Robinhood, the incredibly popular investing app, unveiled new checking and savings accounts Thursday that have no fees, access to 75,000 free ATMs and — here’s the kicker — an interest rate that earns 3% for consumers who put money in the product.
A 3% checking and savings rate is unheard of at a time when interest rates — despite several Federal Reserve hikes — remain relatively low. Checking rates are barely above zero at many banks. And according to Bankrate, the top savings rates are currently 2.25%.
But there may be a big problem with Robinhood’s offerings: They may not be insured.
The Securities Investor Protection Corporation, a Washington-based nonprofit organization that protects investors from losses at member brokerage firms, said Friday that the new Robinhood products would not be protected.
“SIPC protects cash that is deposited with a brokerage firm for one limited purpose … the purpose of purchasing securities,” said Stephen P. Harbeck, president and CEO of SIPC, in a statement to CNN Business.
“Cash deposited for other reasons would not be protected. SIPC does not protect checking and savings accounts since the money has not been deposited for a protected purpose,” Harbeck added.
In other words, if Robinhood goes belly up and you have money in their checking or savings accounts, you may be out of luck.
In a statement on its website, Robinhood said: “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.”
Robinhood has made waves in the financial services industry, prompting many big banks and brokerage firms to start making lower-cost accounts available to Millennials. Vlad Tenev, the company’s co-founder, wrote in a blog post in October that Robinhood now has more than six million customers.
But Robinhood is not registered as a bank. So any deposits that customers make with the company would not be protected with the Federal Deposit Insurance Corporation either.
Robinhood is offering the checking and savings customers a debit card, but it is in partnership with Ohio-based Sutton Bank.
According to the help center section of Robinhood’s web site, the company says that it is not a bank and it is offering its checking and savings account through a brokerage account. That seems to be why Robinhood thinks it’s eligible for SIPC protection.
The company added in its help center section that SIPC insurance covers checking, savings and investments up to a total of $500,000 — half in cash and the other half in securities.
But Robinhood also pointed out that the SIPC insurance only provides protection if Robinhood fails financially. It would not cover investment losses for any assets that people have in their Robinhood accounts.