Robinhood makes other attempts to launch a high-yield bank-like account
Robinhood gives the bank another shot.
Ten months after the unsuccessful launch of a checking and savings account, the free stock exchange announced a cash management account with 2.05% interest. APY is more than twenty times higher than the national average for savings accounts, according to Bankrate.com.
In December, Robinhood said it would offer zero-fee checks and savings accounts with a 3% interest rate next to its brokerage accounts. . The move was seen as a shot over the bow of traditional banks. But the product quickly saw pushback from regulators who questioned the SIPC insurance that it was promising, which is meant for brokerage accounts ̵[ads1]1; not for savings products. A day later, Robinhood said they would re-brand and name it after the "confusion."
"Over the past year, we pressed the reset button and started building this from scratch," CEO Baiju Bhatt told CNBC in a telephone interview. "We've spent a lot of time and energy growing our business and hired an all-star cast of people with financial services and risky relationships."
For the past year, Robinhood has hired Amazon veteran Jason Warnick as its first chief financial officer and Gretchen Howard, a former partner at Alpha's Growth Capital arm, Capital G, as CEO. On Monday, the company announced that former SEC Commissioner Dan Gallagher will join Robinhood's board. The company also brought in a V.P. of risk and compliance, working with other new employees "around the clock with counterparties," including program banks and regulators, "to ensure that this program is thoroughly controlled," according to V.P. of the product, Josh Elman.
Insured up to $ 1.25 million
Bhatt, who founded Robinhood with CEO Vlad Tenev in 2013, said this is a completely new product and there is "no overlap" between cash management and control and savings product. Those who joined the waiting list in December, for example, must re-register for the new accounts.
These cash management accounts have similar characteristics to savings accounts. They "sweep" customers money from a broker account to various FDIC-insured bank accounts. Because these companies deposit money into several banks, the insurance may be higher than the standard $ 250,000 offered per bank. In Robinhood's case, accounts are insured up to $ 1.25 million.
Robinhood said that the partners include Goldman Sachs, HSBC Bank, Wells Fargo Bank, Citibank, Bank of Baroda and U.S. Bank. The 2.05% rate is significantly higher than the national average, but can still "fluctuate with market conditions" such as the Fed Fund's rate, according to Josh Elman, Robinhood's VP of product.
The company was valued at $ 7.6 billion after closing the last late-stage funding round in July. The high-return product was the first of its kind for a fintech company when it was unveiled in December. But over the past year, SoFi, Betterment, Wealthfront and CreditKarma have all launched similar high-return FDIC-insured accounts.
Most of these fintech companies do not have access to their own FDIC insurance that would protect customers' accounts in the event of a financial crisis. Collaborating with banks is an increasingly popular scheme for start-ups that offer financial services but are not regulated as banks.
Growing Pressure
Ohio-based Sutton Bank will issue Mastercard debit cards that come with Robinhood's accounts, and the company said it will offer access to 75,000 free ATMs. Robinhood said it will not charge foreign transaction fees or maintenance fees, and has no account minimum. Instead, it earns money on the exchange fee made by debit card purchases and collects some fees from the partner banks.
"This is diversifying our revenue streams," Bhatt said, adding that it is a way to expand the existing 6 million customer base.
The pressure to diversify is growing after Charles Schwab, TD Ameritrade and E-Trade all announced last week that they will no longer pay for individual stocks, ETFs and options. Analysts said last week that the move from established companies has the potential to take away price-sensitive customers like floods to Robinhood in search of low costs. Others said this puts pressure on Robinhood to lean into new banking products to add value beyond just stock trading.
"Without a doubt, the price-sensitive incremental customer may be less likely to use them in the future," equities analyst JMP Devin Ryan told CNBC. "Start-ups must continue to find ways to set out their business model apart from just free trade."
In response to announcements from established brokerage firms, Bhatt said Robinhood "has always represented the underdog in this industry." [19659002] "When we think about building financial products that are more accessible and more inclusive, it is not a headline for us. This is not a gimmick – it is absolutely central and important to why our company exists," he said. "We believe that if we stay focused on our customers, we will continue to build great products that they love, and our business will continue to grow."
