Robinhood Offering 3% APY Savings & Checking in Bold Shot Across the Bow Of Established Banks, but No FDIC Insurance

As of this morning, Robinhood is offering a 3% APY savings & checking rate on its website. The account is advertised as being completely without fees and providing access to 75,000 ATMs.

In an earlier article, we suggested that there was no need to rush into neobanks for their service. However, anybody who has followed the savings and money market space for the last decade knows that it has been impossible to obtain anything close to 3% APY on your liquid cash.

As of the date of this publication, the best nationally online savings rate stands at 2.50%. See all the best online savings rates here. You may, however, be able to obtain a better rate at a brick-and-mortar bank or a credit union near you.

In fact, even if you are willing to tie up your money for 12-months, you still cannot get 3% on a one-year Certificate of Deposit on a nationally-available online account, although 3% may be obtainable at your location from local banks and credit unions.

Let’s be very clear: Robinhood is not FDIC-insured.

Robinhood notes that it is insured by the SIPC. The SIPC is not just another 4-letter acronym with virtually identical protection (like perhaps the NCUA that covers credit unions). It is the Securities Investor Protection Corporation and the coverage is very different from FDIC insurance.

The SIPC says that it ensures cash in a brokerage account to $250,000 (and securities to $500,000). SIPC coverage is designed to protect the account should the brokerage fail and the assets not be present in the account of the other side of a failure. It often takes time for brokerage assets to be identified and sorted out in the event of a failure and it could be a lot of time. On the other hand, the FDIC steps in and restores bank accounts to their full value at another institution the following day (so you have no meaningful loss of liquidity and no sleepless nights as long as you stay within FDIC limits).

Another important difference between FDIC insurance and SIPC coverage is that the latter is significantly more limited. SIPC coverage attaches to you in each “separate capacity” which differs from “ownership class” at the FDIC. The terminology difference may seem trivial but it actually has severe implications because the SIPC insurance is much more limited. Here are two ways in which the difference is most evident:

First, a husband and wife opening a joint account at a bank are insured in that account up to $500,000. With a joint brokerage account, their combined cash is only protected to at most $250,000.

Second, your total securities are protected up to $500,000 by SIPC insurance across all brokerages. While retirement accounts are a separate capacity, if we were to experience a failure at several brokerages, you would be limiting your SIPC coverage at other institutions by having an account in your personal capacity at Robinhood.

You can learn more about FDIC insurance and the coverage it provides here.

Robinhood seems to be founded by millennials and it is aimed at millennials with moderate assets. However, if you aren’t a millennial or are one with assets in other places, you’ll likely be able to sleep better by seeking out the best online savings rate you can find at an FDIC-insured online bank. See those rates here.