Robinhood, the free stock trading startup that announced plans earlier this week to offer high-yield checking and savings accounts, appears to be backing away from that plan.
In a blog post on its site late Friday the founders are now saying the announcement “may have caused some confusion.” References to checking and saving have been removed from the site in place of wordage about “cash management” accounts.
The site had originally stated that all its proposed savings and checking accounts with an eye-popping 3 percent yield were covered by the Securities Investor Protection Corporation.
Stephen P. Harbeck, the CEO of SIPC, immediately expressed concerns over fund protection, telling Bloomberg that he disagrees that customer funds in such accounts would be protected by SIPC. He added that he had “serious concerns” about the new services, and that it “has gigantic ramifications for the banking industry.”
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.”
Robinhood did not respond to requests for comment.
In the blog on its site, founders Baiju Bhatt and Vlad Tenev wrote: “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.”
The company did earlier state on its site that its Robinhood Checking & Savings would not insured by the Federal Deposit Insurance Corp. (FDIC). 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.
See our Robinhood review here.