INSUBCONTINENT EXCLUSIVE:
Robinhood’s new high-interest, zero-fee checking and savings feature seems to be too good to be true
Users’ money may not be fully protected
The CEO of the Securities Investor Protection Corporation, a nonprofit membership corporation that insures stock brokerages, tells
TechCrunch its insurance would not apply to checking and savings accounts the way Robinhood claims
“Robinhood would be buying securities for its account and sharing a portion of the proceeds with their customers, and that’s not what we
cover,” says SIPC CEO Stephen Harbeck
“I’ve never seen a single document on this
I haven’t been consulted on this.”That info directly conflicts with comments from Robinhood’s comms team, which told me yesterday
users would be protected because the SIPC insures brokerages and the checking/savings feature is offered via Robinhood’s brokerage that is
a member of the SIPC.If Robinhood checking and savings is indeed ineligible for insurance coverage from the SIPC, and since it doesn’t
qualify for FDIC protection like a standard bank, users’ funds could be at risk
Robinhood co-CEO Baiju Bhatt told me that “Robinhood invests users’ checking and savings money into government-grade assets like U.S
treasuries and we collect yield from those assets and pay that back to customers in the form of 3 percent interest.” But Harbeck tells me
that means users would effectively be loaning Robinhood their money, and the SIPC doesn’t cover loans
If a market downturn caused the values of those securities to decline and Robinhood couldn’t cover the losses, the SIPC wouldn’t
necessarily help users get their money back. Robinhood’s team insisted yesterday that customers would not lose their money in the event
that the treasuries in which it invests decline, and that only what users gamble on the stock market would be unprotected, as is standard
But now it appears that because Robinhood is misusing its brokerage classification to operate checking and savings accounts where it says
users don’t have to invest in stocks and other securities, SIPC insurance wouldn’t apply
“I have an issue with some of the things on their website about whether these checking and savings accounts would be protected
I referred the issue to the SEC,” Harbeck tells me
TechCrunch got in touch with the SEC, but it declined to comment.Robinhood planned to start shipping its Mastercard debit cards to customers
on December 18th with users being added off the waitlist in January
That might need to be delayed due to the insurance problem
We’ve repeatedly asked Bhatt and Robinhood’s team for a formal statement and clarification this morning, but have not heard
back.Robinhood touted how its checking and savings features have no minimum account balance, overdraft fees, foreign transaction fees or
It also has 75,000 free-to-use ATMs in its network, which Bhatt claims is more than the top five U.S
And its 3 percent interest rate users earn is much higher than the 0.09 percent average interest rate for traditional savings, and beats
most name-brand banks outside of some credit unions.But for those perks, users must sacrifice brick-and-mortar bank branches that can help
them with troubles, and instead rely on a 24/7 live chat customer support feature from Robinhood
The debit card has Mastercard’s zero-liability protection against fraud, and Robinhood partners with Sutton Bank to issue the card
But it’s unclear how the checking and savings accounts would be protected against other types of attacks or scams.Robinhood was likely
hoping to build a larger user base on top of its existing 6 million accounts by leveraging software scalability to provide such competitive
It planned to be profitable from its margin on the interest from investing users’ money and a revenue-sharing agreement with Mastercard on
interchange fees charged to merchants when you swipe your card
But long term, Robinhood may use checking and savings as a wedge into the larger financial services market from which it can launch more
lucrative products like loans.But that could fall apart if users are scared to move their checking and savings money to Robinhood
Startups can suddenly fold or make too risky of decisions while chasing growth
Robinhood’s valuation went from $1.3 billion last year to $5.6 billion when it raised $363 million this year
That puts intense pressure on the company to grow to justify that massive valuation
In its rush to break into banking, it may have cut corners on becoming properly insured.[DIsclosure: The author of this article knows
Robinhood co-founders Baiju Bhatt and Vlad Tenev from college 10 years ago.]
