UBS senior equity research analyst Brennan Hawken told CNBC that he was surprised by the speed in which the SIPC responded. Hawken said that this shows it was a major overreach. “We shouldn’t call it an about-face, but an epic fail,” Hawken told CNBC. And regulators said that users could be misled if there are uncertainties about regulatory protection.
To provide a 3% interest rate, Robinhood said it was going to invest customer deposits in government-grade securities such as U.S. Treasuries. This is similar to money market funds that are offered by major banking institutions, which also puts money into short-term debt securities such as U.S. Treasury bills. Hawken said that offering a product similar to a money market fund and saying it was a checking account is an “apples to oranges” comparison.
Users who signed up for the checking and savings account are still on the waiting list for the new cash management program. And Robinhood said it is going to provide additional information on the cash management program once it becomes operational.
The typical checking and savings accounts are usually less than 0.2%. But there are online savings account accounts like Marcus by Goldman Sachs, which has been increasing its annual percentage yield every few months and is now offering 2.05%. By offering free stock trading, it put pressure on larger financial institutions. For example, JPMorgan Chase announced a free trading app back in August called YouInvest.
Robinhood’s app is now used by 6 million users and the company has a $5.6 billion valuation. And Robinhood is backed by companies like DST Global, NEA, Index Ventures, Kleiner Perkins, and Sequoia Capital.