Robinhood rocks banking with 3-percent savings interest rate

Corrections & Clarifications: This story is revised to reflect that cash deposits in Robinhood’s checking and savings products are not insured by the Securities Investor Protection Corporation, or SIPC. 

The competition for checking and savings just got hotter.

Fintech investing platform Robinhood on Thursday introduced its own no-fee checking and savings products that earns 3 percent. That is three-quarters of a point higher than the next-best available rate and thousands of times higher than what the big banks provide.

Robinhood charges no monthly fees, no overdraft fees and no foreign transaction fees, and requires no minimum balance. You get a debit card and free access to 75,000 ATMs, many of which are located in such retailers as Target, Walgreens and 7-Eleven.

The company wants to offer an alternative to the high-fee, low-yield savings accounts offered by the traditional banking giants.

“We believe you should earn more on your money, and shouldn’t be charged fees to access it,” wrote co-founders Baiju Bhatt and and Vlad Tenev.

T

he checking and savings products are not technically bank accounts. They are separate balances held within a Robinhood brokerage account. Your checking and savings funds are not FDIC-insured.

The company said the funds would be protected by insurance from the Securities Investor Protection Corporation, but on Friday the SIPC — which oversees the liquidation of broker-dealers if they go bankrupt or close due to financial trouble — said the protection it offered Robinhood customers was narrower in scope.

“SIPC protects cash that is deposited with a brokerage firm for one limited purpose … the purpose of purchasing securities,” according to a statement from SIPC President and CEO Stephen Harbeck. “Cash deposited for other reasons would not be protected. SIPC does not protect checking and savings accounts since the money has not been deposited for a protected purpose.”

Robinhood did not contact the SIPC before publicly announcing its checking and savings products, Harbeck said Friday. 

Robinhood has not responded to USA TODAY’s requests for comment or clarification. 

The company, which made a name for itself by offering commission-free investing, is signing up customers on its website, with its debit cards becoming active in January. You must have or sign up for a brokerage account to take advantage of the checking and savings feature.

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Why checking and savings?

Robinhood’s move comes as other online banks and fintech startups try to use the minuscule deposit rates offered by bigger banks against them to gain new customers.

While the Federal Reserve has steadily increased the fed funds rate that helps set rates on consumer financial products, the rate of return on savings accounts at larger banks has stayed insignificant. The national savings rate on deposits under $100,000 is 0.09 percent, per the FDIC. It’s even lower – 0.06 percent – on interest checking accounts.

In September, startup company Empower introduced its mobile bank services that included a fee-free checking account with rewards, and a savings account that earned 2 percent. That same month, Simple introduced a 2.02-percent rate on accounts with at least $2,000.

Before the Robinhood announcement, BBVA Compass and CIT Bank previously offered the best rates on savings accounts at 2.25 percent, according to Bankrate.

Will the big banks respond?

Will these rates from startups be enough to create a sea-change in the banking industry?

The consulting firm cg42 forecasts that the 10 biggest banks will lose $159 billion in deposits over the next year to smaller firms.

Still, three in five Americans have no clue what their savings accounts earn, while 56 percent opened their accounts without checking out other options, according to an October survey from Marcus – the banking arm of Goldman Sachs, which also offers higher rates.

And while Chase and Wells have both revamped their mobile banking presence to appeal to younger customers, their savings rates and those at their counterparts remain small, except, in some cases, for those customers with huge account balances.