An insurance problem has forced Robinhood Brokerage to postpone its launch of a checking and savings account app in the U.S. The app has features that will undercut the big banks, such as Chase, Bank of America, and Wells Fargo. The launch originally scheduled for December 18 has run into a hurdle after a claim by the CEO of the Securities Investor Protection Corporation. According to the SIPC CEO, SIPC’s insurance is not applicable to checking and savings accounts.
SIPC, a non-profit membership corporation, offers insurance to stock brokerages. Robinhood’s team has claimed that customers of the Checking/Savings app would not lose their money in the event of a decline of the treasuries in which it invests. This claim is at variance with the SIPC’s claim. According to the SIPC, its insurance wouldn’t apply to the Checking/Savings app whose operation implies a misuse by Robinhood of its brokerage classification.
Features of the Checking/Saving App
After its eventual launch, users of Robinhood brokerage can expect invitations to use the checking/savings app. They can do so either exclusively or alongside their existing savings account. However, there is no obligation to trade stocks for those who may wish to sign up directly for checking and savings.
The features of the checking/savings app include impressive perks for customers, including zero-fee accounts, waiver of overdraft or monthly fees, a substantial interest rate of 3% that compares well with the 0.09% offered by the big banks. Users will also receive a Mastercard debit card issued through Sutton Bank that can be used on more U.S. ATMs than the aggregate of ATMs used by the five biggest banks. These include 75,000 free-to-use ATMs in such places as Walgreens, Target, and 7-Eleven.
In other benefits, as claimed by Robinhood, signing would not impact users’ credit scores, and users would be able to issue checks by merely telling the start-up how much to pay and to whom. They would also get a customized Robinhood-branded debit card whose acceptability would match Mastercard’s.
However, while customers can avail 24×7 live text chat support, they will not be able to visit a brick-and-mortar branch. This landmark model intended to help Robinhood to break into the larger financial services market was made possible by scaleability of software. The free stock trading app has already used this approach to combat such per-trade fee charging competitors as Charles Schwab and E*Trade.
The response has been fairly positive since their original announcement. Some positicve comments from customers on Reddit include:
“I’m looking to buy my first house now… If RH comes out with a 0% mortgage, I’d buy the first house I see.”
However, technical issues on 13th and 14th Dec clouded the positive sentiment with a number of users questioning their ability to handle their checking and savings account.
“Some weird options trades happened, then we got locked out of trading them for the rest of the day with a message that said our account was deactivated… To be fair, they did send an email telling us to ignore the deactivation notice and alerted us to the problem…”
The Challenge of Maintaining Valuation
Since taking a $363 million Series D in March, Robinhood’s valuation has risen from $1.3 billion to $5.6 billion. The current launch, aimed at disrupting how people store money, is seen as a huge opportunity for the 6 million-user app to compete with big banks that impose surprise fees and provide mediocre experience to users. The launch could prove critical to maintaining Robinhood’s current valuation, The new adventure promises a lucrative revenue stream, and a future opportunity to offer more financial services.
The Insurance Hurdle
However, these plans could come unraveled if potential users hesitate to invest their money in Robinhood’s checking and savings app. Risky decisions made while chasing growth could lead a start-up to collapse suddenly. Cutting corners in its hurry to break into the banking sector, Robinhood runs the risk of leaving users exposed. The launch, bereft of adequate protection, could end up hurting the start-up’s reputation.
The launch must wait, given the SIPC’s claim that the Checking/Savings customers would effectively be loaning their money to Robinhood and that loans are not covered by the SIPC. Such loans would be invested in market securities, whose values could decline due to a market downturn.
Consequent to the insurance problem, Robinhood has decided to delay the launch of the Checking/Savings app. The brokerage company has announced that it will change how the app works and position it differently.