By Jacob Passy
Robinhood is taking another stab at offering a banking product.
On Tuesday, the investment app announced a cash management feature for its brokerage accounts that will carry an annual percentage yield of 2.05%. The cash management feature will also come with a Mastercard debit card /zigman2/quotes/207581792/composite MA +1.09% . The rollout comes nearly a year after Robinhood first announced it would offer cash management accounts called Robinhood Checking & Savings, offering 3% interest.
But within days of announcing those accounts, the head of the Securities Investor Protection Corp. (SIPC), a bipartisan group of senators and analysts, raised concerns about the product. Stephen Harbeck, then president and CEO of SIPC, said it would only provide insurance protection for cash that’s used to buy securities.
In response, a bipartisan group of senators sent a letter to the heads of the Securities and Exchange Commission, the Federal Deposit Insurance Corp. (FDIC) and SIPC. They said Robinhood’s marketing could “mislead” consumers. Robinhood eventually stopped users from signing up for the cash management accounts and said it would revamp the program.
How Robinhood’s accounts will work
Cash deposited into Robinhood’s accounts are automatically “swept” into accounts at partner banks. The company said it could change those partner banks at any time. Customers will be insured for up to $250,000 at each of these partner banks, for a maximum of $1.25 million, by the Federal Deposit Insurance Corp.
There are currently six banks participating in the program: Goldman Sachs /zigman2/quotes/209237603/composite GS -0.08% , HSBC /zigman2/quotes/208272822/composite HSBC -1.52% , Wells Fargo /zigman2/quotes/203790192/composite WFC +1.37% , Citibank /zigman2/quotes/207741460/composite C -0.40% , Bank of Baroda /zigman2/quotes/209070695/delayed IN:BANKBARODA +4.27% and U.S. Bank /zigman2/quotes/206934678/composite USB +1.24% , according to Robinhood. (The accounts also come with debit cards issued by Sutton Bank, but Sutton Bank will not hold any deposits.)
However, customers will need to monitor their individual accounts at each of the partner banks to ensure that the funds deposited don’t exceed $250,000. And if customers already have accounts at one of these banks, they can request that Robinhood sweep their cash management deposits to another institution if they’re in danger of surpassing the $250,000 limit at a given bank.
Robinhood said it charges no maintenance fees on the cash management accounts nor any foreign transactions fees on the debit card. There is also no dollar minimum required to open a cash-management account. The debit card prevents overdrafts by declining any transactions that would put the account in the red.
The debit card can be used to withdraw cash for free from ATMs in the Allpoint or MoneyPass networks. If the card is used at an out-of-network ATM, Robinhood won’t reimburse customers for any out-of-network ATM fees they incur.
How Robinhood’s cash management accounts stack up
Other companies have already released their own versions of these cash management banking products, including online lender SoFi, wireless company T-Mobile /zigman2/quotes/204659678/composite TMUS +1.33% , and robo advisory firms Acorns, Stash, Wealthfront and Betterment. Unlike Robinhood, Betterment will reimburse customers for out-of-network ATM fees.
While Robinhood’s 2.05% APY is well below the 3% it initially promised, it’s broadly in line with other institutional APYs such as Wealthfront (2.07%), Betterment (2.04%) and SoFi (1.80%). These are lower than many bank APYs, however. Vio Bank offers 2.42% APY. According to personal-finance site Bankrate , that’s the best rate available as of October 2019.