Robinhood mobile app
Bankrate

Fintech startup Robinhood announced something huge in banking this week: the company would soon be offering checking and savings accounts with a whopping 3 percent interest rate.

The announcement of the new service, called Robinhood Checking & Savings, came with plenty of buzz. The interest rate towered over weekly deposit account averages of 0.10 to 0.21 percent at the time of the announcement.

But there’s a not-so-rosy aspect to the proposed accounts: these aren’t FDIC-insured banking accounts, and don’t offer the same level of protection for consumers.

Before racing to sign up for these accounts, consumers should take a close look at what they mean for their money — and what will happen to it, should the service fail.

Why SIPC-insured checking, savings could be problematic

The Robinhood Checking & Savings is not insured by the Federal Deposit Insurance Corp. (FDIC) Instead, the service is backed by the Securities Investor Protection Corporation (SIPC). See our Robinhood review here.

The FDIC is an independent agency created by Congress. The agency insures customers on bank deposits up to $250,000, should a bank fail. The SIPC, on the other hand, is a nonprofit corporation that protects customers if their brokerage firm fails.

The distinct difference is that Robinhood’s new service doesn’t offer traditional bank accounts; they’re separate balances within a Robinhood brokerage account. That means Robinhood can invest your cash in Treasurys, which is how it plans to cover the 3 percent interest returns.

However, Stephen P. Harbeck, the CEO of SIPC, has expressed concerns over fund protection, telling Bloomberg that he disagrees that these funds are protected by SIPC. He added that he has “serious concerns” about the new services, and that it “has gigantic ramifications for the banking industry.”

The help center on Robinhood’s website explicitly states that Robinhood is not a bank; it also says that customers “do not need to invest to use Robinhood Checking & Savings,” which is where things become problematic.

In an emailed statement to Bankrate, Harbeck expanded on the matter: ”SIPC protects cash that is deposited with a brokerage firm for one limited purpose….the purpose of purchasing securities,” says Harbeck. “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.”

The American Bankers Association also finds the murky insurance coverage to be problematic.

“Consumer trust is critical to the safety and soundness of the banking system, and that is why it is so important that consumers have clear and accurate information about deposit insurance,” says Sarah Grano, a spokesperson for the association, in an emailed statement to Bankrate. “Over the FDIC’s 80-year history for example, bank customers have come to value and appreciate that no one has ever lost a penny of an FDIC-insured deposit. Given the stakes to our customers, we appreciate any effort by regulators to clarify when deposits are fully insured and when they are not, and the need to respond quickly to misrepresentations.”

Bankrate has reached out to Robinhood for comment and the company has yet to respond.