They are offering this as a brokerage and not a bank so the accounts are not FDIC insured but SIPC insured instead https://support.robinhood.com/hc/en-us/articles/360001469903
> SIPC insurance provides protection for your cash balance and securities holdings if Robinhood fails financially, but does not cover investment losses due to declines in the value of securities themselves.
Emphasis mine.
If you put $250,000 into an FDIC-protected checking account, that account holds cash and FDIC protects the full amount of that cash.
If you put $250,000 in an SIPC-protected brokerage account, that account holds both cash and securities, and SIPC does not protect you from a decline in the market value of those securities. So imagine the stock market drops and you go to your "checking account" and that has dropped too! To me, the concept of such a "checking account" violates my basic assumptions of how I think about my cash holdings vs. my security holdings.
I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow.
It also seems like there could be weird tax implications if your "checking account" has to liquidate securities to cover a big check you wrote.
Aside from that, it appears they're investing this money in short-term treasuries rather than stocks, making up the difference in merchant fees for debit card transactions, and maybe treating this as a loss leader. They've partnered with Sutton Bank since they don't have their own banking license.
https://www.forbes.com/sites/jeffkauflin/2018/12/13/in-a-bol...
FWIW, some Vanguard bond mutual funds (most of the investment-grade ones) allow you to write checks against them, and those funds can lose value.
I can't find an easy link that says which specific ones, but here's their policy:
https://personal.vanguard.com/us/whatweoffer/accountservices...
Note: this isn't a general checking account that permits debit card usage, and each check must be for at least $250. But right now, you can use their Prime money market fund, which aims to avoid loss of capital ("breaking the buck" is very rare) and write checks against it, and it yields ~2.3%
So I won't buy any securities, just use it as a checking account, keeping the cash sitting there earning the 3% interest.
I wonder if there is a rule of Robinhood which prevents me doing this.
I just learned that this is how Betterment's "Smart Saver" account is as well.
> Is Robinhood a bank?
No. Robinhood offers Checking & Savings through a brokerage account and it offers the Robinhood debit card in partnership with Sutton Bank.
Because if it is, then this is basically the same. Your cash is fully insured, but obviously your investments run investment risk.
If Robinhood automatically converts your money into securities, then it's a different matter. It sounds unlikely to me that any bank account would work that way, but I don't know how Robinhood works.
I'd recommend reading up on the Federal Reserve (The Creature from Jekyll Island), the modern financial system (any of Michael Lewis's books, especially Boomerang and The Big Short), and maybe the first global banking families (The Medicis: Power, Money, and Ambition in the Italian Renaissance). We're talking about the power structure of the world here and it's good to be informed on the main points.
I still suspect that the securities mentioned are your own securities rather than the bank's, which makes it totally sensible that they're not covered by the insurance.
"Own nothing, but control everything." -John D. Rockefeller
edit: good note from /u/snowwrestler below:
> > It's not the cash/securities that Robinhood holds as part of their business, it's the one they hold for you. You may well choose to hold 100% cash or 100% securities.
> If I'm holding 100% securities, a) SIPC offers me no protection from losses, b) I better be making more than 3% return, and c) I would not call that situation "a checking account."
"I bought 100 shares of Acmecorp, then Robinhood shuttered their doors and said they sold the shares to fund their yacht."
The SIPC's job there is to reimburse you for 100 shares of Acmecorp as of now; they're not going to let investors cherry-pick and say "but they mishandled the account during the one day it was at its peak and I want that price!"
I don't understand what a "checking account" is that guarantees 3% interest and is covered by SIPC instead of FDIC.
There's SIPC protection for your cash and securities (stocks etc.) that Robinhood holds for you, up to 250,000$ each. For obvious reasons, the value of a security in dollars fluctuates and therefore such losses cannot be insured. What is being recovered is the securities themselves, not their dollar value at a time of your choosing.
> I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow.
It's not the cash/securities that Robinhood holds as part of their business, it's the one they hold for you. You may well choose to hold 100% cash or 100% securities.
Actual banks hold only a small fraction of cash deposits in reserve, many of their assets may just as well turn out to be made up of bad loans, bad junk bonds and bad stocks. That's how banks can fail even without a bank run.
If I'm holding 100% securities, a) SIPC offers me no protection from losses, b) I better be making more than 3% return, and c) I would not call that situation "a checking account."
A checking account holds 100% cash (dollars), not securities. That cash is insured by SIPC up to $250,000, just like the cash in your bank account is only insured up to $250,000.
Securities is things like stocks. Stocks are subject to significant gains, but also significant losses. That's the investment risk you have to take. There's no way around it. There can't be a government insurance against it. You can buy "insurance" against losses by purchasing options to sell at a specific price, or you can reduce risk by diversifying your portfolio.
I don't know the details of how securities are valued for recovery in the context of SIPC, but the point is that you will receive (parts of) your securities, not cash. Therefore, if for example you hold Microsoft stock at the time of bankruptcy of Robinhood, you are not entitled to be reimbursed any losses that may have occured as a result of Microsoft's stock price dropping in the meantime. Conversely, you do not owe any gains that the stock price may have made.
Sure it does. The point of SIPC is that if your broker goes under, and you had, say, 100 shares of MSFT and $100 in cash, you get those things even if your broker somehow comes up short. Now, what 100 shares of MSFT is worth in dollars is unrelated to SIPC and depends on the stock market.
The purpose of SIPC is to protect against a breakdown in financial abstractions at one particular level.
SIPC CEO rejects claims of coverage:
https://www.barrons.com/articles/activist-investors-on-the-m...
But cash in a checking account is not going to suddenly start showing negative returns.
The only example I can think of what you’re referring to is the new Betterment checking account which is basically like a security masquerading as a riskier savings account.
But I am not an expert and don't take my advice.
I want to emphasize this point. You are never* getting returns for free, you are getting paid to take on some risk. If someone is trying to sell you "risk-free" returns that are higher than widely-known market rates, they are lying to you by downplaying, omitting or obfuscating the risk associated with those returns, and warning bells should be going off in your head. Proceed with caution.
* You can of course find better risk-adjusted returns than the market by way of information asymmetry in your favor. Suffice it to say that is not the case with a consumer financial instrument aimed at "the masses" (not high net worth individuals).
Sure, but you can buy US treasury bills, and then your risk is "lose some money if the US government defaults", which is very low.
We all live every day with risks far greater than that risk level.
If you look at the current treasury yields, they are very close to 3%. Add the interchange revenue, and RobinHood can pull a 3% guarantee while still making a (narrow) profit.
If treasury yields go down, then no problem: RobinHood can instantly adjust their returns downward. If they go bankrupt because of an unlikely combination of events - lots of deposits coupled with a very sharp and unexpected decline in treasury yields - SIPC will pick up the pieces and make sure you get your cash and securities up to $500k.
My understanding is that any cash and securities you own when they go out of business is covered up to the limit. So if you have $250k in your RobinHood checking/saving, that will be guaranteed by SIPC.
DISCLAIMER: I am not a financial adviser and nothing I ever post is financial advice.
There are all kinds of other risks associated with buying US treasury bills besides the US government defaulting, which is why you get paid - but you're right, the risk is low so you get paid a low amount. You have opportunity costs during the time that your money is locked up in treasuries. You also incur some inflation risk. If we are specifically talking about T-bills then we're talking about treasuries with maturities of less than one year, meaning that particular risk is low. There is interest rate risk. If you have an emergency and need to convert back into cash before the maturity date hits, you have to sell them on the market, where you may lose money if interest rates have increased. If you're investing in the treasuries via an ETF or via a broker, you are incurring additional counterparty risk.
> If you look at the current treasury yields, they are very close to 3%.
The 10-year bond is 2.91%, the 20-year bond is 3.05%. Investing in a 10 or 20 year bond is obviously different than having a checking account which can be emptied at any time without penalty and without having to go to the market to find a buyer, so there's a large maturity mismatch that's being incurred by your counterparty, RobinHood (assuming they are in fact investing in long-dated treasuries).
> If they go bankrupt because of an unlikely combination of events - lots of deposits coupled with a very sharp and unexpected decline in treasury yields - SIPC will pick up the pieces and make sure you get your cash and securities up to $500k.
The part where they pick up the pieces could take weeks or months; if you need the cash before then, you're in trouble. If you can afford to wait, you're right, no big deal. I don't expect RobinHood to go bankrupt tomorrow, but if they were wiped out as part of a wider financial crisis, it's possible that under those conditions you'll need access to your cash quicker than you think.
Every dollar-denominated investment incurs inflation risk, including any sort of cash account like a dollar saving/checking account.
> If you're investing in the treasuries via an ETF or via a broker, you are incurring additional counterparty risk.
That counterparty risk is exactly what SIPC insures.
> Investing in a 10 or 20 year bond is obviously different than having a checking account which can be emptied at any time without penalty and without having to go to the market to find a buyer, so there's a large maturity mismatch that's being incurred by your counterparty, RobinHood
But RobinHood can make certain reasonably safe assumptions about the flow of capital into their various accounts, and adjust based on that.
For example, while they're growing, every withdrawal will be matched by a great amount of deposits. So they'll always have the cash in hand to satisfy withdrawals.
Of course, if they ever stop growing, that assumption no longer holds. But the very nature of startups is to bet on growth, even at the risk of potential bust (since failing to grow rapidly means failure).
> The part where they pick up the pieces could take weeks or months; if you need the cash before then, you're in trouble. If you can afford to wait, you're right, no big deal. I don't expect RobinHood to go bankrupt tomorrow, but if they were wiped out as part of a wider financial crisis, it's possible that under those conditions you'll need access to your cash quicker than you think.
Absolutely. I would keep an emergency fund in an FDIC-insured bank account somewhere else.
You're right, inflation risk isn't particularly relevant when comparing treasuries vs checking accounts or cash. Those are all exposed.
> For example, while they're growing, every withdrawal will be matched by a great amount of deposits. So they'll always have the cash in hand to satisfy withdrawals.
Ha, if we can just assume they'll have money pouring in faster than withdrawals, even when markets experience turmoil, there's very little to worry about! I don't know exactly how sure we can be about that - or at least, for how long.
> Absolutely. I would keep an emergency fund in an FDIC-insured bank account somewhere else.
Wise, and it sounds like we're on the same page. All I was arguing is that there is some risk here that's being glossed over by selling it as just-another-checking-account-except-you-get-more-money. Maybe small/unlikely risk, but you're not getting 3% for free. You can always just go buy some IEF or TLT or actual treasuries too.
Your typical bank has far more than RobinHood's 300 employees, and far greater expenses in general.
This is an example of a disruption.
This comment just reinforces my feeling that Robinhood's business model is to extract money from credulous customers who think they are too cool for regular banks.
For example Chase has over 10 banks within blocks of each other in downtown Chicago.
Hundreds of thousands, actually.
Wells Fargo had 262,700 employees in 2017. Bank of America, Chase, Citi - all had over 200,000 employees that same year.
These numbers have only gone up since then.
No private insurance company can provide such guarantees and keep then if the entire sector needs to be bailed out at the same time.
SIPC is like Fannie Mae, where the US implies a backing without making a promise. When push comes to shove the US Government gets to choose whether to do a bailout on a case-by-case basis.
FDIC is not like that at all. The US explicitly and unconditionally backs them.
Look at it in political terms. FDIC is guaranteeing everyone's savings, rich or poor. You just can't let that fail. SIPC is guaranteeing a bunch of investments. If the class in power takes a dim view of bailing out a bunch of "wealthy speculators", the ball can definitely be dropped.
Edit: I forgot about the details of the limit. Thank you all.
It's actually per bank, per type of account. So $250k in savings accounts, $250k in checking, $250 in Money Market, etc.
> All single accounts owned by the same person at the same bank are added together and insured up to $250,000
Revocable trusts, joint accounts, and other types of accounts with multiple custodians are covered separately, but checking, savings, and so on are not.
It's not per type of account, it's per ownership category. Ownership categories are:
(1) Single accounts
(2) Certain self-directed retirement accounts
(3) Joint accounts
(4) Revocable trust accounts
(5) Irrevocable trust accounts
(6) Employee benefit (non-self-directed) plan accounts
(7) Corporation, partnership, or unicorporated association account
(8) Government accounts
https://www.fdic.gov/deposit/covered/categories.html
With a little bit of work, you can probably spread your money into a few of those categories without much problem and have more than $250k coverage, but it's not as easy as just having checking and savings.
To clarify, I am talking about customers who held money at LB invested in mutual funds or securities. If the account had a mix M of securities before LB collapsed they would have the same mix once the dust settled and LB account was forced to whatever other brokerage. If this is incorrect (not for some advanced hedge funds, etc. but for retail customers) I would love to know.
If you are talking about folks who held LB stock or bonds, they sure did lose money when the company went bankrupt, but that is not unexpected. Stocks fluctuate in price and some go all the way to zero; for every Google there are a few KMarts, Sears or Enrons.
https://www.kiplinger.com/article/investing/T023-C000-S001-w...
However, reading more I am not as sure that individual investors holding money in LB investing in other (non-LB) securities did not suffer. I am not an expert and cannot always distinguish between reputable sources and conspiracy theorists. Can someone provide some good references?
And if the gov't really wanted to weasel out of FDIC there are plenty of loopholes. For example, I think FDIC can take a long time (up to 10 years?) to pay and is not adjusted for inflation, so inflate, wait and pay pre-inflate amounts is an option (stupid, but technically possible).
And big brokerages have offered this type of account for decades. It's usually called a "cash management account" and works just like a checking account--takes direct deposit, provides checks and an ATM card, etc.
Robinhood's innovation might simply be in calling it a "checking account" so the interest rate looks huge (it's actually small compared to expected investing returns) and marketing it to young people who are suspicious of big financial companies.
> to encourage people to keep all their spare money one-click away from its investment products
These are not mutually exclusive. Robinhood could write this off as CAC that's mitigated by investments into (relatively) safe and low-yield investments. Robinhood could spend a million on Google/FB ads, or they could have an X% chance of losing an amount equal to (3%-bond yield) where X is reasonably low. The (mitigated) loss gives them access to capital and access to customers. If the 3% is permanent, there is no reason for anyone to store their money in a different checking account, as inflation will eat into their savings if those savings aren't invested. Extremely smart move on their part.
In an email to Barron’s the head of the SIPC cast doubt on
the idea that it would insure checking or savings accounts.
“SIPC protects cash that is deposited with a brokerage firm
for one limited purpose...the purpose of purchasing
securities,” wrote Stephen P. Harbeck, the president and CEO
of SIPC. “Cash deposited for other reasons would not be
protected.”
Betterment has their Smart Saver[1], which offers a 2.09% rate and attempts to position it as vastly better than FDIC-insured accounts by comparing to some terrible “national average” instead of the ~2% rates that Ally, Capital One & others offer. It’s still an investment account with the risk, tax implications & liquidity challenges that such an account has.
Their misleading marketing around this is driving me away from them.
[1]: https://www.google.com/amp/s/www.betterment.com/resources/sh...
> Smart Saver’s built-in portfolio is the Betterment Portfolio Strategy’s allocation at 0% stocks, 100% bonds.
The one big downside could be is if you need cash _now_ it can take a few days (5?) before being able to use it.