By Jacob Passy
<STRONG>(Editor’s note: Story has been updated with a late-Friday statement from the company that implies some regulatory questions have been raised.)</STRONG>
Robinhood is no longer just a digital trading platform for stocks and other investments.
The Menlo Park, Calif.-based company announced Dec. 13 that it is rolling out a cash management product called Robinhood Checking & Savings.
However, late the next day, the company’s founders added an update to their rollout news, a vague statement that left some would-be banking converts wondering if the new product would emerge as promised.
It read, in part:
“We realize the announcement may have caused some confusion. 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... [S]tay tuned for updates.”
Designed to be competitive with the offerings from online banks and other investment companies, the accounts, at least as first pitched, will earn 3% interest on both checking and savings. Comparatively, the highest interest rate for savings accounts currently on offer from banks is 2.36%.
“Over the last decade, traditional banks have shared such insignificant amounts with their customers that most of us have forgotten that earning interest is even a thing,” Robinhood co-founder and CEO Baiju Bhatt said in an email. “We wanted to offer a product that makes saving money dead simple, and introduce a brand new checking and savings experience for customers — one where you get paid money for saving, every day.”
Robinhood joins a growing list of companies offering checking and savings products. Others include SoFi, Qapital, Stash and Acorns. Wealthfront confirmed to MarketWatch that it’s now testing beta versions of cash accounts insured by the Federal Deposit Insurance Corp. and will officially launch them in the first quarter of 2019.
‘These services are looking for ways to keep their customers’ money in house as we approach periods of market volatility.’
— Arielle O’Shea, an investing specialist at personal-finance website NerdWallet.
While they are technically cash management accounts , Robinhood’s new accounts will function like traditional bank accounts. They come with a MasterCard /zigman2/quotes/207581792/composite MA +1.75% debit card that can be used for cash withdrawals at more than 75,000 ATMs across the country. While the accounts roll out beginning Thursday, the company said most debit cards won’t ship until January.
Using the Robinhood app, which also links with customers’ investing accounts, consumers can deposit checks. And while account holders won’t receive checkbooks, they can order individual checks through the app that then are cut and mailed by Robinhood.
Robinhood Checking & Savings accounts come with no fees, minimum balances or deposit requirements. Robinhood invests the cash placed in these accounts in low-risk assets such as U.S. treasuries. Additionally, Robinhood earns money through interchange fees when consumers use their debit cards. The firm says the income from these investments and debit card fees are what allows it to pass on 3% interest to customers, even though the yield on the 10-year Treasury note was just 2.9% as of Thursday.
Robinhood told MarketWatch that its new accounts would be insured by the Securities Investor Protection Corp (SIPC). However, the agency said Friday that this wasn’t necessarily the case. Robinhood never contacted the SIPC in advance and the accounts may be ineligible for protection, the agency’s head said.
“SIPC protects cash that is deposited with a brokerage firm for one limited purpose....the purpose of purchasing securities. Cash deposited for other reasons would not be protected. SIPC does not protect checking and savings accounts since the money has not been deposited for a protected purpose,” said Stephen P. Harbeck, president and CEO of SIPC, in a statement.
Other fintech firms have begun offering checking and savings accounts
Many online investment and other fintech firms have introduced checking or savings products in the past year.
Robo-adviser Betterment began offering a new account called Smart Saver — funds placed in these accounts are invested in a low-risk ETF portfolio that the company says can earn a 2.09% annual yield. Additionally, Betterment provides clients with access to a cash-flow management tool called Two-Way Sweep , which will move funds from traditional bank accounts into their Smart Saver account to earn more interest.
Digital bank MoneyLion added checking accounts to its suite of products, which also include investment accounts and loans, in October.
Wealthfront is unveiling cash accounts, too
Online investment firm Wealthfront’s cash accounts are in beta versions now; the company plans to officially launch them in the first quarter of 2019, the company’s vice president of communications, Kate Wauck, told MarketWatch. “Part of what we promote to our clients is having enough cash savings on hand,” Wauck said. “And our clients have been asking for this.”
Wauck told MarketWatch that the company plans to offer FDIC-insured accounts through an as-of-yet unnamed partner, rather than a cash management account like those available from Robinhood or Betterment. The company currently does not have plans to seek a bank charter.
Other brokerage firms, such as Fidelity , have cash accounts similar to what Wealthfront is developing. Consumers can deposit cash into an account with the brokerage firm, where it is held until the following business day, at which point it is “swept” into a different FDIC-insured interest-bearing account at a partner bank.
Other fintech firms that have introduced checking or savings accounts include student loan refinance company SoFi, savings app Qapital and online investing firms Stash and Acorns.
Driving this trend toward banking-style products is primarily a need to retain clients, said Nick Clements, co-founder of personal-finance website MagnifyMoney. Consumers are generally reluctant to change checking or savings accounts — meaning that once a company has captured this business from a consumer, he or she is more likely to remain with them in the long run.
“It’s a pain to change checking accounts,” Clements said. “And if you think about traditional retail banks, that checking account is the entry point, where they can start offering you credit cards and loans.”
Another factor, especially among younger consumers, is a growing aversion to traditional banks. “Most Americans self-identify as having an adversarial relationship with their existing bank and are hit with hundreds of dollars in fees every year,” Jon Stevenson, head of wealth management and banking at MoneyLion, said in an email.
Adding these products does more than just attract new customers though — it diversifies these firms’ businesses. For starters, that helps these companies more effectively achieve their goal to provide holistic financial planning services.
But in times like these when equities markets have been more volatile than in years past, that diversification serves another purpose. “These services are looking for ways to keep their customers’ money in house as we approach periods of market volatility,” said Arielle O’Shea, an investing specialist at personal-finance website NerdWallet. “Consumers can leave [their money] with Robinhood or Betterment, but move it to a safer alternative.”
(The companies interviewed all noted that their checking and savings products were in development well before the market’s recent spate of volatility.)
What consumers need to look for when choosing a checking or savings account
While the wide array of accounts available from online investment firms and banks may all seem similar on the surface, under the hood they can be quite different.
For starters, many of these accounts, like Robinhood’s and Betterment’s, are cash management accounts. While these function much like a typical bank account, they are technically investment accounts. The interest they earn is accrued because the funds are invested in low-risk products, namely U.S. treasury bonds. Some argue this structure is favorable because it exposes consumers’ cash more readily to rising interest rates. “We want to give our consumers exposure to rising interest rates as quickly as possible,” Dan Egan, director of behavioral finance and investments at Betterment, said.
But because they’re investment accounts though, they are taxed differently. For instance, interest earned through U.S. treasuries is tax-exempt at the state and local level, whereas interest accrued on a traditional savings account is taxable.
Beyond those details, consumers should compare accounts on merit, Clements said. While having all of your accounts at one financial institution may make matters easier, it doesn’t necessarily garner the same return. “As much as financial institutions will try to bundle the offerings, a smart consumer will look at each product individually subject to their desire to have multiple institutions,” Clements said.
Consumers should look at whether accounts come with fees or minimum balances. For instance, while Robinhood’s accounts are free, Betterment charges a fee of 25 basis points.
They also should double check whether or not their deposits are insured by the Federal Deposit Insurance Corp. (as traditional bank accounts are) or the Securities Investor Protection Corp. (in the case of accounts on offer from broker-dealers.) Both FDIC and SIPC insurance protect consumers from losses in the event that the institution holding their account fails — not all checking and savings accounts carry this insurance though.
Finally, consumers should consider their own financial habits when choosing a checking or savings account. Because the savings accounts from companies like Betterment and Robinhood are linked with their investing platforms, it could make it easier for a consumer to pull money out of the market in a downturn, O’Shea said. That has the nasty side effect though of sealing in losses. “You shouldn’t be making changes to how you’re investing,” she said. “I wouldn’t want to make it too easy for people to pull money out of the market.”
This story was updated on Dec. 21, 2018.