I was excited about Robinhood’s announcement too. The prospect of earning 3% on a savings and checking account was extremely appealing. The interest rate is 95 basis points (or 0.95%) higher than that of Goldman Sachs’ Marcus which continues to rank among the top yielding bank accounts.
Unfortunately, it didn’t take long for the company to backpedal on their announcement, which attracted hundreds of thousands to the waitlist. I checked the site today and secured spot 744,248 for their “Cash Management” offering which was hastily changed from the original name, Robinhood Checking & Savings. Issues arose as many dug into the actual offering, mainly how deposits would be insured. Bank accounts today are protected by the Federal Deposit Insurance Corporation, up to $250,000. Because this was part of a brokerage account, rather than being insured the the FDIC, Robinhood’s offering would be protected by the SIPC or Securities Investor Protection Corporation.
However Robinhood failed to disclose the difference between the SIPC and FDIC. The main difference is that the SIPC protects cash which is slated to purchase securities. According to the SIPC website:
SIPC protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash. Most customers of failed brokerage firms when assets are missing from customer accounts are protected.
The SIPC goes on to address the limitations of SIPC protection:
It is important to recognize that SIPC protection is not the same as protection for your cash at a Federal Deposit Insurance Corporation (FDIC) insured banking institution because SIPC does not protect the value of any security.