Robinhood recently prepared to launch its stunning checking & saving offering for cash management with a 3% rate.
That is an astonishing number compared with regular checking accounts (and saving accounts). Industry average is 0.08 percent yield on U.S. checking accounts and the 0.1 percent average on savings accounts (find more about rates here on bankrate.com).
However, the comparison didn’t last long… as Robinhood pulled back and slowed down it official launch. The center question is that “accounts look like bank accounts, (but) they aren’t.” Below is the description at the bottom of the website.
Robinhood Financial LLC and Robinhood Crypto, LLC are wholly-owned subsidiaries of Robinhood Markets, Inc. Equities and options are offered to self-directed customers by Robinhood Financial. Robinhood Financial is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). Explanatory brochure available upon request or at www.sipc.org. Cryptocurrency trading is offered through an account with Robinhood Crypto. Robinhood Crypto is not a member of FINRA or SIPC. Cryptocurrencies are not stocks and your cryptocurrency investments are not protected by either FDIC or SIPC insurance
It is not FDIC protected and it is reported that – “the head of the Securities Investor Protection Corp. (SIPC) told CNBC on Friday that the start-up didn’t contact his office ahead of the product launch, and to his knowledge Robinhood had not contacted the SEC, either.”
While regulation is an issue, another question is – whether 3% reasonable / doable?
US has been through years of low-interest environment; people are not familiar with 10% or 5% interest rate back then. But after Fed’s meeting this week, it is highly likely that there is another 25bp raise, pushing fed funds rate into a range of 2.25 to 2.50 percent.
Here is a brief history of four increases this year (updated in Jan 2019)
| Date | Increase | Decrease | Level (%) |
|---|---|---|---|
| December 20 | 25 | 0 | 2.25-2.50 |
| September 27 | 25 | 0 | 2.00-2.25 |
| June 14 | 25 | 0 | 1.75-2.00 |
| March 22 | 25 | 0 | 1.50-1.75 |
And a history – Intended federal funds rate change, 1990 to present.
I should say 3% in 2019 is not undoable. But the core difference is a marketing issue. Robinhood could invest in higher yield products.
But in consumers’ view, it is truly disrupting and may level up the playground for all players in this field.
The time of easy money is gone. The startups or new initiatives with better and sustainable solutions (usually tech-oriented) are attacking the incumbents. Robinhood may or may not be the one (and this may not be the exact right approach), but the industry needs to be prepared.