Robinhood’s New 3% Checking & Savings Account

With an APY of 3%, Robinhood’s new checking & savings account boasts a rate 50% higher than the most competitive high yield savings accounts (HYSA). [1] How are they able to do it? What are the benefits and risks of signing up?

About Robinhood…

Founded in 2013, Robinhood has been attempting to “build a financial services company that democratizes America’s financial system”. [2][3] It is considered a “unicorn”, a privately held startup company with a valuation of over $1 billion. Robinhood recently onboarded Jason Warnick, a VP of Finance at Amazon, as their CFO to potentially help bring the company public. [4]

Robinhood’s main platform is in its smartphone application, allowing its millennial rich demographic to invest in publicly traded companies and ETFs on U.S. stock exchanges. It boasts no fee transactions. However, it has to generate revenue somehow. It does so through interest earned on customers’ cash balances and margin lending, a newer feature.

In early 2018, Robinhood began offering commission-free trading of Cryptocurrency, including Bitcoin and Ethereum. Furthermore, its user base grew to match E-Trade’s user base, an impressive 3 million users! [2]

Should I Open a Robinhood Checking & Savings Account?

A 3% annual yield is quite attractive, when big banks right now offer less than a fraction of a percent and HYSAs offer at most 2% (written 12/14/18). How is Robinhood able to offer such an attractive yield? Well, there are few moving pieces, but the biggest few in my opinion are:

They minimize costs by not offering in-person service (Brick & Mortar locations).
They forgo profits to gain market share from its competitors (Similar to Amazon’s approach where they sustain losses until their competitors go out of business).
They are fairly new, so they need to solidify its reputation to attract more users. Acting as a “loss-leader“, Robinhood’s new checking & savings account will bring money and users into its ecosystem, thus allowing them the user base to expand in the future with higher return products (e.g. loans).
Such a high impact product will generate buzz, increasing traffic to Robinhood’s website and app in the short term.

There are numerous benefits the new checking & savings account brings to the table.

Here are a few:

There are no monthly fees, no overdraft fees, no minimums, etc.!
It leverages the scalability of software, and savings are passed to the user (us!).
It claims to include 75,000+ Free ATMS, with partners including Costco, 7-Eleven, Target, Walgreens. The app will be able to direct you to the nearest ATM.
It includes services such as direct deposit, deposit checks via mobile, and others found at traditional big banks.
It offers an extremely attractive APY (3%) with no hoops to jump through!

With all these amazing benefits, there HAS to be some catch, right?

Well, there are a few risks involved:

It’s not FDIC insured; it’s SIPC insured. FDIC goes through the government, whereas SIPC does not.
- “It’s increasingly unclear whether the SIPC’s insurance would cover Robinhood’s checking and savings feature to protect users in the event that Robinhood loses their money investing it in treasury securities if there was a market downturn.” [3]
- Bloomberg article stating that Robinhood’s product may not be covered
It must convince users that it’s trustworthy. It’s a company that has been around only for a few years. What would it mean for Robinhood if a security breach occurred?
A lack of physical branches could deter adoption from a less tech-savvy demographic.
This is only the “Early Access” period, where Robinhood will be sending out invitations in January 2019. This *might* mean sign-up bonuses when invitations go out next month.
Your money is now in the Robinhood ecosystem. If you did not previously have a Robinhood account, now you do! This isn’t necessarily a downside, as Robinhood offers commission free trading, but it could take you away from other ecosystems where you’ve built up loyalty points or benefits (e.g. BOA Preferred Rewards program).
When (if) the company goes public, will it be able to retain its employees after the sudden windfall? This may affect the long term viability of the company.

What’s the Verdict?

With most of my cash savings in an AMERICAN EXPRESS® Personal Savings account, I find the 3% APY is quite attractive compared to the 2% I currently get.

With how my current finances are set up, it would be a nuisance to move all my cash and investments into the Robinhood ecosystem, as most of it has been automated (set it and forget it). For folks already using the Robinhood app as their main brokerage and are looking for a new checking & savings account, this account is quite attractive.

However, there are risks with being an early adopter, especially with a product that has not yet been released. Personally, I would wait until January to see if there is a sign-up bonus, and make the decision then. In the next month, there will also be more information released on the the benefits and risks, which will make the decision much easier.