Robinhood’s 3% Interest Checking Is Just a Money-Market Fund

(Bloomberg Opinion) -- Robinhood Financial LLC’s grand plan to disrupt the traditional bank account with a checking-and-savings offering isn’t quite as innovative as it might seem. It’s effectively a classic money-market fund with a few additional bells and whistles.

The startup, which got off the ground as a no-fee stock trading app, began to roll out its “Robinhood Checking & Savings” on Thursday. Its website trumpets the plans as “fee-free and give 3 percent on every dollar.” That sounds great, considering that other high-earning online savings accounts from Barclays Plc and Marcus, the consumer arm of Goldman Sachs Group Inc., have interest rates of about 2 percent. As Bloomberg News’s Julie Verhage reported, though, “There are some key differences in how the product was created — including how it’s insured.” First and foremost, the fine print on its website states that the new offering “is not a separate account or a bank account.”

Indeed, its money-making strategy is investing in U.S. Treasury bills and other low-risk, short-term debt. As a reminder, the rate on three-month bills keeps climbing as the Federal Reserve tightens monetary policy. It reached 2.425 percent this week, the highest since January 2008 and up from about zero percent just three years ago. The U.S. 12-month London Interbank Offered Rate rose above 3 percent in October for the first time since the financial crisis. As I’ve written before, cash is king in the current market because it actually pays something decent.

Robinhood’s 3% Interest Checking Is Just a Money-Market Fund

Because Robinhood is investing in short-term securities, it will be backed by the Securities Investor Protection Corp., not the Federal Deposit Insurance Corp. On its website, the FDIC states that it “covers the traditional types of bank deposit accounts — including checking and savings accounts.” SIPC, by contrast, notes that “money market mutual funds, often thought of as cash, are protected as securities.” In most cases, the distinction won’t mean much because Treasury bills are the closest thing to a risk-free asset and are unlikely to decline sharply in value, which SIPC doesn’t protect against. Plus, few brokerage firms fail.

Still, checking and savings accounts are supposed to be the safest places for someone’s money. The U.S. economy will inevitably slow at some point and the Fed will cut interest rates. At that point, Robinhood will have two choices: Lower the 3 percent rate on its checking-and-savings product, or invest in riskier securities to maintain above-market interest. Verhage posed that question to the company, to which it said in an email that it would take the first path: “Customers would get an email notification that clearly states the 3 percent interest rate is changing.”

That’s the safe answer and the right one. At the same time, Robinhood is hoping to turn a profit at least in part by investing customers’ deposits, which can lead to reaching for yield. That’s why short-term funds from Pacific Investment Management Co. and Vanguard Group Inc. have General Electric Co. preferred stock as one of their largest holdings.  Again, there’s no indication that Robinhood would make such an investment with money from the checking-and-savings plan, but it’s something any user would have to monitor closely. 

For now, Robinhood’s service will be an added feature for its approximately 6 million customers. And it does have some perks that many money-market funds don’t, like a debit card to access more than 75,000 ATMs with no fee, and the ability to send and receive checks. There’s no minimum monthly balance, which could make it a potentially attractive option for young people who are just beginning to save, or those who have been using the app and want to get out of the volatile equity markets. Then again, there’s no minimum to invest in the $138 billion Fidelity Government Cash Reserves fund, either, though its yield is slightly less than 2 percent. It’s celebrating its 40th birthday in May.

Baiju Bhatt, who co-founded Robinhood with Vlad Tenev, said, “The idea of reinventing checking and savings is something Vlad and I have been talking about since probably 2010.” Ultimately, though, this move is less a game-changer and more a clever rebranding of a foundation of the financial markets. 

According to holdings data compiled by Bloomberg, which is as of Sept. 30. The figures may have since changed.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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