If Robinhood had offered this as a normal bank with FDIC insurance I would have been impressed. For now it just seems they're just moving a little bit higher up the risk/reward curve and trying to pretend the risk is the same.
FDIC insures the value of your deposits. SIPC covers the case where your broker or mutual fund cannot keep operating (eg. pay the help)
In a case like that all of your stocks and bonds are still there and have most of their value, but you can't get at them because there is nobody to process the transaction. Somehow the holdings need to be transferred to another brokerage or liquidated, and SIPC is there to make sure the resources exist for that happen.
Circa 1970 there was a crisis on "Wall Street" in the sense that many brokerages failed, see
https://en.wikipedia.org/wiki/Securities_Investor_Protection...
for a backgrounder on why we have the SIPC.
The danger that the FDIC protects us from is even more pernicious because fractional reserve banking is one of the most dangerous things people do. By design the assets and liabilities of a bank are very close to each other, in fact far larger than the equity of the bank. If the depositors want their money out, a bank might not be able to support the cash flow -- which means depositors REALLY want their money out.
The stock market on the other hand is "risky" because stocks can go up and down, but it is not dangerous systemically because if your stocks went down you have to accept that they went down. The bank is legally required to pay you back what you put in and promising to do that 100% of the time is a big promise. If people don't trust banks and banks don't trust each other then you can't cash your paycheck, get money out of the ATM, buy groceries, and then you really have a problem...
As I recall it, the 340,000 people of Iceland had no chance in hell of covering the enormous amounts even if they wanted to.
That's a very inaccurate recalling of history which you can see from reading the intro to the relevant Wikipedia article[1] and a summary of the EFTA Court's decision on the matter[2].
The case centered around a dispute between mainly Britain, The Netherlands and Iceland about how to interpret certain EFTA regulations. Iceland's position ultimately prevailed in court.
1. https://en.wikipedia.org/wiki/Icesave_dispute
2. https://en.wikipedia.org/wiki/EFTA_Surveillance_Authority_v_...
----
When Landsbanki was placed into receivership by the Icelandic Financial Supervisory Authority (FME), 343,306 retail depositors in the UK and Netherlands that held accounts in the "Icesave" branch of Landsbanki lost a total of €6.7bn of savings. Because no immediate repayment was expected by any Icelandic institutions, the Dutch and British national deposit guarantee schemes covered repayment up to the maximum limit for the national deposit guarantees – and the Dutch and British states covered the rest.[1]
The Icelandic state refused to take on this liability on behalf of the guarantee fund. Originally this was because the state lost funding access at credit markets due to the Icelandic financial crisis, but later proposed bilateral loan guarantees for repayment were rejected by Icelandic voters.
----
At the end of the day there were a ton of foreign depositors who felt like these were just normal savings accounts with higher rates, but when the financial crisis came they were in a much more difficult position than people who used domestic banks.
Many of the institutions I had CDs with were dissolved and I was refunded the principal (without interest) by the FDIC. Compared to the losses everyone else was seeing I was more than happy with my 0% "return".
Consumer savings accounts had absolutely nothing to do with the crisis.
Like, on the list of “things that caused the crisis,” they would literally be dead last.
Did you know your parents had savings accounts that delivered 10% interest at one time? Look up historical interest rates in the US. 4% is like average.
1: https://en.wikipedia.org/wiki/Federal_funds_rate#Historical_...
The consumer banking side of the story has almost nothing to do with it
https://investor.vanguard.com/etf/profile/VCSH
It is entirely possible for them to safely promise a 3% account under these conditions. This is not at all like the financial crisis. It's just wrapping an investment grade bond fund in a bank account interface.
Additionally, Robinhood is reportedly investing proceeds in US Treasuries. US Treasuries have a completely different risk profile than corporate investment grade bonds.
Ex: You buy a $100 bond at %3, then the prime rate goes up %1 so the typical market price of bonds of your class are now %4. Now your bond is worth less than $100 if you were to liquidate it.
Big difference.
It is precisely this kind of bundled 'derisked' derivatives which caused the last financial crisis (those were sold as very low risk mortgage debt , these are corporate debt).
The 3% return is compensation for the added risk. The financial markets are pretty efficient for liquid stuff like this.
Banks also provide services that consumers are willing pay for through lower rates on their checking accounts, and need to cover their administrative costs or have some other way of making money with the deposits.
A bond fund like that, even with a relatively short duration of 2.65, is going to have significant price movement in the principal amount due to interest rate risk. (Not counting credit risk etc -- credit spreads could move significantly too in a financial crisis.)
A big rate move coupled with a big jump in credit spreads could easily move the price of the underlying by several percent in a matter of days.
Not so cool when your deposit of $100 can only be cashed out for $97 a few days later.
If you want a guaranteed return you do not buy bonds or stocks. You buy a money market fund like VMMXX. See https://investor.vanguard.com/mutual-funds/profile/performan...
"There is a lot of confusion about what Robinhood’s thing is. Delightfully, it is called “Robinhood Checking & Savings,” apparently because calling it a “checking account” or a “savings account” would come too close to implying that it is a real bank account insured by the Federal Deposit Insurance Corp., while “checking & savings” is not a thing and so does not carry that implication. A magic ampersand!"
How the hell did this product get launched?
A: Are our customers accounts insured?
B: Yes, through SIPC, which is like FDIC for brokerages.
A: Great! Let's create this product.
No more questions were asked.
You just don't launch a financial product of this nature, out of your ass like that. If that was the case then Robinhood customers have legitimate reasons to be concerned about the safety of their funds and securities. (For the record, I'm on of those Robinhood customers).
Of course, maybe that didn't happen, but between the idea that RH would build and announce a new product without running past the proper regulatory authorities, and the idea that the president of SIPC might just be wrong ... well, the latter seems more plausible to me.
Their website says "Robinhood Checking & Savings is launching early 2019."
Which may be the whole point of the offering.
Second, the SIPC boss probably is not in the best position to understand how RH is setting it up. Harbeck seemed unaware that the "cash" in RH accounts was actually going to reside in investments like Treasuries and thus be covered.
These accounts remind me a lot of the accounts offered by Washington Mutual right before there was no longer a Washington Mutual. Except back then, their bold rate offering was only something like 1.5%. A lot of young dumb people are going to lose their shirts on this one.
The only thing that has changed here is Robinhood is explicitly marketing their brokerage account as being able to be used as a savings account without any need to invest in securities.
It’s not black and white on either side. If there ever was a default event, it would surely go to court and it’s not 100% clear who would win. For that reason, I wouldn’t make use of the account.
Downvoters: you are confused. When you move cash to a brokerage account, it's protected by SIPC. It's a loophole, because this protection was not intended to be for permanent cash parking in an account - but there is nothing that can stop that protection from taking effect. SIPC statute is clear, cash in account is protected. You don't have to invest it, you just have to move it there with the intent of at some point maybe investing it, which is impossible to verify.
"“The statute that we administer says that we protect money with a brokerage firm that is used for the purchase of securities,” he added. “On Robinhood’s help page, it says that you don’t need to invest to use Robinhood checking and savings, that statement is wrong. If you deposit money for any other purpose, it is not protected.”
If they disagree it's a brokerage account, and it's certainly not being sold as such, then it seems to me there's alot he can do.
But that aside, here's the point you're missing: Robinhood is marketing this as a product that can be used independently of brokerage purposes. SIPC covers brokerage firms and, yes, cash in such accounts. But the SIPC president is arguing that it's not a brokerage account if it's marketed as an independent product for people with no intention of using it as such.
this sounds like a lot of silicon valley darlings
That sounds extremely profitable, so long as you stay ahead of the law - just like Robin Hood, in fact. But in this case it's not taking money from the rich ...
Such as?
They shouldn't be using Robinhood to buy individual stocks, buy cryptocurrency, or do options trading.
Fidelity Investments pioneered this product, and now it's available from others like Schwab.
But at Fidelity, the cash management account is distinct from the brokerage account. While the brokerage account is insured by the SIPC, cash management funds are swept into FDIC-insured balances at actual banks.
Looks like Robinhood is gonna lose on this one.
Source: https://www.fidelity.com/cash-management/faqs-cash-managemen...
The CMA account has mobile image deposit, free online bill pay, check writing (with free checks), free ACH transfers, free wire transfers, ATM/debit card (with ATM fee reimbursement at any ATM worldwide, no less), etc.
The only “best-in-class” factor that Robinhood has presented is setting the interest at 3%.
The somewhat recent addition of crypto is just depressing. They've integrated it with chat and live announcements of transactions, so you see people's names as they buy $1500 or $2500 worth of crypto as the whole market makes an inverted hockey stick nosedive to zero.
But the most absurd thing was seeing the HN comments yesterday as people were saying they were living up to their name of taking from the rich and giving to the poor. They're doing something worse--tricking non-rich people into thinking they'll get rich, while making a ton of money in the process.
I have been using Ameritrade for a while and was curious about their no fee platform so gave it a quick go. The graphs have no legends associated in the app. The spreads seems not up-to-date with official quotes, etc. I went back to Ameritrade as fast as possible.
They are the "go fast and break things" of finance. There is a good chance that this will not end well.
For me the strangest thing about their business is their zero-fee approach. Yes you can make money by getting interest from uninvested funds + premium subscriptions + trade arbitrage, but if it's such a good business why aren't the incumbents taking similar approaches?
Contrarians would say that incumbents are just to engrained in their past approaches to actually adopt modern strategies, but I had that extremely hard to believe, especially when one of the incumbents, E-Trade, was the pioneer of online trading.
Also, unlike other industries, financial firms are savage. They're not scared to make risky bets and spin-off new businesses and strategies. Their industry is naturally risky, so they have the experience and tenure to make risky bets, without souring stakeholders.
I always give Robinhood the benefit of the doubt, because in my day to day I personally can say that it works great. They definitely nailed the Customer Experience. However that doesn't mean that they have an actual viable long-term business, so I prefer to stay reasonably cautious... Time will tell.
They do, they just charge you extra commissions on top of what they make selling order flow, etc, etc. Commissions make up a miniscule portion of income for brokerages. I think that fees a) keep out the "riffraff" and b) brokerages know that it's a zero-sum game to compete on them.
Asking this question is like asking why Ally and Goldman Sachs can offer 2% APY savings accounts, but Bank of America and Chase can only offer 0.01% APY.
There are similarly low-cost brokerages which offer dangerous products, like $500 intraday futures margin (about 250x leverage), 400:1 leverage on Forex products, or more traditional low-cost stock trades. The difference between $5/trade, $1/trade, and $0/trade isn't that significant in reality.
[0] https://www.forbes.com/sites/melaniehaiken/2014/06/12/more-t...
1) They knew SIPC wouldn't cover it, but decided to lie about it anyway
2) They weren't competent enough to assess the risk that SIPC wouldn't cover it, but decided to launch anyway without contacting the SIPC
Regardless of which is the truth, I wouldn't trust my money with someone who does either. Might as well jump into a tried-and-true pyramid scheme like bitcoin!
It might work, but in this case, the people most likely to get screwed are the customers.
I agree though that Robinhood is a different story with potentially harmful consequences for unsophisticated investors looking for a safe/easy investment.
These companies are not democratizing investment, accommodation, tranportation or whatever they are rent seekers that use a combination of technology, business model and rule breaking to extract a portion of every transaction.
They explicitly position themselves as 3rd party to the transaction. While the rest of us suckers play by the rules or gasp work to change them, they realize a portion of their advantage by just ignoring them.
And for its shareholders, so is a factory dumping heavy metals to the nearby river. And for its customers, so is a slave plantation.
You judge businesses by the treatment of all participants of an economic activity, not just the ones giving and receiving money. Uber and AirBnB are examples of companies that shit on society at large to provide better service to some small fraction of it. In a civilized world, there's no place for this, which is why it saddens me deeply that they're still around.
EDIT: The fact that these crimes "have happened at hotels/in taxis as well" ignores the fact that they are far more likely in an environment where regulations meant to prevent or reduce them are wholesale ignored.
Uber and AirBnB both flouted primarily city-level regulations that are tough to enforce against external players, and where they broke larger rules it was by pushing vulnerability onto their service providers (e.g. drivers who assume Uber handles taxes like they're direct employees). And at least some of the regulations they ignored were so obviously protectionist that "look, we're breaking the law!" could actually form a selling point. (Which let them redirect focus from more popular rules like property hygiene.)
Robinhood is tangling with national financial regulations, which for all their loopholes and weaknesses are made to take on far larger players with a history of bad behavior. Meanwhile, the rules they're breaking are pretty much all directly tied to consumer protection, so it's going to be mighty hard to run an ad campaign to raise sympathy.
It reminds me a bit of Theranos, actually - "fake it till you make it" wasn't novel, but they neglected massive differences like offering an unsustainable service versus signing unfulfillable contracts, or failing random website visitors versus crossing major corporations and the DoD. It's like a clumsy new lobbyist offering a bribe instead of making a campaign contribution and expecting consideration; the dynamics might be similar, but the gap in execution could easily destroy them.
Not sure that leaves a lot of room for speculation - don’t sign up to use Robinhood as a savings account unless you are comfortable doing so without an FDIC level of guaranteed protection.
Robinhood thinks their checking account should fall under the SIPC...so is their bank account not a bank account? What am I missing?
It's kinda smart - but i'm curious how they settle some of the backend with daily transactions moving in and out - if they're actually making bond purchases/sales with each transaction, for each customer each day, or for all customers each day etc.
edit: fwiw I think the entire premise of these new products and 3% paid (way over what treasury bonds pay) is as a loss leader to the gambling that is a lot of the "investing" done by Robinhood users. Must be temping to buy some Tesla options once you have a chequing account in the same app.
edit 2: their 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 they're saying they might market it as a bank account, but it isn't
The question then becomes whether this is a good kind of move-fast-and-break-things a la early Uber breaking into an over-regulated market, or if it's defeating an important protection that consumers need.
Money market accounts have been around a while. Is Robinhood's account different because they are subsidizing it to hit 3% APR?
ffs - they didn’t even do the most basic due diligence on this?
This is not just an indicator that this particular product might be in trouble, this is another order of magnitude kind of incompetence that makes me wonder why anyone would trust this company at all.
Wouldn’t you have to feel like the probability they end up with a major security issue, funding issue, executive behavior issue, etc., are all magnified by this knowledge?
I mean really, this is a staggering thing to read. I don’t think there could be hyperbole in this, it’s just incredible hubris-based incompetence.
[1] https://d2ue93q3u507c2.cloudfront.net/assets/robinhood/legal...
So it is insured, unless they can prove it's not for investing?
Think through this like a court case, where the insured is suing the insurer.
The insured doesn't simply go in front of a jury and state, "SIPC owes me $N. I rest my case."
consumer securities purchases protected by sipc
robinhood bank checking format:
deposit: money -> account -> robinhood backend securities purchased
withdrawal: robinhood backend securities sold -> account -> money
Is this the argument made by robinhood? Perhaps if that is laid out clearly in contract, i.e. robinhood is granted agent status to purchase and sale securities on behalf of consumer
Not exactly confidence-inspiring, but we will see.
It's just VC money being burnt to acquire more market share. The intent isn't to be profitable on the actual services provided, but to grow revenue and profit on an eventual IPO.
As an example, if I'm going to own my car anyway, I'm going to pay the time-based depreciation whether or not I drive Uber. My marginal cost to drive a mile is around 10 cents for power, 2 cents for tires/brakes, and 2-3 cents for miles-based diminution of value. The fact that GSA/IRS allows $0.545/mile doesn't mean that's my actual marginal cost, just that that's a permissible financial rate for profit-seeking business usage. (As one example, the IRS only allows $0.14/mile for charitable deduction driving, which squares pretty well with my marginal cost estimate above.)
Near as I can tell from a few minutes of Googling, Uber pays $1.35/mile and $0.21/minute in Boston, or roughly 10x the marginal cost of driving a mile. That leaves a lot of margin for driving to/from fares, positioning yourself to an in-demand area, disputed rides, Pool differences, etc.
They also offer a checking account that pays 1.2% with zero fees and even waives ATM fees worldwide. These are all FDIC insured. I've been banking with them for about 6 months now and they're pretty awesome, outside of having a rather janky web and mobile app.
https://radiusbank.com/personal/high-yield-savings/
Radius High-Yield Savings is a free savings account with no monthly maintenance fee, no minimum balance requirement after $100.00 to open the account, and is FDIC-insured up to the maximum allowed. Annual Percentage Yield (APY) accurate as of 12/14/2018. Minimum amount to open account is $100.00. Rate tiers are as follows, 0.00% APY applies to balances of $0.01—$9.99, 0.05% APY applies to the entire balance on balances of $10.00—$2,499.99, 1.50% APY applies to the entire balance on balances of $2,500-$24,999.99, and 2.05% APY applies to the entire balance on balances of $25,000 or more. Rates may change after account is opened. Fees may reduce earnings.
$1,000 bonus on $150,000 deposit or more
$200 bonus on $10,000 - $149,999 deposit
Also, Citizens Access at 2.25% is also pretty good.
both of those are FDIC insured.
[0] https://blog.robinhood.com/news/2018/12/13/introducing-robin...
and interest rates are rising
Its the Theranos of finance!
it's now up to 2.4% for a online savings account, that is FDIC insured. i've been using them for 2 years now, and it's been awesome. As far as i know, 2.4% is the highest there is for online accounts. i'm surprised they don't top the list on nerdwallet.com
What I mean is, banks like Ally offer both near-highest interest rates, are well established, and provide a nice experience. Your savings account is bread and butter in your financial life. Using some "janky" bank just to squeeze few dollars probably isn't a good use of your time.
I'm not saying mysavingsdirect.com is "janky"; I really have no idea about them. But I've seen a number of higher interest bank accounts and turned them down because they were from unknown vendors.
As an example, I was pissed at Ally and needed a new vendor. I decided to try Discover Bank, figuring they'd be good with a well established reputation like Discover, and with the same interest rates as Ally. But the experience has been decidedly worse. Slower deposits and transfers, for example.
Also worth noting that usually you shouldn't be carrying a lot in savings anyway. Excess cash should be sitting in investments and doing work. So savings accounts will only be carrying emergency funds et al. If you've got, say, $12k in your account, an extra 0.4% is only going to give you a few extra bucks a year.
Is a few extra bucks worth working with a lesser bank?
Or, to the focus of the original article, is a few extra bucks worth working with an uninsured bank?
I advise extreme caution when it comes to savings accounts, which are explicitly for "safe" money in a health financial portfolio.
Slow deposits and transfers are not a problem at all. You only need to transfer in or out maybe a few times per year at the very most.
i'm not sure what you mean with "janky"
mysavingsdirect has for the last 2 or 3 years shown they're commited to staying at the highest rates.
>> “I disagree with the statement that these funds are protected by SIPC,” Stephen Harbeck, president and chief executive officer of SIPC
As a result, I will not be signing up for Robinhood, that's for sure. I get the sense, It's not the place to park your money, if you're just trying to save up without investing.
we protect (money with a brokerage firm) that is used for the purchase of securities
or
we protect money with a (brokerage firm that is used for the purchase of securities)
Unfortunately, due to the nature of law, there's no way to get an answer on this until it goes to the courts which will only happen if/when there's a problem.
The only other story I can find on this quote right now is on CNBC. It's a little better. https://www.cnbc.com/2018/12/14/sipc-chief-raises-concerns-t...
NOTE: I do think these are important points to report, and important to understand if you are considering using the service. I will watch the development of the Robinhood checking with an eyebrow raised. I just really hate poor quality writing from 'top' news outlets. We should demand better.
What's "tech" about Uber or AirBnb?