SIPC Says “Not So Fast” to Robinhood’s Savings Account Plans
Yesterday, the investment app Robinhood made headlines by announcing a new checking and savings product that would pay users 3% interest on their money while skipping many of the fees that traditional banks charge. As part of that announcement, the company said that account funds up to $250,000 would be insured by the Securities Investor Protection Corporation (SIPC). However the head of that organization now says that Robinhood never spoke to the agency about their plans and that their assertions about insurance may be incorrect.
Speaking to CNBC, SIPC President and CEO Stephen Harbeck said he had concerns about Robinhood’s plans. For example, while Robinhood states that users will not need to invest in order to take advantage of Robinhood Checking & Savings. On the contrary, Harbeck says that SIPC insurance is meant to cover funds that are intended to be used to purchase securities. Thus he says deposits made without the intent of eventually buying securities would not be insured. This among other factors led Harbeck to say in an interview, “Had they called us, I would have told them what I just told you in that I have serious concerns about this. This has gigantic ramifications for the banking industry.” CNBC said neither the Securities and Exchange Commission (SEC) nor Robinhood offered comment on Harbeck’s remarks.
Prior to the SIPC raising their concerns, there were already those questioning Robinhood’s plans to pay 3% interest, not charge fees, and still turn a profit. While some had assumed the company might be adopting an Amazon-esque “growth first, profit later” model, CEO Baiju Bhatt explained to CNBC that his company did have plans to make the upcoming product profitable. He told the network’s Squawk Alley that, since the company is issuing debit cards via Mastercard, they’ll collect interchange revenue. Additionally Bhatt says Robinhood plans to invest customer cash into treasuries and “government-grade assets.” As he explained, “We believe that, over time, we’ll be able to generate yield in excess of what we pay to customers.”
Given that response, it is possible that Robinhood is thinking that funds will be insured since they’ll be investing them one way or another. Of course how that reality balances with the customer perception of this being a new twist on a classic bank account remains to be seen. Moreover seemingly leaving the SIPC out of the loop could give Robinhood — and, in turn, the FinTech industry — a bad look. Ultimately we’ll have to see what becomes of this developing battle and whether Robinhood’s new product proves even more disruptive than initially thought.