A warning about Robinhood's 3% Checking Account…

If it sounds too good to be true, it probably is…but does that apply to Robinhood’s new 3% Checking and Savings accounts? After reading the fine print, here’s what you need to know. Enjoy! Add me on Snapchat/Instagram: GPStephan

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Robinhood just announced that it will now be offering a 3% Interest Rate on their Checking and Savings accounts to begin in 2019. What makes this an amazing offer is that “Robinhood Checking & Savings accounts come with no fees, minimum balances or deposit requirements.” Also, interest is paid out DAILY…that’s absolutely incredible.

The “catch” here is that because Robinhood isn’t technically a “bank,” you’re actually opening a brokerage account where your money isn’t FDIC insured. So instead, they offer SIPC Insurance. SIPC protects you up to $250,000 in cash, or $500,000 in assets upon broker failures…this means that if Robinhood ever closed down due to financial difficulties and assets went missing, SIPC steps in to help return client’s money. This does NOT apply if Robinhood mismanages funds or breaks regulation. It’s not quite as strong as FDIC insurance, but it’s relatively safe as long as Robinhood is in compliance.

Another small risk here is that the President and CEO of SIPC claims that “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.”

Robinhood claims that because the checking and saving products are technically part of a brokerage account, they would be protected by SIPC like other brokerage assets. People can trade stocks and other assets through the brokerage using the money in these checking and savings accounts. Personally, this sounds a little sneaky of Robinhood to call this a “checking account”…but characterize it as a brokerage account.

So how are they able to even pay out a 3% in the first place?

The way I see it, this is their cost of customer acquisition. This is how much they believe ONE customer is worth to them, long term. They want people to talk about it, they want people to be Robinhood customers, and in order to do that, they have to do something DRAMATIC…otherwise no one would bother moving their money over.

Fortunately for them, this is just going to be a Short Term loss…I have a feeling we’ll see ALL checking accounts offering a 3% interest rate in the next 10-15 months. And by then, they lose the early mover advantage of offering this before anyone else.

Here’s what I think is going to happen…this is going to be a loss leader for the company. I also think Robinhood is going to SIGNIFICANTLY underestimate how many people will sign up for this service, as well. But as long as they have the funds, they will manage just fine. Now of course you run the small risk of them being a newer company that’s not FDIC insured…and the “Risk” is really only for an extra 1% compared to keeping your money in Ally, for instance…so is it worth the risk? Maybe.

Also if something happens to Robinhood and they break the law, and SIPC insurance says “you called it a checking account, we’re not covering it”…you might be out of luck.

The good news is that Robinhood doing this forces OTHER companies to be more aggressive with their checking and savings account returns, and I bet we’re going to see many other companies follow this move coming in January!

For business inquiries or paid one-on-one real estate investing/real estate agent consulting or coaching, you can reach me at GrahamStephanBusiness@gmail.com

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