Robinhood gives the banking business a new opportunity.
Ten months after the failed start of a checking and savings account, the free stock trading start-up announced a cash management account with an interest rate of 2.05%. According to Bankrate.com, the APY is more than twenty times higher than the national average for savings accounts.
In December, Robinhood announced that it would offer toll-free check and savings accounts with a 3% interest rate in addition to its brokerage accounts. The movement was seen as a shot over the bow of traditional banks. However, the product was quickly pushed back by the regulators who questioned the promising SIPC insurance. This insurance is for brokerage accounts and not for savings products. A day later, Robinhood said they would rename and rename the product after the "confusion".
"Last year, we pressed the reset button and started building it from scratch," CEO Baiju Bhatt told CNBC in a telephone interview. "We've spent a lot of time and energy to grow our business, and have an all-star cast of employees with financial services and background on risk compliance."
Last year, Robinhood hired Amazon veteran Jason Warnick as its employee Chief Financial Officer and Gretchen Howard, former partner of Alphabet's Growth Equity arm, Capital G, as Chief Operating Officer. On Monday, the company announced that former SEC Representative Dan Gallagher will join Robinhood's Board of Directors. The company also brought a V.P. of risk and compliance, who worked with other "24/7" counterparties, including program banks and regulators, "to ensure that this program is thoroughly reviewed," said V.P. Josh Elman.
Insured up to $ 1
Bhatt, founder of Robinhood with co-CEO Vlad Tenev in 2013, said this was a completely new product, and that there was "no overlap" between cash and cash equivalents. Management and the control and savings product. For example, those who have enrolled on the waiting list in December will have to sign up for the new accounts again.
These cash management accounts have similar features to savings accounts. They "sweep" customer money from a brokerage account to various bank accounts insured by the FDIC. As these companies deposit money through multiple banks, the insurance may be higher than the standard $ 250,000 offered per bank. Robinhood insures up to $ 1.25 million in accounts.
Robinhood's partners include Goldman Sachs, HSBC Bank, Wells Fargo Bank, Citibank, Bank of Baroda and the US Bank. The 2.05% interest rate is significantly higher than the national average, but could still "fluctuate with market conditions," according to Josh Elman, Robinhood's VP of Product.
The company was rated $ 7.6 billion after its closing, the most recent round of financing in late July. The high yield product was the first of its kind for a fintech company when it was first introduced in December. Last year, SoFi, Betterment, Wealthfront and CreditKarma introduced similar FDIC-insured high-yield accounts.
Most of these fintech companies do not have access to their own FDIC insurance, which protects their clients' accounts in the event of a financial crisis. Collaboration with banks is becoming increasingly popular with start-ups that offer financial services but are not regulated as banks.
Ohio-based Sutton Bank will issue the Mastercard debit card, which comes with the Robinhood accounts. and the company announced that it will provide access to 75,000 free ATMs. Robinhood said it will not charge foreign transaction or maintenance fees and has no account minima. Instead, the exchange fees incurred when purchasing debit cards are made into money and some fees are collected from the partner banks.
"This diversifies our revenue streams," Bhatt said, adding that this is one way to expand the existing 6 million customer base.
Diversification pressures are growing after Charles Schwab, TD Ameritrade and E-Trade announced last week that they would no longer charge any individual stock, ETFs and options. Analysts said last week that the move of incumbents has the potential to drive price-conscious customers into Robinhood looking for low cost. Others said this puts pressure on Robinhood to rely on new banking products to add value beyond pure stock trading. Devin Ryan told CNBC. "Start-ups must continue to find ways to differentiate their business model from pure free trade."
In response to announcements by established brokerage firms, Bhatt said Robinhood "has always portrayed outsiders in this industry."  "When we think about developing financial products that are more accessible and inclusive, this is not a headline for us – this is no trick – it is absolutely central and vital to the existence of our company," he said. "We believe that as we continue to focus on our customers, we will continue to develop great products that they love, and our business will continue to grow."