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.

The last couple of weeks have been fraught with uncertainty in global markets. In the US, we ended November with Fed Chairman Jay Powell moving to appease a President in a speech before the NY Economic Club by suggesting that a “neutral” Fed Funds rate lies just above current rates and removing a 3% + target.

Subsequently, we have seen an escalation in trade tensions with China with the arrest in Canada of Meng Wanzhou, Huawei’s CFO, and a realization that Mueller now has the evidence to expose Trump’s suspect enterprise when his final report is released. Financial markets have gone into a tailspin.

Whereas the Federal Reserve is still predicted to raise the Fed Funds rate to a 2.25-to-2.50% target at its next meeting, the language in its statement will almost certainly mirror Powell’s statement in front of the NY Economic Club which could cause the rise that we have seen in savings and CD rates to stop or to slow.

In advance of each Fed move this year, we have seen a rise in savings and CD rates for two weeks in anticipation of the move (with some banks trailing to raise their rates subsequently). With all of this uncertain and a likely change articulated in Federal Reserve policy, one might expect banks less eager to move to raise rates going into the FOMC meeting on December 18 and 19, 2018. Contrary to this expectation, the most aggressive online banks have already raised savings rates this past week (Popular raised to 2.36% and My Savings Direct to 2.40%). We expect other online banks will be forced to match this move in order to stay competitive going into the Fed move.

See the best online savings today rates here.

We are also seeing local banks and local credit unions continue to aggressively raise their savings and money market rates.

See the best savings and money market rates at banks near you here.

See what credit unions near you are paying on cash here.

We are also seeing short-term CD rates advance around the anticipated December rate increase, again in spite of Powell's statement that we are now just below target. Over the last week, we have seen several increases in online one-year CD rates with several banks now offering over 2.85%.

Local banks near you may offer even higher 1-year rates, as may local credit unions.

Interest rate anxiety around whether the Fed is going to continue to raise or pause may increase following the Fed’s December statement. The average spread between online savings and online 1-year CDs now stands at 77 basis points which is the widest it has been in a decade (see the third graph on BestCashCow's rate analysis page). It may be peaking around here.

Unlike manufacturers, banks don’t make things. Unlike retailers, banks don’t sell things. Banks make money in three ways - the fees they charge for services, the interest they charge on the loans they make, and the income they generate from investments. They fund the loans and investments from the deposits they gather from people like you and me - or from loans, bonds and equity investments in the bank itself. In return for these funds, depositors get interest paid on their savings, lenders are paid principal and interest, bondholders get income and stockholders get dividends - as well as equity appreciation.

Enter the neo-banks. These financial services firms look to lure consumers away from the large incumbent institutions like Chase and Wells Fargo. They offer free-checking and mobile apps to manage your account. These challenger banks, such as Chime, Simple and Moven, offer a wide variety of technology tools to help manage your financial life - particularly your spending. They are driven, due to the ever-increasing amount of time we spend on our mobile devices, to find ways to get consumers to interact with their financial services app and collect data on that usage.

These companies are very good at technology. However, neo-banks aren’t, by their own admission, banks.

• “We’re not a bank, we’re a technology company that provides online banking services, and partners with an FDIC-insured bank, BBVA Compass.” - from Simple’s website.
• “That means we don’t profit off of you. We profit with you: every time you use your Chime debit card, we earn a small amount from Visa (paid by the merchant).” - from Chime’s website
• “Moven is the world’s first real-time mobile money tool. Moven is a financial service provider. We partner with CBW Bank, along with other vendors, to provide digital banking services.” - from Moven’s website

BestCashCow helps savers make better decisions in their financial lives by helping them find the best savings rates at banks across the country. Though Simple has offered special rates that compete with the incumbents, at this point in time, most neo-banks are not in the position to offer competitive rates or the range of banking services desired by the majority of consumers.

Your banking decision should be based on a number of factors - customer service, access, convenience, financial stability and, of course, an offer of competitive interest rates. Though these new mobile players succeed at delivering convenience and access through technology, the reality is their size, and the fact that they are not banks, limits their offerings and calls into question their long-term financial stability.

You’ll undoubtedly hear more about neo-banks, as the Treasury’s Office of the Comptroller of the Currency (the “OCC”) continues to explore special purpose national bank charters for fintech companies. The future may bring opportunities to get access to new innovations in bank technology. But, for now, if you’re unhappy with your current bank, you probably will be better off finding one of the incumbents that is offering a better rate, as well as better technology and service, than you’re getting now.