The Epic Rise, And Fast Fall, Of Robinhood (3% “Checking and Savings”)

Today I come to tell you the epic tale of Robinhood, who launched a product that seemed too good to be true – and it was.

On Thursday, to much fanfare, the venture capital-backed company called Robinhood launched a brand-new, innovative “checking and savings” account paying 3% interest.

They assured customers not only did they have innovative, yet safe, ways to pay the three percent rate – but also that the accounts were protected by SIPC (the Securities Investor Protection Corporation) insurance.

“Read: You’re Covered” they stated.

Apparently, this was all news to SIPC. On Friday, Stephen P. Harbeck, president & CEO of SIPC, confirmed that no, that’s not quite how it works. There was a big media blowback, retractions from the founders, and scrambling to start updating their website immediately.

This is the tale of the epic rise, and fast fall, of the “3% Checking and Savings Account” – and why it matters.

Setting The Stage – What Is Robinhood?

First, let me spend a few minutes telling you about the company Robinhood.

Robinhood was founded as a trading platform back in 2013, by Baiju Bhaat and Vlad Tenev – both now in their early 30’s. They are both sons of immigrants, met at Stanford, and decided to found Robinhood after seeing the Occupy Wall Street movement up close.

Instead of running a hedge fund to help the rich get richer like they were originally going to, they would run a platform that allowed users to buy stocks for free.

Robinhood’s founders are now Silicon Valley billionaires according to the company valuation at their last round of venture capital funding. The company is worth about $5.6 billion, and the founders each retain one third ownership. They’re looking to launch an IPO, or initial public offering, at some point in the future. 

If you can trade for free, how do they make money? According to Silicon Angle:

“One of the keys to this explosive growth is the service’s accessibility. Robinhood doesn’t charge any brokerage fees and instead generates revenue from interest on users’ uninvested funds, plus so-called margin loans that it provides for trades. The startup’s app enables users to trade in stocks, options and other securities, as well as various cryptocurrencies.”

And on Thursday, to great fanfare, the company added “checking and savings” accounts to their offerings.

Thursday, December 13th – The Launch

Today was the day. It was time to go on a press tour to launch the company’s new checking and savings accounts paying 3% interest. This was the culmination of over two years of product development. I’m sure the team was excited to finally launch this to the world.

This would be a revolutionary, disruptive offering, in a world where the average savings account pays 0.09%, and the average interest-bearing checking account pays 0.06% (according to the December 10th FDIC data). 

Their announcement, since deleted, can be found at this link from the Wayback Machine.

The rate would surpass even that of the highest of the high online banks, paying just over 2% interest. The last time the USA has seen rates of 3% and higher on savings accounts was before the Great Recession – more than ten years ago. Many young adults have never in their adult lives seen rates so high. And retirees are tired of earning almost nothing on the money they must keep safe and risk-free. 

In other words, this is a market ripe for disruption. And an interest rate starting with the number “three” was just the ticket.

The news spread through the personal finance community like wildfire. THREE PERCENT interest on savings and checking accounts? Folks rushed to sign up for a waitlist that, as of early Saturday morning, held nearly 700,000 people.

Apparently there are almost 700k people ahead of me in line

Oh well!

People were naturally suspicious of an account paying such a high rate.

One key question people started asking – was the account FDIC insured? After all, those of us in our mid-late thirties and above remember a time when FDIC insurance was very much needed. When the Great Recession of 2008/2009 hit us, banks closed. The FDIC increased their coverage from $100k to $250k per account type/person/bank to help increase faith in the stability of our financial system. They closed 465 failed banks from 2008 to 2012, when they had only closed 10 banks in the five years before that. 

FDIC is backed by “the full faith and credit of the US Government”. It’s essentially as safe as we can get. If FDIC fails, we all have bigger problems to worry about. 

Robinhood assured folks in their Help Center, linked directly from their new product, that the account may not be FDIC insured, but it was SIPC insured. Read: You’re Covered.

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News articles echoed the “SIPC Insured” statement provided by Robinhood. And most folks I saw on Twitter, Instagram, and Facebook figured they must essentially be the same thing. After all, they sound similar, right? It’s just one covers banks, and the other covers cash and securities. 

Spoiler: They are not the same. Not even close.

So folks kept spreading the word about these AMAZING accounts, sharing their links in a bid to bump themselves up the waitlist, and shrugging at the difference in insurance. Some of us tried to spread a warning that FDIC and SIPC insurance are different things, work differently, and you should do your research.

But we were wet blankets on the exciting news of three percent interest.

Today is the second time I’ve seen companies recently advertise “savings accounts” that are not savings accounts

SIPC and FDIC insurance are two different things.

If it’s not a real savings account, there’s a risk of “breaking the buck”

Please, please do your research guys. pic.twitter.com/gv0dD8QE2H

— Liz @ Chief Mom Officer (@LizOfficer) December 13, 2018

On top of those reached through the media blitz, Robinhoods millions of current customers received exciting e-mails about their new “checking and savings” account options. It was prominently displayed on their website, and their app. Big thanks to my Twitter friend DIY Money Stuff for sharing both the offer and the original sign-up email with me.

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The other question on peoples minds was, of course, how on earth could Robinhood be paying 3% interest when no bank, or money market fund, could go that high? It’s simple, the founders explained. 

Although some folks were still skeptical, most were excited. Social media was abuzz, with people sharing their links. People were posting on their Instagram stories that the accounts were “better than Ally bank!” and comparing it directly to other savings account offerings. 

The irrational exuberance was not to last long, however. You see, Robinhood had forgotten one of the key rules those of us who live and breathe in highly regulated industries know well.

NEVER SURPRISE YOUR REGULATOR.

Or, for that matter, your insurer.

Friday, December 14th

Early on Friday, Julie VerHage got on the phone with SIPC to ask them about this great new account option.

Just got off the phone with the head of the SIPC and he says Robinhood never contacted him and he has serious concerns about this new product. Story coming soon.

— Julie VerHage-Greenberg (@julieverhage) December 14, 2018

Later that day, I got a Facebook notification that my friend Robert (The College Investor) had posted something in the Choose FI Facebook group. Always interested to see what my friends are up to, I clicked over. And then I saw he had shared a link to this USA Today article. I then shared it over in the Women’s Personal Finance Facebook group, as well as on Twitter. 

The news was simple, yet shocking after what we saw the prior day.

Hmmm-saw @CollegeInvestin post this interesting article in the @ChooseFi group https://t.co/MdUhl8Up2f

— Liz @ Chief Mom Officer (@LizOfficer) December 14, 2018

A scramble had begun inside the various news agencies, who had yesterday helped proclaim the news of this fabulous new account. Not only did they start updating their prior articles, but they also issued new ones to help spread the news. Yahoo Finance proclaimed the launch a “disaster”.  Forbes stated that SIPC has “serious concerns”. And Bloomberg shared the same thing. 

Apparently, SIPC found out about this new type of account at the same time the rest of the world was. From the Bloomberg article:

” ‘I disagree with the statement that these funds are protected by SIPC,” Stephen Harbeck, president and chief executive officer of SIPC, said in an interview Friday. “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.’

“Harbeck said that he first heard about Robinhood’s product Thursday afternoon and called the Securities and Exchange Commission to see if the government regulator agreed with his view that these funds will not be protected.”

Robinhood, while not returning calls for comment, looks to have been scrambling around behind the scenes to make some serious changes.

At some point between Friday afternoon and early Saturday morning, all mentions of their “checking and savings” accounts had vanished from their website. Instead, you can sign up on their waitlist for a “cash management” account. There are no details on what this cash management account is, what it does, or what interest rate it pays. Likely, that will come later.

Note – as of the morning of December 15th, their app still had prominent displays of the “checking and savings” account. Those already on the waitlist had not received communications about the change. I fully expect that to change shortly.

Instead, what you can see is a blog post that replaced their original one (which was deleted). The letter is brief, and starts off like this:

“We’re excited and humbled by the response to yesterday’s announcement of Robinhood’s cash management program launching in 2019. However, we realize the announcement may have caused some confusion.

As a licensed broker-dealer, we’re highly regulated and take clear communication very seriously. We plan to work closely with regulators as we prepare to launch our cash management program, and we’re revamping our marketing materials, including the name.”

I would like to take note of two key items here:

• There is no mention of a “checking and savings” account here. Instead, they refer to it as a “cash management” account. Words have meaning, after all. 
• The reference to being a licensed broker-dealer, their regulation, and the need for clear communication makes me suspect these changes were a result of some…pointed conversations with the SEC (who is also not commenting as of this writing)

Why It Matters

OK, so what’s the big deal? As long as the account still pays 3%, who cares?

I care. Here’s why: 

• Insurance – and risk in general – is a huge factor in deciding where to put money. You don’t keep money in a savings account because you’re looking to make an amazing return. If you want more return, you take more risk – including the risk of losses. If you want security, you want real security. 
• Those that need the most security tend to be the most vulnerable. Retirees on fixed incomes are raring to get higher risk-free interest rates. Announcing a high-rate, totally secure product 
• Many of us are burned from 2008. We remember when FDIC stepped in to cover the failed banks – and did it well, and quickly, without interruption. We remember having money market funds and hearing the news that one had “broke the buck”, leading to massive fund redemptions everywhere. They only stopped when the government stepped in to guarantee the funds. Bottom line: security matters
• SIPC and FDIC are very, very different. People often have never heard of SIPC, and positioning it as very similar to FDIC causes confusion.
• Design and wording matter – a lot. I know from experience, it’s very hard to strike a balance between “easy to understand” and “totally accurate” when it comes to complicated financial products. But financial institutions typically have teams of designers, copywriters, legal, and compliance working together on that problem. Even at a fintech company, those roles are essential.
• The cat can’t be put back in the bag. There was a huge, planned media blitz about the launch of the accounts. And then a much quieter backtracking. Hopefully, in the coming week, we’ll see more changes – like removing the language from their app, e-mailing their millions of customers, and getting corrections out into the media. Oh, and contacting the 700k people on that waitlist.
• You don’t play fast and loose with regulation. As I mentioned above, never surprise your regulator. If you have an idea for an “innovative financial product”, and you look around to see no one else does the same thing – maybe run it by your regulator first. Oh, and probably your insurer before you proclaim proudly how protected the account will be.

Bottom line – don’t play fast and loose with peoples money.

Where Will We End Up?

Hopefully, the tale will end happily.

Robinhood will have learned valuable lessons, and work with SIPC and the SEC to structure a product similar to the one they originally envisioned. Other fintech companies will take note, and better run new products by their regulators first.

Robinhood will look into the root cause of how the product got all the way to launch – two years in the making – without red flags going up. They’ll then make changes to their process so there won’t be a repeat.

Customers will be notified of the change, and incorrect information will be taken down. Once the product is reconfigured and launched, they will still receive a competitive, and truly safe, rate. 

That’s the happiest ending I can envision, anyway.

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