3%?! But how? Robinhood’s 3% interest rate on checking and savings accounts is an astounding 30 times higher than the national average, according to a recent CNBC article.

Any rational investor’s first reaction to this news should be, ‘This is far too good to be true. What’s the catch? And how do they do it?’  Despite the questions, Robinhood Co-Founder and Co-CEO Baiju Bhatt asserts that the announced 3% rate is “not a teaser.”

In a CNBC interview Bhatt stated that Robinhood will be able to sustain this rate through interchange revenue via debit cards offered through its partnership with Master Card.  The company will also invest customer cash in Treasuries and investment grade assets.

Robinhood’s digital structure also allows it to operate at a fraction of the cost of traditional banks. In fact, the company is currently able to serve about 6 million brokerage accounts with no substantial brick and mortar overhead and a skeleton staff of about 300 employees.

The scalability and success of Robinhood’s free online stock-trading model is self-evident as the company’s valuation has grown to an estimated $5.6 billion. If the company can pull off its next plan, it may become one of the largest and fastest growing financial services company in history.

Regulatory hurdles ahead. Market Reporter Kate Rooney of CNBC reported that the SIPC President and CEO Stephen Harbeck was surprised as anyone to learn of Robinhood’s recent announcement. Robinhood, which is insured by the SIPC, did not notify key regulators before unveiling its plan. In a subsequent blog post, Robinhood founders admitted that the announcement, “may have caused some confusion.”

The press release raised serious concerns from Harbeck and other regulatory leaders regarding whether the program could adequately protect investor money. Robinhood clients are required to sign up for a brokerage account in order gain access to a checking and savings account, and Harbeck is concerned that among other issues some of these accounts may not be covered in the event of the broker’s failure.   He has since taken his concerns to the SEC, the governing body that oversees the SIPC.

Former Rep. Barney Frank, a major contributor to post-crisis financial reform, noted that fintech institutions don’t always come under the same regulatory scrutiny as traditional banks. The former Congressman expressed his apprehension stating, “banks are now having to compete with someone who doesn’t have those obligations.”

According to MarketWatch, Robinhood may already be feeling the regulatory pressure.  The company removed its signup feature from the app on December 31^st.  More than 850,000 people have signed up for the still dormant accounts.  Robinhood website says it is still committed to the new accounts, but is making changes to its cash management program.

Robinhood has done it before. Can it do it again? When Robinhood first came onto the scene five years ago, many financial industry leaders dismissed the fintech nerds believing investors would never trust a website over an established financial institution. So far, the traditional banks have been wrong.

Perhaps traditional banks lost people’s trust during the financial crisis, or maybe people became open to Robinhood’s digital approach as technology has seeped into every other aspect of our lives.

Whatever the reason, Robinhood has found a sweet spot as its adoption rates have since increased exponentially. In 2018, the number of customers has jumped from 5 million to 6 million.

In August 2018, J.P. Morgan Chase inadvertently acknowledged Robinhood’s success by releasing their own free stock-trading app, which sent TD Ameritrade and other public broker shares down for that day.

With the new plan to provide 3% no-fee checking and savings accounts, Robinhood seems poised to deliver another revolution to the financial services industry.

Sources:

“Robinhood, the start-up upending stock trading, goes after banks with 3% checking and savings accounts” Kate Rooney, CNBC, Dec. 14, 2018

“Robinhood to re-launch, rebrand its savings account plan after widespread criticism” Kate Rooney and Javier E. David, CNBC, Dec. 15, 2018

“What fintech can learn from Robinhood’s ‘epic fail’ of launching checking accounts” Kate Rooney, CNBC, Dec. 17, 2018

“Robinhood Blogpost”, Baiju Bhatt and Vlad Tenev Co-Founders and Co-CEOs, Robinhood, Dec. 14, 2018

“Robinhood quietly stops users from signing up for cash accounts amid scrutiny from regulators” Jacob Passy, MarketWatch, Jan. 2 2019