Robinhood (Not a) Checking Account 3% APY: SIPC Insurance Confusion

Update: Robinhood basically pulled the plug on the entire thing.

I don’t know who does PR for Robinhood, but they are good. I don’t ever recall this many media articles in a single day for a pseudo-checking account. Techcrunch, Barron’s, Business Insider, Bloomberg, USA Today, CNBC, Marketwatch… All coming the day after they deactivated some user accounts without notice and halted all options trading mid-day.

Robinhood announced a new Checking & Savings Cash Management account to expand their existing (required) brokerage account product. Robinhood is not a bank, and this account is not FDIC-insured. They did partner with Sutton Bank to provide a debit card, but deposits are not held at Sutton Bank. After reading through all their materials, here’s what is included:

• 3% APY, subject to change at any time.
• No minimum balance, no monthly fee, no overdrafts allowed.
• ATM/Debit card with free access at 75,000+ ATMs (Allpoint and MoneyPass ATM networks). Only 4,000 of those ATMs accept deposits, and you are limited to depositing up to $1,000 per day and $5,000 per month.
• “Pay bills, send and receive checks, transfer money, and set up direct deposit–all from the Robinhood app.”
• “This process will not affect your credit score.” (I assume this means no credit check.)
• No physical checkbooks. You request a check via app and they will send a physical check via USPS First Class mail the next business day. Limited to $2,500 per day and $10,000 total per month.
• Mobile check deposit (take pictures on your smartphone) is limited to $2,500 per day and $10,000 total per month.

What does SIPC insurance mean? As with any other US brokerage account, Robinhood has SIPC insurance. This covers up to $500,000 by the SIPC in cash and securities, of which $250,000 can be in cash. SIPC does not cover changes in value to securities. However, you may be surprised to know that per the SIPC website, the following are considered securities:

• Money market mutual funds.
• Treasury bills and Treasury bonds.
• Certificates of deposit.

Is your money earning 3% APY at Robinhood cash? securities? Robinhood is being rather vague about this. They say “we only use the safest assets, such as US treasuries”. Well, short-term US Treasuries are securities and they don’t even earn 3%. They call it a “cash management account”, but many cash management accounts have an FDIC-insured sweep (i.e. Fidelity CMA). Are they keeping it as pure “cash” and just crediting you money on the side somehow? Are they just creating another money market mutual fund? Money market mutual funds are securities, and tightly regulated ones, especially after 2008 when the Reserve Primary Fund did “break the buck”. Is the SIPC going to let them offer a loss-leader money market fund that pays out more interest than it earns?

(Update: The SIPC has some concerns.)

(Update 2: Looks like Robinhood got a phone call and they have to change the name from “Checking & Savings”. Seems like they will still try to work this in as a cash management account.)

In my opinion, if this is just a hyped-up money market mutual fund, the worst case scenario is that start-up Robinhood runs out of venture capital giving away free trades and crazy interest and both the brokerage fails and the money market fund has issues. This means you may not have access to your money for a while. The Reserve fund mentioned above gave back 99 cents on the dollar, but it took over a year (!) for all the money to be distributed. No interest was paid during that lost time. Following that history, you will probably get most of your cash back eventually (up to the limits) since money market mutual funds must only hold relatively safe assets. Then there is the hassle from losing potentially your primary checking account and all the bill payments, direct deposits, etc.

In contrast, I feel that the FDIC has a more streamlined process to handle bank failures. Several banks fail every year. As long as you are within the limits, you’ll get every last penny back. Nearly all of the time, another bank will take over the deposits immediately and your transactions will keep posting as usual.

I see a lot of internet comments that are either “OMG I’m moving all my money here!” or “OMG you’d be stupid to keep any money here!”. I’m in the middle. I am signing up on the waitlist (that’s my referral link so I move up the waitlist) since it’s free and will read through the application fine print when the dust settles. Right now, Robinhood is just in hype mode. By the time they actually start accepting money, 3% APY might not be all that special.

In any case, I don’t plan to move all of my money or my daily transactions over there. I just don’t trust them enough as a young start-up with barebones customer service that discourages phone calls. With all of the various deposit and withdrawal limits, I would definitely consider maintaining a full-service checking account somewhere else.

If you like how this sounds but don’t have a Robinhood brokerage account yet, you should get your free share of stock first since you need that opened first anyway. WeBull also offers new users free trades and a free share of stock.