Hacker News Reader

Comment by mikeash | Hacker News Reader

Why would they expect this account to be used as a high-velocity, low-balance account rather than a park-your-savings account, given the rate?

I agree that the high rate is reasonable in that scenario, but the high rate is also actively fighting to ensure that scenario doesn’t happen.

I don’t see people here thinking that Robinhood is bad at math. They’re all asking, “what’s the catch?” Because it sure seems like there must be one.

View on HN

I assume they're trying to break the inertia people have with major banks. There's no reason to change bank unless there's some substantial incentive like favorable interest rate to offset the hassle involved. I'm not sure there's an ulterior motive here other than customer acquisition.

Right, but that incentive is only substantial if you’re going to park a lot of money there, which is exactly the sort of customer they don’t want according to the comment I replied to.

They may be playing this on two sides: the more obvious one which is acquiring customers to feed their trading business, and simply trying to evolve into a financial institution, which should bolster their valuation in their inevitable IPO in 2019 or 2020. Their backers might be content to burn money for a year or so to get a larger multiplier at some point in the future.

They might be able to actually make a profit off the float in this case, too

Or maybe they're going to be able to sell people's transaction histories...

> Right, but that incentive is only substantial if you’re going to park a lot of money there,

You are assuming that customers make this decision rationally; marketing very often leverages the fact that humans very often don't do that.

I'll move my ~$100K emergency fund into there just to get free money. And move it out somewhere else when the rates change. Over the years I've moved accounts between Dollar Savings, Emigrant, Orange, Ally, and probably 2 or 3 others...

Would you really move your emergency funds into a less secure more likely problematic service though?

I would have to read up on the transfer times. If it's reasonably standard (2-3 days) and doesn't have any daily limits, then yes. It's a US company, FINRA approved, SIPC insured, so the risk is minimal.

SIPC says they don't think they have to insure this.

Agreed, they are trying to buy customers, if it turns out that they can't convert these customers into traders they will lower the rate to a breakeven amount and not care if they lose those accounts.

Perhaps true, there's been an opening for a 'cool' millennial-oriented financial institution for a while now, so perhaps fewer customers will drop off than expected.

Seems like a weak market to go after, given that people likely to respond to a "cool" financial services brand may be a poorer demographic that maybe doesn't have any prior experience with "legacy" financial services providers. So just because they create accounts @3% doesn't mean they'll also open trading accounts.

Millennials may not have money now, but they'll accumulate more wealth as they get older. If you can convert them now, the friction to changing again is high enough that you'll probably still have them when they're worth something.

Yep that's a good play, but their page says that the 3% can change depending on the market. So if that percent changes a few months after you create an account, I would bet many people would leave cause of the bait and switch.

And many won't leave, because many of us are lazy.

That's a good point. A friend of mine in medical school told me that banks are itching to give loans to broke med school students because they know building the relationship now is going to pay dividends when the now-broke student becomes a doctor looking to buy a new car or new house.

> So just because they create accounts @3% doesn't mean they'll also open trading accounts.

From the Robinhood website fine print “Robinhood Checking and Savings is an added feature to existing Robinhood accounts and is not a separate account or a bank account.”

So, yes, opening a Robinhood Checking & Savings account does mean that they will open a trading account, because they aren't actually different accounts. (And it's a waitlisted feature where you get moved up the waitlisted by referring others to RobinHood, so it's a clear way of getting the overall service in front of more users.)

Poor now, wealthier once they have brand loyalty.

> Seems like a weak market to go after, given that people likely to respond to a "cool" financial services brand may be a poorer demographic that maybe doesn't have any prior experience with "legacy" financial services providers.

Yeah but people do grow up. And I don't know about you, but I've got some super long term relationships with some banks. They are in it for the long game.

I find legacy banks a nuisance. They're always trying to get me to come into a bank branch.

Huh. I don't have much of a problem going in to a bank branch, given that there's one every half mile. A quick in-person meeting is fine compared to the shitstorm of unusable menus and nearly unintelligible communication that is calling your bank on a cell phone.

(I mean it would be great if there were a bank that did all its customer service over text chat, but that's too much to ask for, right?)

Well, they’re trying, with chatbots

And I’d really wish they’d just stop

I'd prefer a usable website in addition to guarantees of prudence in investing the money. My $ for both. If Robinhood replaced SIPC with something as credible, I'd go for it. They could probably do it with US Treasuries and bonds from Google, Apple, Facebook, etc.

I've used a legacy bank since the credit union I used in college slammed me with a wall of fees.

The branches have only been to my benefit, never really required, just faster.

> there's been an opening for a 'cool' millennial-oriented financial institution for a while now

I think Simple was supposed to be that. I wonder how they'll respond to this, given that they only recently moved to 2% ($2k minimum).

Judging by their recent activity, Simple won't respond well at all. They've been in a downward spiral for the past few years post-acquisition by BBVA. All the original founders have left amidst a revolving door of executives, and the company has struggled to launch new products and innovate beyond their initial budget features.

... I can't remember but there was one I used at some time that was like that. Had a weird spirograph logo and a cardboard motif on their site. There were a few others.

Which should tell you a lot. I've been through the "Millennial Bank" wringer.

Honestly, checking accounts are all the same. Especially because I use a credit card paid in full every month. It's a holding pool till next month's CC bill is due. Until the US treats debit cards with the same protections as credit, I won't let my debit card near a gas pump or wander off with a waiter or be used online.

I don't know that there's an opening really. That so-called opening keeps popping up since like 2005 and gets "filled" by a SV-backed MVNO-For-Banking and it's just........a checking account provided by some.other actual bank repackaged with a (nice) angular front end and on the AllPoint ATM network with crappy chat customer support.

Simple bank. They’re based out of portland. I use them. They’re pretty good and have great support. Also $1 out of country withdrawal fee which is nice.

Is that (this akin to) what Paypal did in the early days with their money market accounts?

> There's no reason to change bank unless there's some substantial incentive

Or you bank at Wells Fargo or some other institution whose corrupt practices spill out into public.

here the catch, I believe: 1. it's ensured by SIPC, not FDIC, so it's not as safe. 2. They're going to lower that 3% rate down whatever all the other banks are at (2%) in a couple of years, unless the interest rates catch up to their higher rate, which they are expected to do in about 2 to 3 years: at that time, 3% will be roughly the norm for the highest interest savings accounts.

I remember the days when Citibank would give out 4% interest about a decade ago. now of course, it's about 0%. It's just classic bait and switch.

Cash balances ensured by SIPC are safe to the coverage amount. 100% safe actually.

I’m sure they said that about Cyprus and Iceland too.

As far as I can tell, the coverage amount of 100,000 euros was respected in these cases, probably precisely to avoid doubts like that about the safety of deposits.

The UK and Dutch depositors in the Icelandic banks got bailed out by the UK and Dutch taxpayer.

Iceland's government/deposit insurance did not pull through.

Cyprus wasn't much different either.

https://www.telegraph.co.uk/finance/financialcrisis/11877219...

https://www.telegraph.co.uk/finance/financialcrisis/9965943/...

Your first link doesn't mention the insurance amount at all, the second only talks about deposits beyond the 100,000 euro limit and apparently British customers got an even better deal with the higher limit of £85,000.

If the SPIC fails to cover the cash balances to the coverage limits, the financial world as we know it stopped existing.

This are cash balances, not money market funds or any other funds.

Bloomberg says it's a money market account. https://www.bloomberg.com/opinion/articles/2018-12-13/robinh...

Robinhood's checking page says "Robinhood Checking and Savings is an added feature to existing Robinhood accounts and is not a separate account or a bank account."

I have not dug thought this specific offering but here is how it works in general it works this way:

Account has 3 parts:

1. Marketable securities -- value is NOT insured.

2. Cash on hand -- value IS ensured.

3. Money market fund -- value is NOT insured.

(3) may or may not be offered and if (3) is offered it has to be elected by the account holder. Money cannot flow from (1) to (3) or from (3) to (1) bypassing (2) due to securities regulations -- one cannot pay for one security with another security, a settled cash must be used.

If the APY is on (2) they will get killed by the fatwallet/slickdeals crowd. If the APY is on (3) it is more complicated but debit/check transactions against (3) are very expensive to clear so I don't quite see what the play is.

Apparently the president of the SIPC stated that Robinhood didn't contact the SIPC before making their announcement. The SIPC president Stephen Harbeck is on record saying 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. SIPC does not protect checking and savings accounts since the money has not been deposited for a protected purpose."

He later stated that the SEC would need to take the lead on clarifying the matter though.

I have a one-year emergency fund with Robinhood that is invested in index funds (secondary emergency fund as the primary emergency fund is in cash). I think I'll keep my primary emergency fund in the PNC high yield savings account for now until all that gets worked out.

> I remember the days when Citibank would give out 4% interest about a decade ago. now of course, it's about 0%. It's just classic bait and switch.

That's not a bait in switch, interest rates plummeted globally to the point a lot of people were happy to even get 0%!

> It's just classic bait and switch.

Are you unaware that interest rates today are drastically different than a decade ago?

all the other top savings accounts are currently 2% to 2.2%. i think they are not going to maintain that lead.

The Federal funds rate is currently 2.00-2.25%.

A decade ago, the rate was 1.00%. (And three days later, it was 0.00-0.25%.)

At this time it is not insured. The SIPC openly stated this.

The product is already being renamed as a "money management fund"

The danger for the user is that the $10k or $100k they store there may be ripe for {$urgent FOMO} buy.

So Robinhood wants users to have their cash on hand ready to jump into the market. Will be too tempting to many.

>Why would they expect this account to be used as a high-velocity, low-balance account rather than a park-your-savings account, given the rate?

Think of it like being a health insurance salesman who puts your office at the top of a long flights of stairs. You can have a lower risk pool because the only clients who come to see you are the ones who can climb a bunch of stairs to get there.

In other words, they advertise to a user-base that doesn't have much in the way of savings so they're avoiding people who would keep high balances anyway.

Besides, most people who do have large balances tend to park them in money market funds anyway. They can usually hit between 2% to 3% annually and offer more flexibility in terms of being able to access the money without transferring balances around. Alternatively they'll be putting it in tax-deferred accounts.

If you have enough money coming in that you can accrue a lot of savings, a savings account isn't the most productive place to put it. It should be regarded as more of a rainy day fund or a place to park money that you're saving up for something specific, like a down payment.

I'm a millennial, and the target market for this sort of product.

1. I don't care about physical branches, I've been using online banking from the beginning. 2. I am at a stage in my life where I am slowly paying back all my debts and making just enough to set some cash aside every paycheck.

I don't have enough money to go looking at financial instruments such as money market funds or CD's, because they tend to lock my money up for a certain period of time.

I still need to be liquid. Some place where I can make 3% and have it just sit is fine for me, and allows me to access it in case of an emergency without paying fines or penalties for doing so, and with less hassle than some other financial instruments where it is locked up.

Once I have a buffer built up, and I feel comfortable with that buffer, maybe then I'll start looking at other places to potentially let my money make more money faster with a little higher risk and with less liquidity.

I’m sure a lot of people might start out that way. But if you get free money for parking your cash there, why not use that money to dabble in some trading? Seems like there is little downside for the company, and potential for upside for the consumer. Pretty good acquisition strategy, in my opinion.

Alternatively: If you get free money for parking your cash there, why risk that money by trading?

3% guaranteed earnings is a very good deal without any downside, while the risks involved with trading that money are substantial.

That's higher than index funds returns as of late.

Holding cash had higher returns than index funds over the last 6 months. That's not a high bar when the market is going down. VTI is below where it was 12 months ago.

I bought a decent chunk of VTI @ 133.00 this week, glad I had some roth contributions left

Most people won't think like that though, especially the millennial target customer who has the time to gamble money, rather than necessarily needing to save for retirement. Currently Robinhood takes three days to transfer funds, so reducing that friction, when customers make impulse decisions when they see that the stock is going up, is paramount. Why wait a few days when the money is already there? This is the benefit of vertical integration.

>while the risks involved with trading that money are substantial.

Also, presumably lots of people would rather put their beautiful minds towards things other than being anxious about how their savings are going. There is a lot to be said for just being able to park your money somewhere and not have to worry about it while you go live your life.

Greed.

Their treasury approach is probably very risky.

Usually you want to build a tractor (recurring deposits to a reference rate) at the 7 or 10 year treasury, to ensure that you have a stable supply of available deposits, and a short term rate too to handle "hot money".

You make money on the spread.

I really don't see how they are funding their interest rate.

Margin lending?

No one knows what Robinhood will do, but no bank can promise a perpetual 3% rate. The rate is probably a teaser. Even if it is perpetual, it may be "on the first $10,000, with a minuscule rate on larger sums...something that allows them to advertise 3% but offer much less on larger sums.

Their FAQ states no caps, though it can vary depending on what the fed does with rates.

With the current 2 year treasury being 2.76%, they must making money on fees. I am seriously considering moving my savings from a Capital One money market account that earns 2% to this that earns 3%. That extra percent is decently significant.

You should look into their recent problems. Locking option traders out of their accounts ( potentially millions lost)

They have no customer service and a decently easy collection of horror stories related to their lack of customer service.

Kind of funny but I remember 3% rate being kind of normal for a checking account in the early 90s. Of course inflation and Fed was higher back then too.

What I don't understand is those people who willingly park their money in CDs at under 1% and the banks proudly advertising these rates.

This era of seemingly permanent low(or even negative) rates just somehow seem unnatural.

What happened to banker's 6-3-3 rule? "Lend at 6%, borrow at 3% and go golfing at 3:00PM"

> What happened to banker's 6-3-3 rule? "Lend at 6%, borrow at 3% and go golfing at 3:00PM"

The Bretton Woods agreement ended.

> No one knows what Robinhood will do, but no bank can promise a perpetual 3% rate.

It's not too crazy, rates have gone up a ton without most bank accounts adjusting from being near 0%. The 10-year is currently just under 3% with the whole curve being really flat and lots of online banks offer over 2%. I currently get 2.05% with my Marcus account and Goldman Sachs isn't exactly known for giving things away (and with 3 month t-bills paying 2.41% they certainly aren't giving anything away!).

The catch is soon there will be a maximum balance or activity requirement, or something to that effect, all of which are not contradicted by their PR sheet. It's otherwise utterly unsustainable.

Reply on news.ycombinator.com