One of the big new names in the fintech space right now is Robinhood. Established in 2013 in Menlo Park, CA, Robinhood is a startup company that essentially makes it possible for people to invest in publicly traded companies via a mobile app and not pay commissions on any earnings. Instead, Robinhood makes money largely off the interest earned on its customers’ cash balances. Going forward, though, Robinhood wants to expand beyond investing and into the world of banking. The company recently announced checking and savings account products that guarantee 3 percent interest.
From the beginning, Robinhood’s 3 percent interest offer has seemed like it might be too good to be true. Three percent interest is the highest gain available on the market for checking or savings accounts. The national average is just 0.10 percent for savings accounts, while the second highest market rate is only 2.25 percent. If Robinhood could make good on its offer, then there would be a good reason for many consumers to switch their banking to the app.
There’s just one issue: Robinhood may or may not be able to insure its checking and savings accounts. According to a recent Forbes column by fintech expert Jeff Kauflin, Robinhood is not a member of FDIC (Federal Deposit Insurance Corporation), which means its accounts are not FDIC-insured. That’s not to say the company has been doing business in the financial space for five years without offering any coverage for its customers. On the contrary, Robinhood is a member of SIPC, or the Securities Investor Protection Corporation. Being insured by SIPC makes sense for a securities trading company, which is essentially what Robinhood has been up to this point. However, as Robinhood seeks to break into banking, it seems to have stumbled into misunderstanding its own insurance coverage.
According to Forbes, Robinhood claimed that its checking and savings accounts were insured “up to $250,000 by SIPC.” However, SIPC does not actually provide that type of insurance. Instead, SIPC exists to protect investors of brokerage or investment firms, should those firms go under or run into financial struggles. All brokerage houses are legally required to be members of SIPC, to ensure that customers have this protection. The complicating factor, though, is that SIPC insurance only kicks into gear after a customer has actually invested with a brokerage house. Customers using Robinhood’s checking or savings accounts are not technically investing. There is even language on the Robinhood website that says customers “do not need to invest” to use the company’s banking options. Robinhood may be making money off these services by turning around and investing customer cash in various securities. However, since the customers using these services did not deposit “for the purpose of purchasing securities,” their money is not insured by SIPC.
After the Forbes article hit the web, Robinhood published a blog promising to “work closely with regulators” before launching the new savings and checking account services. In addition to figuring out compliance with federal laws, the company says it will update its marketing materials to avoid further miscommunications with customers.
So, what’s the bottom line? Is Robinhood’s 3 percent interest promise too good to be true after all? At this point, the jury is still out. It could well be that Robinhood will figure out its regulatory issues and return with a service that does what it promises and insures customers properly. In the meantime, though, customers will want to wait and see what happens. For any kind of cash management service, secure insurance coverage is a non-negotiable feature.