More financial technology startups are wading into a crowded, stodgy business: checking accounts. Last spring, personal finance app Acorns and lending startup SoFi announced new debit cards. “Neobank” Chime has been offering free online checking accounts since 2014, and it has 2.3 million users today. Now Robinhood is crashing the party, offering 3% interest on both checking and savings accounts. That’s the highest rate on the market. It dwarfs the national average of 0.10% for savings accounts, and it’s well above the second-highest rate of 2.25% offered by BBVA, according to Bankrate.com.
Founded in 2013, Robinhood has built a base of more than 6 million users by providing commission-free stock and cryptocurrency trades. It makes money through the rebates brokers provide when Robinhood sends them trades to execute. It collects interest income on the cash and stocks its customers hold, and it earns revenue on its premium membership. This model has carried the 300-person Menlo Park company to a $5.6 billion valuation. Across Robinhood’s six million accounts, Forbes estimates its customers’ assets are in the tens of billions of dollars (the company declined to comment on total assets).
Why is Robinhood expanding into checking accounts? The main reason seems to be to seize market share. As competition for digital-first deposit accounts heats up, and as JPMorgan Chase walks further onto Robinhood’s turf by offering free stock trades, Robinhood wants to hoard more customers for their long-term value, even if it loses money in the short term. Co-CEO Baiju Bhatt says Robinhood aims “to make it so that customers don’t need to go anywhere else for financial services.”
Robinhood’s checking and savings accounts have no account minimums, no monthly fees, no overdraft fees and no foreign transaction fees. The new Mastercard debit card can be used for free at 75,000 ATMs around the country, and Robinhood will start shipping the cards to customers in January.
The accounts are not FDIC insured. "Cash in Robinhood Checking & Savings is insured up to $250,000 by SIPC," according to a Robinhood spokesperson. The Securities Investor Protection Corporation is a non-profit membership organization whose focus is "restoring customer cash and securities left in the hands of bankrupt or otherwise financially troubled brokerage firms," according to its website.
Bhatt says Robinhood has been thinking about offering a checking account product for two years. But the timing of this release also aligns well with a changing U.S. economy. We’re in the late stages of a bull market, trading volumes are declining and interest rates are rising. Those dynamics give consumers more incentive to pull their money out of brokerage accounts that bear no interest. Robinhood’s new products may plug that potential outflow.
To help fund the sky-high 3% rate, Bhatt says the startup will invest customers’ deposits into other securities like Treasurys. But short-term Treasury yields are well below 3%, so Robinhood will initially take a loss on that spread. It will make up for some of that difference on the interchange fees (charged to merchants) it will collect when someone uses a Robinhood debit card to make a purchase. But the program likely won’t be profitable in the short term.
The new high-interest accounts are an unabashed marketing move. Robinhood chose 3% by “looking at what was the highest possible amount we could pay and still have a long-term sustainable business,” Bhatt says. “We also really love simplicity of 3%. It’s very easy for people to remember.” He insists it’s not a “teaser rate” that the company will soon lower.
Ron Shevlin, director of research at banking consultancy Cornerstone Advisors, thinks many fintech companies are overestimating the opportunity to steal share from megabanks. “They think there's this great level of dissatisfaction among consumers with their banks,” he says. “When you’re 24 years old, not starting a family, the reality is that you don’t care what bank you do business with.” He points to a late 2017 survey that showed 57% of Millennials still bank with a large bank, while just 1% use digital-first banks.
That tide seems to be shifting, although it’s hard to tell how much and how quickly it will move. It has taken Chime four years to pass two million accounts, and it's currently adding 200,000 new customers a month. Empower, a San Francisco startup that announced a debit card with 1% cash back and 2% interest on savings in September, has about 23,000 customers on its waitlist. Empower CEO Warren Hogarth thinks he can reach one million customers in 18 months.
As a proxy for adoption, Hogarth points to Europe. “If you look at the leading three challenger banks, Monzo, Revolut and n26, in the first two and a half years since they launched, they opened four million accounts combined. At their current growth rate, they will hit 20 million before the end of 2020,” he says.
It won’t be easy for any fintech to gain a sizable share of the market, where banks like Chase and Wells Fargo have trillions in assets. And as the space gets even more competitive, Robinhood will need to be ready to spend heavily on marketing. That’s where its war chest of venture capital—the startup raised $363 million this past May—will come in handy.
Correction, 12/14/18: This story has been updated to note that Robinhood is using its brokerage arm, not its banking partner, to administer checking and savings account services. The accounts are not FDIC insured.
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