For folks trying to understand this, some context which may be useful:
Checking accounts are loss leaders virtually everywhere, the exception being smaller community banks. Their primary revenue stream was, once upon a time, net interest income, but these days due to the extremely low interest environment and alternate sources of funding the revenue stream is more weighted towards fees (primarily NSFs, although that was hit a few years ago) and debit card interchange.
Robinhood also likely expects to not become the park-your-money account of choice for older dentists but rather to become the spend-your-money account for their millennial userbase. With high velocity of money and low balances the interest expense is minimal and, to the extent they use debit cards, the interchange revenue can be material. (In a stylized example where someone makes $2k a month and spends $200 on debit card purchases and $1.8k on rent/etc the interest cost for the year is ~$30 and the debit card interchange for the year is ~$60, even ignoring potential interest revenue.)
This is roughly in the same line as their core strategy, which is spending what would otherwise be a marketing budget on keeping commissions at zero, making money on the other ways brokerages make money. If you do not understand how a brokerage makes money, I encourage you to peruse the annual reports of e.g. eTrade or TD Ameritrade, which will happily explain their revenue sources and why commissions are a surprisingly small portion.
Metacomment: geeks who believe they have outmathed a financial firm should ask themselves "Are financial firms likely to be bad at math?" and "Are financial firms incapable of hiring their own geeks?"
> Metacomment: geeks who believe they have outmathed a financial firm should ask themselves "Are financial firms likely to be bad at math?" and "Are financial firms incapable of hiring their own geeks?"
reminds me of the first time i interviewed at google, and one of the interviewers asked "if you could set up your own project and get a team to work on it, what would you do?". i answered that i would get a bunch of maths phds together and have them work out graph-theoretic ways of detecting link farms (this was 2004, and i had actually been wondering for a while why google hadn't done exactly that).
the interviewer (who was a pretty senior person) asked "why do you think the spammers don't have their own phd mathematicians to defeat such measures?". i was only a few years out of grad school at the time, and it was honestly the first time i thought about the fact that people who were both smart and educated might nonetheless go into a shady and declasse activity like running spam sites. i consider it a valuable lesson to this day.
Geeks can and do outmath financial firms and even bookmakers and casinos.
The financial firm, bookmaker and casino just needs to outmath the 99.9% of customers who are not trying to beat them to win, and evict the 0.01% of customers whose outmathing is so good it is causing them problems.
Exactly. Counting cards at the blackjack table in Vegas isn't illegal, but they won't let you play after they figure out that you are. You can can beat the bookmakers, but once you do, you either get cut off or you only get offered odds with more juice.
How much are you willing to gamble on the prospect that you're in the top 0.1%? And before you answer, consider that you haven't been evicted so you're obviously not in the top 0.01%.
>> people who were both smart and educated might nonetheless go into a shady and declasse activity like running spam sites.
The crooks I've met have been the smartest and most insightful people I've met in tech. I know one guy who, after years with a CC scam operations when to work for an online merchant. His knowledge of payment systems and payment processor policies was encyclopedic. The big issue was whether he was trustworthy. Lucky he had never been convicted of anything.
For every criminal savant there's probably at least 10 script kiddies exploiting older people, prostitutes, and every other vulnerable group imaginable.
I’ve never imagined link farms to be so profitable an enterprise that they could afford a team of phds and come out ahead; but if they could, then its an arm race, and google would be at a much greater disadvantaged if they didn’t have their own.
Thus, your response should have been: link farms with their own phds is only more reason to instantiate your plan
>I’ve never imagined link farms to be so profitable an enterprise that they could afford a team of phds and come out ahead; but if they could, then its an arm race, and google would be at a much greater disadvantaged if they didn’t have their own.
Go on a blackhat SEO forum. Look at the number of sellers, the number of listings, the number of positive feedback and the cost of some packages (you can easily go on and spend 50$ or a 1000$+ for a single package). There's a LOT of money in blackhat SEO. That's just the people offering to do it for you.
Then look at the dozens of software packages for sell that are constantly being updated and have both one-time fees and ongoing subscription pricing.
Then go look at the people selling just various social media accounts which mass-creation of gets harder and harder.
Then there's people that sell VPS access. They'll buy the software tools and host them all on a VPS and rent to you weekly or monthly so you can shell out tens of dollars or hundreds of dollars a month instead of needing to cough up thousands just to get all of the software for the month.
And that's just what's readily available with paypal or a credit card on the clearnet.
I assume they're trying to break the inertia people have with major banks. There's no reason to change bank unless there's some substantial incentive like favorable interest rate to offset the hassle involved. I'm not sure there's an ulterior motive here other than customer acquisition.
Agreed, they are trying to buy customers, if it turns out that they can't convert these customers into traders they will lower the rate to a breakeven amount and not care if they lose those accounts.
Perhaps true, there's been an opening for a 'cool' millennial-oriented financial institution for a while now, so perhaps fewer customers will drop off than expected.
... I can't remember but there was one I used at some time that was like that. Had a weird spirograph logo and a cardboard motif on their site. There were a few others.
Which should tell you a lot. I've been through the "Millennial Bank" wringer.
Honestly, checking accounts are all the same. Especially because I use a credit card paid in full every month. It's a holding pool till next month's CC bill is due. Until the US treats debit cards with the same protections as credit, I won't let my debit card near a gas pump or wander off with a waiter or be used online.
I don't know that there's an opening really. That so-called opening keeps popping up since like 2005 and gets "filled" by a SV-backed MVNO-For-Banking and it's just........a checking account provided by some.other actual bank repackaged with a (nice) angular front end and on the AllPoint ATM network with crappy chat customer support.
Simple bank. They’re based out of portland. I use them. They’re pretty good and have great support. Also $1 out of country withdrawal fee which is nice.
Seems like a weak market to go after, given that people likely to respond to a "cool" financial services brand may be a poorer demographic that maybe doesn't have any prior experience with "legacy" financial services providers. So just because they create accounts @3% doesn't mean they'll also open trading accounts.
> So just because they create accounts @3% doesn't mean they'll also open trading accounts.
From the Robinhood website fine print “Robinhood Checking and Savings is an added feature to existing Robinhood accounts and is not a separate account or a bank account.”
So, yes, opening a Robinhood Checking & Savings account does mean that they will open a trading account, because they aren't actually different accounts. (And it's a waitlisted feature where you get moved up the waitlisted by referring others to RobinHood, so it's a clear way of getting the overall service in front of more users.)
Millennials may not have money now, but they'll accumulate more wealth as they get older. If you can convert them now, the friction to changing again is high enough that you'll probably still have them when they're worth something.
That's a good point. A friend of mine in medical school told me that banks are itching to give loans to broke med school students because they know building the relationship now is going to pay dividends when the now-broke student becomes a doctor looking to buy a new car or new house.
Yep that's a good play, but their page says that the 3% can change depending on the market. So if that percent changes a few months after you create an account, I would bet many people would leave cause of the bait and switch.
> Seems like a weak market to go after, given that people likely to respond to a "cool" financial services brand may be a poorer demographic that maybe doesn't have any prior experience with "legacy" financial services providers.
Yeah but people do grow up. And I don't know about you, but I've got some super long term relationships with some banks. They are in it for the long game.
Huh. I don't have much of a problem going in to a bank branch, given that there's one every half mile. A quick in-person meeting is fine compared to the shitstorm of unusable menus and nearly unintelligible communication that is calling your bank on a cell phone.
(I mean it would be great if there were a bank that did all its customer service over text chat, but that's too much to ask for, right?)
I'd prefer a usable website in addition to guarantees of prudence in investing the money. My $ for both. If Robinhood replaced SIPC with something as credible, I'd go for it. They could probably do it with US Treasuries and bonds from Google, Apple, Facebook, etc.
Judging by their recent activity, Simple won't respond well at all. They've been in a downward spiral for the past few years post-acquisition by BBVA. All the original founders have left amidst a revolving door of executives, and the company has struggled to launch new products and innovate beyond their initial budget features.
Right, but that incentive is only substantial if you’re going to park a lot of money there, which is exactly the sort of customer they don’t want according to the comment I replied to.
I'll move my ~$100K emergency fund into there just to get free money. And move it out somewhere else when the rates change. Over the years I've moved accounts between Dollar Savings, Emigrant, Orange, Ally, and probably 2 or 3 others...
I would have to read up on the transfer times. If it's reasonably standard (2-3 days) and doesn't have any daily limits, then yes. It's a US company, FINRA approved, SIPC insured, so the risk is minimal.
Not to make you feel bad, but at $150k/year salary (average in SV) one should be able to save $100k within 5 years, with little impact on quality of life.
They may be playing this on two sides: the more obvious one which is acquiring customers to feed their trading business, and simply trying to evolve into a financial institution, which should bolster their valuation in their inevitable IPO in 2019 or 2020. Their backers might be content to burn money for a year or so to get a larger multiplier at some point in the future.
here the catch, I believe:
1. it's ensured by SIPC, not FDIC, so it's not as safe.
2. They're going to lower that 3% rate down whatever all the other banks are at (2%) in a couple of years, unless the interest rates catch up to their higher rate, which they are expected to do in about 2 to 3 years: at that time, 3% will be roughly the norm for the highest interest savings accounts.
I remember the days when Citibank would give out 4% interest about a decade ago. now of course, it's about 0%. It's just classic bait and switch.
As far as I can tell, the coverage amount of 100,000 euros was respected in these cases, probably precisely to avoid doubts like that about the safety of deposits.
Your first link doesn't mention the insurance amount at all, the second only talks about deposits beyond the 100,000 euro limit and apparently British customers got an even better deal with the higher limit of £85,000.
Apparently the president of the SIPC stated that Robinhood didn't contact the SIPC before making their announcement. The SIPC president Stephen Harbeck is on record saying that "SIPC protects cash that is deposited with a brokerage firm for one limited purpose... the purpose of purchasing securities. 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."
He later stated that the SEC would need to take the lead on clarifying the matter though.
I have a one-year emergency fund with Robinhood that is invested in index funds (secondary emergency fund as the primary emergency fund is in cash). I think I'll keep my primary emergency fund in the PNC high yield savings account for now until all that gets worked out.
Robinhood's checking page says "Robinhood Checking and Savings is an added feature to existing Robinhood accounts and is not a separate account or a bank account."
I have not dug thought this specific offering but here is how it works in general it works this way:
Account has 3 parts:
1. Marketable securities -- value is NOT insured.
2. Cash on hand -- value IS ensured.
3. Money market fund -- value is NOT insured.
(3) may or may not be offered and if (3) is offered it has to be elected by the account holder. Money cannot flow from (1) to (3) or from (3) to (1) bypassing (2) due to securities regulations -- one cannot pay for one security with another security, a settled cash must be used.
If the APY is on (2) they will get killed by the fatwallet/slickdeals crowd. If the APY is on (3) it is more complicated but debit/check transactions against (3) are very expensive to clear so I don't quite see what the play is.
>Why would they expect this account to be used as a high-velocity, low-balance account rather than a park-your-savings account, given the rate?
Think of it like being a health insurance salesman who puts your office at the top of a long flights of stairs. You can have a lower risk pool because the only clients who come to see you are the ones who can climb a bunch of stairs to get there.
In other words, they advertise to a user-base that doesn't have much in the way of savings so they're avoiding people who would keep high balances anyway.
Besides, most people who do have large balances tend to park them in money market funds anyway. They can usually hit between 2% to 3% annually and offer more flexibility in terms of being able to access the money without transferring balances around. Alternatively they'll be putting it in tax-deferred accounts.
If you have enough money coming in that you can accrue a lot of savings, a savings account isn't the most productive place to put it. It should be regarded as more of a rainy day fund or a place to park money that you're saving up for something specific, like a down payment.
I'm a millennial, and the target market for this sort of product.
1. I don't care about physical branches, I've been using online banking from the beginning.
2. I am at a stage in my life where I am slowly paying back all my debts and making just enough to set some cash aside every paycheck.
I don't have enough money to go looking at financial instruments such as money market funds or CD's, because they tend to lock my money up for a certain period of time.
I still need to be liquid. Some place where I can make 3% and have it just sit is fine for me, and allows me to access it in case of an emergency without paying fines or penalties for doing so, and with less hassle than some other financial instruments where it is locked up.
Once I have a buffer built up, and I feel comfortable with that buffer, maybe then I'll start looking at other places to potentially let my money make more money faster with a little higher risk and with less liquidity.
I’m sure a lot of people might start out that way. But if you get free money for parking your cash there, why not use that money to dabble in some trading? Seems like there is little downside for the company, and potential for upside for the consumer. Pretty good acquisition strategy, in my opinion.
>while the risks involved with trading that money are substantial.
Also, presumably lots of people would rather put their beautiful minds towards things other than being anxious about how their savings are going. There is a lot to be said for just being able to park your money somewhere and not have to worry about it while you go live your life.
Most people won't think like that though, especially the millennial target customer who has the time to gamble money, rather than necessarily needing to save for retirement. Currently Robinhood takes three days to transfer funds, so reducing that friction, when customers make impulse decisions when they see that the stock is going up, is paramount. Why wait a few days when the money is already there? This is the benefit of vertical integration.
Holding cash had higher returns than index funds over the last 6 months. That's not a high bar when the market is going down. VTI is below where it was 12 months ago.
Usually you want to build a tractor (recurring deposits to a reference rate) at the 7 or 10 year treasury, to ensure that you have a stable supply of available deposits, and a short term rate too to handle "hot money".
You make money on the spread.
I really don't see how they are funding their interest rate.
No one knows what Robinhood will do, but no bank can promise a perpetual 3% rate. The rate is probably a teaser. Even if it is perpetual, it may be "on the first $10,000, with a minuscule rate on larger sums...something that allows them to advertise 3% but offer much less on larger sums.
Kind of funny but I remember 3% rate being kind of normal for a checking account in the early 90s. Of course inflation and Fed was higher back then too.
What I don't understand is those people who willingly park their money in CDs at under 1% and the banks proudly advertising these rates.
This era of seemingly permanent low(or even negative) rates just somehow seem unnatural.
What happened to banker's 6-3-3 rule? "Lend at 6%, borrow at 3% and go golfing at 3:00PM"
> No one knows what Robinhood will do, but no bank can promise a perpetual 3% rate.
It's not too crazy, rates have gone up a ton without most bank accounts adjusting from being near 0%. The 10-year is currently just under 3% with the whole curve being really flat and lots of online banks offer over 2%. I currently get 2.05% with my Marcus account and Goldman Sachs isn't exactly known for giving things away (and with 3 month t-bills paying 2.41% they certainly aren't giving anything away!).
Their FAQ states no caps, though it can vary depending on what the fed does with rates.
With the current 2 year treasury being 2.76%, they must making money on fees. I am seriously considering moving my savings from a Capital One money market account that earns 2% to this that earns 3%. That extra percent is decently significant.
The catch is soon there will be a maximum balance or activity requirement, or something to that effect, all of which are not contradicted by their PR sheet. It's otherwise utterly unsustainable.
> geeks who believe they have outmathed a financial firm should ask themselves "Are financial firms likely to be bad at math?" and "Are financial firms incapable of hiring their own geeks?"
Moviepass was also bought by a financial firm... Come to think of it, they have many similarities. Both companies are basically handing out free money and it's unclear how they would make any profit. People speculate that both companies would make money by "selling data." Unless if Robinhood is doing something very illegal, there is no way that they could make enough money that way.
That said, I do think that Robinhood knows what they're doing. They're getting a lot of publicity right now. In the worst case scenario, Robinhood can cut costs by slashing interest rates and putting a cap on the number of free trades you can do. Their worth would plummet, but later investors would be the ones who pay that price. Overall, Robinhood would still be better off.
That's not "analytics"; that's order internalization, something almost every retail brokerage does†, both because they get paid to do it and because it improves outcomes for their customers.
† You could argue either way about whether IB gets paid to "internalize" orders or whether the order flow rebates they get are something else.
This article implies for example that on a $10,000 trade that Robinhood would be compensated $0.80 (0.00008 per $1 of trade). That seems pretty modest.
Moviepass also wrongly assumed they had greater leverage with theaters. Turns out moviepass is still small beans compared to normal moviegoers.
If they had been able to work out a profit share off concessions and cheaper tickets with AMC/Cinemark/Regal/etc they might be in a different setting right now.
Robinhood doesn't make money on commissions, but they do make money with payment for order flow [1]. So they wouldn't want to put a cap on the number of trades you can make.
With transaction fees alone, there's plenty of room to make money. A huge chunk of the population doesn't have money parked in savings/investment and literally spends nearly all of what they have coming in. Especially in younger/millennial targets.
Robinhood makes their revenue on rebate fees, it’s not illegal but considered shady by some people. Ordinary brokers generally don’t do that (although some might).
It's also a way they can secure their loans. It's the exact same reason Capital One has bank accounts along with their credit card business (and Amex doesn't). Getting credit on the open market is expensive, by getting you to sign up with your bank account, they can leverage it to get cheaper loans for buying stocks (i.e. margin accounts). Capital One targets lower income people, so it's riskier and more vulnerable to fluctuations in market conditions. Amex in contrast, targets higher income individuals so fluctuations impact then less. This they can get away not holding bank accounts and securing credit elsewhere.
This means if there's a downturn in the market, they won't go bankrupt due to all the outstanding margin accounts (or have to do margin calls).
Perhaps true in the past, but AmEx has recently (I think?) started offering bank accounts. Their high-yield savings account is 2%, which is pretty comparable to Ally, etc.
Commercial banks also have access to the Fed discount window, which other institutions do not. This is one reason all the big investment banks converted to bank holding companies during the financial crisis.
In answer to your metacomment. The financial crisis is a strong indication that, yes financial firms can be terrible at math. Luckily, they have friends who can bail them out with taxpayer money when they fail at math.
Was that them being terrible at math, or them knowing that they were selling overpriced goods (00's houses, 90's tech stocks, probably college degrees) to folks who didn't know the math?
Big Finance knew it was hustling rubes, and then was able to ride the Gub'mnt Gravy Train when it became unsustainable.
The financial crisis was not a result of bad mathematics. Investments are made because they promise to return dividends. But there is always a chance that they might return lower than expected dividends, or none at all. This can be because the market didn't grow as expected, wages rose above expectations, a tsunami wiped out your factory or an array of other factors completely beyond your control. The best mathematicians in the world cannot predict how many coca cola bottles will be sold in a year.
Not so! One can indeed defend the claim that poor mathematical modeling of the statistical properties of collateralized debt obligations (CDOs) was the underlying cause of the bottom falling out of that market.
In brief, models were constructed of the complex behaviors of packages of loans - CDOs. These models, trained under benign market conditions, did not account adequately for correlations that might make all their component loans default at once.
You can elaborate the story with a lot of context and granular detail, but the core of the crisis did have a strong element of "bad mathematics" -- bad mathematical modeling.
Your point directly contradicts the conclusions of the paper you linked.
The paper concludes that while there were deficiencies with the modelling method (as there are with any model), input manipulation was at greater fault than inherent failures of the model itself.
"These results support the arguments of Donnelly & Embrechts[4] and Mackenzie & Spears[12], that Li and the Gaussian copula were not to blame for the Crisis...Instead it appears that the gaming of the model beyond its original assumptions, the outsourcing of CDO risk management to credit rating agencies, and the failure to perform holistic risk assessment seem far more to blame."
"The simulation results in this paper show that it is more important to focus on parameter estimation than copula choice. This leads to the observation that when it comes to mathematical financial modelling: in order to avoid a disaster, the cooking is more important than the recipe."
The paper is pointing at one aspect of the modeling (estimating the covariances of the copula), versus another aspect (the copula concept itself). That’s a detail that was very important to the author of the paper, but not to my point.
My point is that mathematical models were indeed being used and followed in this case, and that the issue really was with overextension of the model, and not just generic volatility of any market, as claimed by the GP comment.
Completely agree that the crisis wasn't caused by generic volatility, but any mathematical limitations pale in comparison to the human failure of manipulating ratings due to a conflict of interest caused by private rating agencies. That is what the paper you linked concludes, versus your initial claim:
>poor mathematical modeling of the statistical properties of collateralized debt obligations (CDOs) was the underlying cause of the bottom falling out of that market.
The model is hardly to blame when falsified inputs yield poor results.
I'm choosing to include "protocols for setting parameters for the mathematical model" into the "mathematical modeling" line item - please note that is the phrase I used, twice.
I'm not "blaming the model" - probably everyone recognizes that all models have limits.
I call your attention again to the point of my original comment - the GGP comment was claiming that the best mathematicians in the world could not have foreseen the kind of conditions that caused the 2008 market failure. I'm arguing that it was possible, and that it was clear (mostly in retrospect) that the model assumptions were being violated most promiscuously.
In fact, the real reason I chimed in is that I think this crisis was a really awesome example of the power that quite abstract mathematical constructs have over our lives. I felt that point was missed in the generic comment about "who could have known" that kicked this thread off, and I sort of wanted to rescue that underlying mathematical issue.
You are framing it as an exercise in foreseen likelihoods and the pill falling on red rather than black in 2008, but there are many counterexamples that say that is not the whole story. Read the Black Swan, or watch Margin Call, for example.
Metacomment: geeks who believe they have outmathed a financial firm should ask themselves "Are financial firms likely to be bad at math?" and "Are financial firms incapable of hiring their own geeks?"
Ah yes, because as 2000, 2008, and 2019 have shown us, financial firms are infallible when it comes to maths and economics.
They did the math correctly, it was just different math than what they were supposed to be using.
The incorrect ratings were intentional and designed to look like they were correct so that no one would find out. It's easier to make sure no one finds out the number is wrong if you know what the correct number is and how to tweak factors here and there to influence it.
I would argue that they happened exactly because the brokers who made up those financial institutions understood the math perfectly well: They make huge commissions on CDO and other deals. They sell the bad debt to some other shmuck and walk away with cash in their pocket and someone else holding the risk.
That's why it keeps happening. They get rich and get away with it every time.
At least 2008 had nothing to do with being good or bad at math. In fact, it kind of happened because of some rather fancy math. This article has been posted on HN multiple times:
I would call misapplying mathematical tools being bad at math personally. If you said that because you are intergrating revenue back into investments and are showing nx growth you'll get quadratic growth in exchange for cutting growth in half I would call that being bad at math. An uncommon form of it but still bad due to it being a clear failure to model the underlying domain. They did the same thing really by not taking common cause failures into account at all, thinking one can build low risk out of high risks, and more that an ounce of critical thinking could have saved them from.
I think that's a pretty broad definition that wouldn't find much support. I think the words you used later, "critical thinking" or lack thereof, are much more apt.
Also, if you've read any of the stories about digitization in financial firms, they are totally incapable of hiring their own geeks because it would displace very, very rich people who would have to do the hiring.
No. But you don't have to be bad at maths to play exploitably.
Many years ago now I was a hand-to-mouth graduate student. New credit card companies wanted to attract customers so they offered an easy approval card with 0% finance for 18 months. Need to use some of your new credit on existing debts? Rather than figure out all the specifics they just included a cheque book with the product, just write a cheque to pay any debts and it goes on your 0% balance.
Everybody I knew took out a card, write the full credit amount on a cheque, paid it into a fixed term savings account.
Account term ends, you pay off the 0% card, keep the interest, cut the card in half and you're done. Free money.
The people who ran those new card companies knew this might happen, they just didn't guess it would happen often enough to ruin them. Not our problem. A few years later the deals on offer explicitly did not have a way to cash out. Lesson learned.
>their core strategy, which is spending what would otherwise be a marketing budget on keeping commissions at zero, making money on the other ways
"Making money others ways" aka stripping their clients of financial privacy by selling their clients' investment-decision data: "Robinhood Is Making Millions Selling Out Their Millennial Customers To High-Frequency Traders"[1] If your investment brokerage firm's strategy is to use you as a sucker, no marginal gain in interest rate is worth it.
Yes HFT buys trade flow from robin hood because they make more money executing against it but that's not actually to the detriment of the people on the robin hood app. The main way HFT firms make money is by making a market, they offer to buy and sell stocks cheaper than anyone else and get paid by people crossing the spread and sometimes exchange fees. The reason robinhood trade flow is valuable to HFT firms Isn't because they are trading against "dumb" millennials but because they know millennials aren't likely to move the market playing around on their smartphone. HFT firms can collect a small rent sitting in between millenials trading with one another without the risk of being on the wrong side of a trade that materially moves the price of a stock.
The stock market is a zero sum game. If HFTs are making money then someone else's is losing it. The other traders who's trades are closest are the most likely losers. HFTs will tell you what a great liquidity service they provide but they are doing nothing more than using the equivalent of insider information to skim the cream off the top.
This is a facile analysis. If you believe HFT internalizers are taking money from retail traders, try to outline the series of orders that results in money from the retail trader's pocket going into the HFT's pocket, and precisely how the retail trader could have made that same money on their own.
The reality is that market makers price non-retail flow more conservatively (ie: costing traders more) because they have to anticipate informed large block trades wiping them out. Since they don't have to do that for retail flow, their cost basis for those trades is lower, and they can (and do) split the proceeds of that reduced cost with brokerages.
It's overwhelmingly likely that any other brokerage you use does the same thing, and simply doesn't tell you or pass any of those savings on to you.
>The stock market is a zero sum game. If HFTs are making money then someone else's is losing it.
But who's that "someone else"? It's not the robinhood customer, because they're getting at least the best price on NMS[1]. So what's the issue? Would you rather pay $10/trade so your trade gets posted directly to the exchange and the profit goes to some random investment bank or daytrader rather than the HFT firm?
NMS regulations do not apply to "odd lots" (orders <100 shares). This likely constitutes 99.9999999999% of trades done on Robinhood (and most retail trading, to be fair).
The stock market is not a zero sum game. I don't know where people get this idea that because every transaction involves two sides, the sum is therefore zero. Every transaction in the "real economy" also has two sides, and we all know that grows. The stock market grows too. There are even indexes to track how well it is growing.
The “real economy” runs on a fiat (inflating) currency system that is effectively not zero sum. The stock market is a closed system that currencies feed into - at the end of the day it’s still a measure of a fixed amount of value and thus zero sum.
> The stock market is a closed system that currencies feed into
Currencies feed into the stock market, but it's not a closed system. If you think a company is undervalued in the stock market, and you buy shares, that raises the price of shares for that company. With a higher share price, that company can borrow money (by issuing shares) at better terms, and spend that money on growing more than they could have if they had not borrowed that money.
If the stock price is too low, the company may buy back shares of its own stock (thus enabling future borrowing). Alternatively, investors may buy up a majority of the stock of that company, thus acquiring control of that company, and either try to force the company to do a thing they expect to be profitable, or liquidate the assets of the company (which will then be distributed to shareholders in proportion to how many shares they hold).
So basically the stock market moves money to the companies based on how effectively they could spend borrowed money / how valuable they would be if liquidated.
Currency is a tool for measuring economic value, it's not the basis of economic value.
This is why fiat currencies are so useful: you can change the length of the "ruler" to accommodate changes in the thing you're measuring, so the value of the increment remains stable.
No, companies create excess value and grow. Tesla pre Model 3 is a very different company than Tesla post Model 3. A drug company is very different if they've patented a new wonder drug. New companies come into existence and offer shares via an IPO.
Investing in the stock market is literally investing in the collective appreciation of the value of the companies that make up it.
But there's stocks on the other side that represent real things that increase in value. E.g, compare Google 20 years ago with Google today and see if you think it's more valuable.
Stocks are not zero sum. In theory, their value is based on future income. Information about the future is what most affects stock prices, because it changes expectations around future income. Even with no transactions in a stock, offer price can continue to rise because of these expectations, and it represents real increase in wealth to people who own the stock, no transactions necessary. When offer price rises enough to tempt someone to sell then you have an estimate of the market value.
Here is my understanding. Let a<b<c be small numbers. Some investor thinks a stock is worth
x+c. They put in a limit buy order at x. Some HFT firm sees this and thinks well if they want it at x, I want it at x, and puts in their own order at x (+a fees to robin hood). Millenial comes and wants to sell their stock.
Normally the investor would get the stock since they placed their order first. But since the HFT firm is paying for the order they get it instead. If things go well the HFT firm can sell to the investor at x+b, if things go poorly they cut their losses and sell at x.
The investor that didn't get the order and has to buy it from the HFT firm at x+b is the loser.
The money that funds this dance comes from the millennial who sold a stock worth x+c at x, but that would have happened regardless.
I can't speak to the accuracy of your claim, but Matt Levine recently wrote about another factor, payment for order flow [0]:
>They want to buy stock for $99.99 and sell it at $100.01 and clip two cents on each trade. If their orders are random—if sometimes people buy and sometimes they sell, with no pattern—then that works out well for the market makers. But their big risk is what they call “adverse selection”: Sometimes, when a customer buys 100 shares at $100.01, it then buys another 100 shares at $100.02, and another 100 shares at $100.03, and keeps going until it has bought 10,000 shares and pushed the price up dramatically. The market maker who sold it the first 100 shares—and who is probably now short and needs to go out and buy those shares at a higher price—has been run over.
>[...] [I]f a market maker can guarantee that it will only interact with retail customers—if it can filter out big orders from institutional investors—then its risk of adverse selection goes way down. The way the market maker does this is by paying retail brokers to send it their order flow, and promising those brokers that it will execute their orders better* than the public markets would. [...] It can offer a tighter spread than the public markets—and have money left over to pay the retail brokers—because it doesn’t have to worry about adverse selection. If the retail broker is, say, one designed to let young people day-trade for free on their phones, then those orders are probably particularly valuable, because they are probably particularly random.*
That's not true. When Robinhood (or any other retail broker) sends orders to a 3rd party to be filled, there is no way for that 3rd party to see who is sending the order other than it's coming from Robinhood. Robinhood maintains their own book customer orders; the FIX protocol that the orders are coded in doesn't even support that kind of granular info.
There are valid criticisms of payment for order flow but privacy isn't one of them.
Aren't all orders eventually public anyway? I get that the liquidity that "market makers" claim to create is not really that beneficial to society, but as long as you're not trying to use robinhood to compete with the high speed traders, I don't see a problem with it.
Not doing so or at least in a condescended form is kind of operating a fraudulent exchange. It is kosher to bundle 50 buy orders of 1 stock into 1 order or visa versa - get a bunch of little orders that adds up to a cheaper option. If it doesn't work out refund and inform that it failed to go through. If they asked for 1 share at $25 and you legitimately give it to them it isn't fraud. It is another to say "buy" Tesla shares for people when you really shovel it into another investment and work out what they owe when you think they will just go bankrupt and Theranos is the way of thw future....
no. most orders are not executed on the public exchanges, but by internal matching via your broker and a market maker. (also most exchanges only support trades in multiples of 100 shares.)
Exchanges handle odd lot orders nowadays. Maybe some brokers or dark pools do not, but they are not exchanges (their quote is not protected, or they show no quote).
I believe all customer trades/executions on actual securities should eventually be publicly visible, though there may be a small delay for them to "print to the tape".
That's an extremely poor article. Anyone can throw a hot take on SeekingAlpha; that doesn't mean their take is worth anything.
1. I don't know why the title mentions "millenial" customers in particular, because every brokerage does this across all demographics,
2. This activity is not "selling out" customers. If you believe that customers are "suckers" because their order flow is sold to high frequency traders, you have a very fundamental misconception about high frequency trading and its role in market making,
3. There is no codified definition of, or law protecting, "financial privacy" in the sense of order flow. This data isn't connected to you as an individual, just as you can't see which individuals or companies are placing bids and asks in the order book just because you can see the amounts and prices. All trades in the market are publicly reported regardless of whether or not your order flow is sold.
It never ceases to amaze me how the term "high frequency trading" can compel people to pontificate about things they clearly don't understand. You'd think we'd have collectively moved on from the Flash Boys misconceptions by now. Yet here we are, with an article talking about high frequency traders as some kind of financial boogeyman in 2018.
Why does everyone keep referring to checking accounts as "loss leaders"? They are more like "income leaders" - the banks are funding themselves at basically 0% and then earning the spread on whatever they invest in....
The banks incur lots of operational expenses processing transactions, paying for an ATM network, handling customer support calls, dealing with fraud, etc.
That is nothing compared to interest expense on CD's or other interest bearing accounts. Checking accounts are one of the most attractive sources of funding for banks (notwithstanding maturity mismatch).
+100%, deposits are the cheapest and most reliable source of funding. no comparison to wholesale funding by a large stretch - anyone ever heard of Northern Rock?
But also, worth asking oneself "Are search engine companies likely to be bad at searching?" and "If geeks could make a search engine, is a $50 million revenue search engine company incapable of hiring their own geeks?"
Checking accounts are loss leaders for the big banks(10 billion in deposits or more) because of the Durbin amendment which caps interchange rates of debit cards to 0.05% compared to exempt debit cards which rate is around 1.5%.
Why/how is Robinhood now showing how far along I am compared to my friends on the waitlist? I dont believe I ever enabled any social sharing, and Robinhood's access to my contacts is shut off.
I do not feel comfortable sharing (and especially not broadcasting!) my financial decisions with people I am connected to on social media. This is pretty upsetting to me.
Still, 3% is not just a little loss, it's a big loss. This is into the low end of the reward checking range which comes with lots of strings attached. It doesn't matter if they think they're targeting millenials, once the word is out it will be exploited to the extreme, and it's either going to end in a few months or there will be severe capacity limits so that you can't just park money there. You can bet on that.
Their primary revenue stream was, once upon a time, net interest income, but these days due to the extremely low interest environment and alternate sources of funding the revenue stream is more weighted towards fees
There are still banks who are trying to do this. You can rephrase it as, "lending money to winners." Even better if you can lend money to an underdog winner, enabling them to borrow even more in the future. Community banks are now left with only the underdog borrowers, as the low hanging fruit is swept up easily by the megacorporation banks.
Metacomment: geeks who believe they have outmathed a financial firm should ask themselves "Are financial firms likely to be bad at math?" and "Are financial firms incapable of hiring their own geeks?"
This is the POV of my wife, who manages underwriting: Community banks are having problems hiring the "A-Students" and "B-Students." This means that employees either make more mistakes, or need more rigorous support through custom software, which community banks can ill afford, and where the big megacorporation banks can handily outcompete them.
I'm not sure it's even this complicated. They want people to use Robinhood to trade. People need to have cash in their account to do so. Rather than having to wait a day to transfer money they can incentivize you to store your money within Robinhood so that there's no friction to you making more trades.
Things might be very different in the US, but interchange is nowhere near 2.5% for a debit card in Australia. Maybe that's what is levied to the merchant (or more) but by the time it gets back to the issuer, after merchant service fees and on-charged scheme fees it's more like 0.5% for a debit card.
I could be mistaken but business models built on interchange (I think) have been the downfall of a number of 'neo-banks' from the last 5-10 years. More recently I've seen people adopting a commercial-classified card (or other) for these types of plays for the sole reason of it attracting a higher rate of interchange vs a typical consumer debit card.
I imagine that the demographic they are supposedly going after for debit cards is the same demographic that takes advantage of great credit card deals. I don't see debit cards becoming fashionable as the go-to charge card for reasonably well-off millennials that are eligible for great credit cards. Those that aren't eligible for these credit cards likely have inconsequential amounts of savings anyway...
They may expect it - but I could see plenty of savvy investors using at as a short term cash deposit, hell I would (if I was in the USA) its 2x what I get in the UK
Great summary @patio. I was just telling some friends about it..simple bank, offers 2% on checking with certain balances met, and I experienced similar to example above.
Your question seems to be implying that you believe financial firms are more stupid than greedy. In contrast to Hanlon's razor, I think it's usually fair to assume greed over stupidity.
You are just wrong. Being unable to overcome bureaucracy or organizational tech debt is not a matter of stupidity, and various actors up and down the hierarchy can have misaligned incentives that ensure it remains contentious and political.
Furthermore, many boutique investment business exist for purposes of client services and plausible deniability on part of the client’s board.
I’ll give you a concrete example from when I worked in an asset management company. One client was a large pension fund for a state’s retired firefighters.
We showed them time and again a variety of enhancements to the basic portfolio construction product they bought from us, particularly in line with their overall goal of balancing investment in certain sectors across different asset managers to reduce risk.
They were not interested, not even on the basis of paying reduced fees for a simpler process. We also talked to them at length about why using a concentrated benchmark for that product (SP500) was a bad idea. Again, not interested.
After some months where our performance was pretty flat in that portfolio against SP500, pretty much as we told them we predicted it would be, they fired us.
In the client exit interview with two members of their board, they basically told us that each year they have to fire a certain number of the asset managers they do business with, in order to appear proactive and justify getting bonuses for taking action.
They obviously didn’t say this directly, but it was clear enough. They ended the call by saying they would be super excited to review re-investing with us later the next year, presumably at which time they have to do musical chairs with which asset managers they hired & fired to look proactive again.
Internally, some of my older mentors on the portfolio management team badically said this was the business. Nobody cares what math you use for investing at all. Everybody just uses super stupid linear regression based on outdated factor models from 40 years ago, all using the same data from the same big data vendors.
As long as you have hilariously over-credentialed PhDs selling linear regressions based on momentum or price-to-earnings, the clients are happy because you are cover-their-ass hire & fire insurance to them, nothing more.
It would not be hard at all for skilled amateurs to outperform these shops.
I never implied that. Stupidity has nothing to do with the inertia that comes with big organizations and institutions.
Of course they're greedy, but sometimes it's easier and more "natural" to make more money by rising fees, as opposed to deeply changing a modus operandi.
Why is a question like this being downvoted? It seemed honest and in good faith – what is it that leads to organizational ossification and stagnation. It might be different factors in different industries.
my experience with this is that its not whether they are able to - but the cost benefit of abandoning legacy service lines that are still hugely profitable but maybe not be growing (or actually shrinking)
Hopefully, they've already added some fine print, or will shortly. I've seen other banks be successful with this high interest strategy but every one of them requires 12-20 debit transactions per month in order to receive the high rate.
If Robinhood allows users to simply park their money, they could be in for a world of hurt.
My thoughts exactly. This looks like a good deal for people who would alternatively invest in money market funds. I bet they have an account cap or tiered rates.
I just spent 3 months in London, and it's crazy how Monzo seems to have taken the market. Almost everybody seems to be paying with a Monzo card, regardless of age.
Asking around, I consistently heard that Monzo's competitors like Revolut are going to be a future case study in scaling before great product/market fit. I don't know how many people have Revolut accounts, but nobody seems to be using their cards in public.
Little details really add up. For instance, Revolut didn't have contactless support for a while, which meant people could not use it on the Tube. Monzo made their cards pink, which creates a physical network effect.
The US seems to have a wave of startups trying to reinvent checking accounts right now. I wonder which, if any, will take the market:
- Varo (https://varomoney.com) - Product and brand don't look very polished and they haven't launched Android support, but they are doing the "hard thing" of getting a bank charter (rather than having a partner bank, like all of the others).
- Robinhood (https://robinhood.com) - Already offers investment products, so they can get a lot of users quickly. Unclear how good the product will be. (For example - can they support contactless payments with a clear card?)
- Chime (https://chimebank.com) - Seems to have the most mature and polished product. The killer feature they advertise is "get direct deposits faster", which doesn't seem world-changing to me.
My benchmark is Charles Schwab Bank, which offers no fees on any ATM, anywhere. It's what many millennials that I know use. But, it's a bad product and not very user-friendly. Simple tried to reinvent banking, but they never seemed to go beyond polishing the UI. I'm curious to see what the future holds, particularly as some foreign banks expand to the USA!
> My benchmark is Charles Schwab Bank, which offers free ATM fees on any ATM, anywhere. It's what many millennials that I know use. But, it's a bad product and not very user-friendly.
Why do you say it's a bad product? I use Schwab as my main account and it works great for me.
Schwab is excellent. Their "high-yield" (lol) investor checking/brokerage account is a good offering due to no minimums, unlimited foreign ATM fee rebates, unlimited checks, etc. Their customer support is amazing. Three rings and a human picks up the phone.
My direct deposits go there, but I moved all my investments over to Interactive Brokers since Schwab doesn't offer (to my knowledge) portfolio margin and Schwab's margin rates are usurious.
I have risk management parameters for all the positions in my portfolio and for my portfolio overall. I use the kelly criterion to size my trades (beta-hedged intra-sector constituent spread trades). Margin is just additional capital I can allocate and get a slightly smaller return on. I'm about 1.5x leveraged on equities and 6x on forex right now.
I love Schwab's checking account product because it's highly functional. But, I don't think that it has mass-market appeal. It appeals to a rational buyer, not an emotional one.
The opportunity here for a startup bank is to replace credit card spending in the USA. The potential earnings are huge if you can get consumers to spend on a debit card instead of a credit card (because the rake is higher).
To make a checking account capture the spending market in the USA, it needs to feel premium and focused - like the Amex app. The spending analysis needs to be great, the card needs easy control in the mobile app, and it needs to inspire confidence. It also needs to feel like a trusted, approachable brand.
Schwab makes most of their money on investments. I don't foresee them trying to give mass-market appeal to their checking account, separate from the investment account.
A case study in this field is Marcus, a savings app from Goldman Sachs. If Schwab spun out their checking account into a separate sub-brand with branding that appeals to millennials and had a spending-focused mobile app, I could see them doing really well: https://www.marcus.com/us/en/savings
> I love Schwab's checking account product because it's highly functional. But, I don't think that it has mass-market appeal. It appeals to a rational buyer, not an emotional one.
Isn't that the wrong perspective on a financial product? I agree that good design is important, to a degree. Once a certain level is hit, you're not going to gain/lose very many customers based upon the UI.
I don't think anyone should favor one bank over another for emotional reasons Also, I'm not sure design differences qualifies as "emotional"; I think a better word would be "design" or "aesthetic".
If Bank A offers you a 4% interest rate on a loan and Bank B offers you a 4.1% interest rate on a loan, I think most people would pick Bank A over Bank B (assuming fee structures and customer service is more or less equal). Even if Bank B has a beautiful UI as opposed to Bank A's equally functional but okay looking UI.
A coworker looked over my shoulder as I was signing up for Robinhood checking today, saw the American flag debit card and literally yelled, "I NEED THAT CARD!". He signed up using my referral code, you have to learn that you're not the normal consumer.
> Even if Bank B has a beautiful UI as opposed to Bank A's equally functional but okay looking UI.
If only those were the options. I'm considering dropping one of my banks after their mobile-first aesthetic redesign that made their website drastically less functional. (Less information density, more clicks to accomplish anything, extreme non-obviousness of how to access various features.) It's been a year or two, and functionality remains significantly degraded compared to their old website.
By "emotional" vs. "rational" the parent is probably referring to the type of investor/trader that would use a Schwab account, meaning someone who understands the risks they are taking on and won't flinch when the market goes sideways. Nothing to do with UI or product design.
> The opportunity here for a startup bank is to replace credit card spending in the USA. The potential earnings are huge if you can get consumers to spend on a debit card instead of a credit card (because the rake is higher).
I think the converse is true. Card issuers earn 1 percent points higher interchange rates on credit cards (2.60%) than debit cards (1.60%).
I could see an effective marketing campaign making debit a social signal.
Being able to make a large purchase on debit means you can afford it right now-- just as dropping a stack of $100 notes would signal.
In contrast, paying with credit can be a pose-- you look like you can afford the $1000 purchase, but it hides the dark secret that you'll be paying for it well into the next decade.
I use Scwhab "high yield" (lol) as my primary checking account. I find it worthwhile due to the simple requirements/no worry of random fees, and because I can walk up to any crappy atm anywhere in the world and just get money without thinking about it. My experiences with customer service have been positive. But their approach to security is an absolute joke. They're an online-only bank, that stores your password in plaintext (and don't allow your passwords to be more than 8 characters/have any non-alphanumeric characters), regularly asks you to type your social security number over the phone, and have such poor fraud detection that I have their IVR memorized to just get them to leave me alone because they have cried wolf so many times.
My experience as well. Schwab customer service compared to my other checking is consistently and notably better.
For me the killer is no foreign transaction fees. If Robinhood allows world wide ATM + no foreign transaction fees I'd switch in a heartbeat. I dont use Schwab for equities, I use Robinhood & Wealthfront
Same here, they also have very good service. 24/7 chat assistance and I haven't waited for more than 30 seconds to be connected to a customer service representative.
I'm also using Schwab as my main account and for the most part enjoy it. It's not as (seemingly) simple and intuitive as the other products philip1209 mentioned, though. It's a well-established bank/brokerage firm, and it shows in the UI.
In America, I don't think contactless matters that much currently.
It's really a crap shoot if any specific retailer supports contactless, no major metro system that I know of support direct debit / credit contactless cards and no major bank or credit card company issues contactless cards.
If you want to use contactless in america, you add the card to apple / google / samsung pay and use your phone for NFC payments. I get a feeling that america will do a 'leapfrog' in contactless and go directly to smartphone only contactless cards than ever issue a contactless card in the mass market.
Cashier was shocked when I used my contactless card in middle of SF. She nearly screamed "WHAT DID YOU JUST DO???". Meanwhile even in smallest villages of Europe no one bats an eye anymore. America is bizarre!
I just flew through 4 different airports in the last week, and every single one of them, the payment device had a chip reader, but all of them were blocked with a piece of cardstock instructing the person to swipe.
Why? (I think they're all run by the same company, HMSHost, who, AFAICT as a traveler, has a monopoly on airport food.)
This is a perfect example of how bonkers/stupid banking is in the USA. If the retailer allows you to do a chip/pin transaction (much more secure than a magnetic stripe) THEY are liable for any fraud. Whereas a magnetic stripe transaction (super insecure) places all liability on the payment processor. So there is a perverse incentive to stick with old crappy technology. https://qz.com/717876/the-chip-card-transition-in-the-us-has...
Yeah America is fairly bizarre in what is advanced and what is from 30 years ago. But you do get things like generous rewards cards, no exchange fee international ATM & credit cards on many accounts and so on. Not to mention cheap consumer goods.
I just got a Capital One card a month or so ago and unless I'm completely misunderstanding the graphics, it is contactless. I think they qualify as a major credit card company.
> I consistently heard that Monzo's competitors like Revolut are going to be a future case study in scaling before great product/market fit. I don't know how many people have Revolut accounts, but nobody seems to be using their cards in public.
Monzo is a licensed bank in the UK, and Revolut is not.
Still, Revolut has about 30% more customers in the UK than Monzo, and about 3x more in total, since it's available in the entire EU. And, unlike Monzo, which is still losing money, Revolut has been profitable since February 2018.
That's because Revolut does much more than Monzo. It provides multiple premium account types, virtual credit cards for online payments, business accounts with open API access, credit, insurance, and soon – fee-free stock trading like Robinhood.
> he US seems to have a wave of startups trying to reinvent checking accounts right now. I wonder which, if any, will take the market
Square's Cash App + Cash Card is taking the lead here, IMO. Card, direct deposit, ATM usage, p2p payments, rewards program.
They've been the #1 app in finance all year on the Apple store, and were #1 in all free apps for a little while this past week. They are massively popular in the south, but the rest of the country may catch up, but I sort of wonder if silicon valley is gonna miss the rise since its out of sight for the time being. For growth and reach see for example:
I have everything in Fidelity which seems like it has the same benefits as Schwab, but also with the trading availability and zero fee index accounts (not sure if Schwab has this too).
I had simple for a while and the UI was great, app is best of the ones I've seen but they never had anything else (they recently created a savings account) and no checks got annoying to deal with.
My Bank of the future would have these features:
- Full brokerage account with available trading and zero fee index funds
- Free checks
- Free wiring/ability to send money to other people's bank accounts
- Really good app (like simple's)
- Decent interest like Robinhood has here without having to separate things into a savings account
- No fees
- Credit card to rival Chase Sapphire Reserve or AMEX Platinum with tightly coupled integration into the existing app software.
- All ATMs are free (rarely use, but nice to have and Fidelity does it).
- Ability to get loans
Fidelity has nearly all of these things with some negatives:
- App is not that great/UI is bad
- Their credit card is bad and not well integrated into their software
- Interest is poor
Haven is a new startup that's has a pretty cool approach to helping people do the optimal thing with their money (like an automated r/personalfinance), but I'd rather just be able to do it directly with the people holding the money.
> Simple tried to reinvent banking, but they never seemed to go beyond polishing the UI.
I'd take another look at Simple. I've been with them since the beginning and their recent enhancements are fantastic! Expenses tied to your pay schedule that automatically set money aside, same with goals. and then the big one for me was an interest bearing savings account, yielding 2%.
Honestly, Simple botched the transition from Bancorp to BBVA. I switched all of my direct deposit and bill pay back to the big banks, closed my account, and never looked back.
I wouldn't be surprised given their investor docs mentioning America, their £1bn valuation, and their current growth rate, if Monzo launched in the US in the next 12-18 months.
The math itself doesn't matter. Have you seen recent Robinhood commercials popping up on TV? Their whole business is to encourage folks that should not be day trading to day trade.
Having your money parked there just facilitates knee-jerk-reaction and follow-the-crowd trading.
> Their whole business is to encourage folks that should not be day trading to day trade
Trading for most people used to be deliberately obtuse. $7.5 commission per trade is criminal for most people, so is charging $50 a month to get a weekly email with basic technical analysis, but that's literally been the bread and butter of retail investing for decades and no one bats an eye to how deliberately ridiculous it all is.
Robinhood drops all the barriers from buying stocks, gives you a warning before they even let you touch options, and they are the evil here? This is like saying venmo is dumb because it lets people wipe out their checking account quicker than writing a check; don't blame the company for idiotic users. Robinhood doesn't even let you day trade more than 4x in a given week unless you have 25k in your trading account, just like every brokerage.
> Trading for most people used to be deliberately obtuse.
When Robinhood initiates options trading by asking you, "Do you think the stock is going to go up?" on a phone interface, they've decided that trading is now just for morons.
Maybe not based on that metric, but is it really unreasonable to limit loans to people who have demonstrated that they have the ability to understand the terms that they're agreeing to?
Idk if we should, but we do. Generally getting a loan includes this thing called the credit approval process. If one is unable to responsibility manage their personal finances they have a good chance of being limited in their access to loans.
Imagine on iOS you randomly gets a pop up "do you think gold spot is gonna be above 1250 in 2 hours?" -> long tap the notification directly place an order
Hahaha, I love this comment because when I'm trying to buy options it always makes me chuckle how they allow these type of people to trade naked options
Naked, covered, and cash secured are terms used to describe how you are covering your downside when you are selling options.
When you buy an option, your downside is always the cash you spent on the option, so you don't have different types of purchases. When you buy you are just buying an option.
As for Robinhood, they don't allow for selling of naked options, only covered and cash secured.
The average person is more likely to lose money day trading than gain (especially considering the time sink). It's basically boring slow gambling wrapped in the guise of The American Dream.
The average person shouldn't day trade. I buy stocks and basically hold them for years. I've picked some losers and I've picked some winners... but overall my return over the last ~5 years is 19%.
Buying stock with dividends helps even more, now you get money back to invest into more stock :-D
The American Dream is to accumulate wealth, and often involves looking for a way to get rich quick, some people think they can do it by day trading. There's a certain American stereotype of playing stocks to become wealthy.
" Their whole business is to encourage folks that should not be day trading to day trade"
Also using the ridiculously upside down moral convention that they are somehow 'the good guys defeating the system' i.e. 'Robin Hood'.
"We wanted to do something after occupy Wall Street, you know. Something real. So, how about, get all the young people to, you know, put their money into Wall Street" is basically their 'storyboard motivation'. Which the CNN interviewer accepted without a hint of skepticism.
The people in r/wallstreetbets usually understand that they're making stupid bets. OTOH, r/Robinhood is full of completely irresponsible traders -- trading in illiquid securities, dumping tons of money in penny stocks, triggering PDT restrictions and getting stuck with unwanted positions, not understanding bid/ask/mark (usually blaming RH or the "market maker" boogeyman for changing the price on them), buying OTM weekly options (known informally on wallstreetbets as "FD"s...), complaining about tons of "glitches" that are actually just them losing money through ignorance, and (one that has always confused me) blaming all losses on some mysterious "market maker" boogeyman who kills all of their trades.
If it was 1996, these people would be speculating on Beanie Baby portfolios hedged with Charizard cards.
To be fair, RH does sometimes have problems. They blew up the other morning and screwed over a number of people by closing their accounts for the day while they tried to figure out how their system credited them with options sales at 10-100x actual value. RH has definitely got bugs, and if I were serious about playing the market I'd go with IB or TW, or just about anyone else.
That number of people is quite large. Between FB groups, reddit and Twitter comments it definitely exceeds the hundreds.
I was locked out for 29 hours with expiring strangles that would have had significant upside if closed at the right time, lost everything put into them by the time I could get back in.
Never received communication about the lock out or being allowed back in.
They have no phone support and during that whole period not a single email was responded to.
To imagine this company as a bank is one of the most ridiculous concepts ive heard of.
Eh, they're actually going for both millenials and younger. A lot of their advertising is in YouTube ads and YouTube podcasts, which is definitely aimed at a younger audience than millenials.
It's one of my favorite subreddits for that reason. Though there are definitely some people that do seem to have a very legitimate gambling problem and I feel bad for them and their families.
There's one guy on there who lost nearly a million bucks. And another one who I believe has lost more than that, and hasn't posted a single thing in three months, since he finally made it all the way to bankrupt. Makes you think a little, I wonder if he's still alive.
I did learn that options are super exciting and a great way to lose every last penny. I got lucky and came out ever so slightly ahead on my run through WSB, but I got out of it and now I'm back to normal stocks even with my play money.
Yeah, the younger crowd doesn't trade, not because "the maaaan" is keeping them from it, but because it's a very complicated way of making money, and they typically don't want to learn how to do it right. What this startup is doing is telling the younger crowd that it's the former, while also saying "Look how easy this is!" and deliberately oversimplifying complex systems.
It's not a matter of complexity, it's a matter of power, or rather, information asymmetry.
Buying stocks isn't really investing, it's more akin to gambling like Poker, with all other investors at the table.
Many of those investors have massive computers, R&D firms, brilliant minds, 'inside information', and relationships with those companies and CEO's.
So what 'millenial' is going to trade better than those?
Zero. Or at least in the long run.
The only way to 'beat the man' is to have more knowledge than Wall St. and that is extremely rare.
So what 'Robin Hood' does is sign up fish to feed to sharks.
It might make sense to put a chunk of savings in a broad array of stocks (some in bonds, some in gold, some in cash etc.) - but 'trading' against Wall Street is about as smart as playing Poker against the best in the world thinking you're going to win.
The real appeal from the users I have heard is lack of gatekeeping and minimal tolls which I suppose makes it essentially a knife with just a thin hilt as a handle - technically you can save money using it responsibly but most people just hurt themselves.
I’m still up 12% (although down from 30%) in this bull market. The trick to buy an array of better companies and to not sell/trade them. Every trade you make gives the HFT MIT quants an opportunity to take money out of your pocket! Hold at least 1 year for the substantial tax advantage, 2 years for gains to materialize (Peter Lynch’s Advice), or indefinitely as Warren Buffet has advised.
Also don’t touch or put more than 3% in options or crypto. 80% of traders lose money with options and crypto doesn’t usually generate interest or dividends. Also crypto taxes were absolute difficult nightmare for me last year.
HFTs don't make money off of retail investors. Can't front run your trade if it can be filled with 1 order. HFTs pray on institutional investors who need to buy or sell large amounts of stock.
Well, every broker is incentivized to get its customers to trade as much as possible, ie, “make you change your mind often.” This is why brokers promote real-time news, information, focus on earnings reports, etc.
Even on the institutional side, the business is setup to encourage investors to change their mind as much as possible. More trading equals more soft dollars equals getting a larger budget for research. More trading/using more esoteric products means you’ll get more help from Cap Intro to raise money. It takes a lot of restraint to invest like Buffett.
Yeah. It's awful. They've been advertising on a pop culture podcast I listen to, with the host reading copy about how he buys stocks on Robin Hood. Seems irresponsible, especially for a podcast that isn't remotely related to finance.
> Their whole business is to encourage folks that should not be day trading to day trade
See also E-Trade's "Don't get mad, get E-Trade" commercials[0], which are clearly intended to give people the impression that stock trading will make them Super-Yacht rich.
The SEC and FINRA (regulatory agencies) don't allow day trading for accounts with balances less than $25,000. If you exceed 3 (?) day trades in the past 5 days, your account is locked from day trading for 90 days (so if you buy a stock you will be unable to sell it that day). All exchanges enforce this rule, not just Robinhood.
The real story is that the plebes realized they could make 2% per day by day trading and selling short. I did this with my dad and we were up about $40k before 9/11 wiped out most people's gains (this was back when Apple stock was in the $12-20 range). Edit: my dad never sold short because he felt it was unsupportive of companies, but had he done it to balance each of the buy/sell targets I gave him, he would have been up $80k.
I remember being demoralized that I couldn't trade on margin because I would likely never be able to save $25k with my student loan and credit card debt. But if I read the rules correctly now, I don't even think you can sell short anymore unless you have $25k.
This keeps the real day trading profits back in the hands of the rich and I feel that it could/should be challenged as discrimination. Also it breaks the ZOI rule so doesn't sit right with me..
Day trading is not some magical way to profit. Most people who make money around day trading are selling day trading services. Few make money over the long term day trading, and even fewer (any?) are making 2% every single day (400% over the course of a year with ~200 trading days).
The rules were put in place to protect people from being lured into day trading by day trading service companies. The thought was to prevent people from spending their rent money thinking they were going to get rich day trading. Also, trading with small amounts of money pushes people into penny stocks, which is an even faster way for someone to lose all their money.
Good catch, that could be some selective memory on my part. What I remember most is that it was very easy to make 2% on a good day, and we did that over the course of about 6 months or a year, trading about every other week and pulling the money out to sit idle on weeks that we were too busy to trade. I remember there were several times as many days that gained 5% (trading 2-4 times each day) than days that lost 5%.
One of the charts in etrade said we were up $40k over about a 4 month period and my dad had about $50k in play, trading on margin so working with about $100k. So the real return was more like 80% over 4 months, so I guess 240% for a year although I don't know if I'm doing that math right.
My biggest fear most days was honestly that there wasn't going to be enough volatility for the stock to move, meaning we threw away $7 to $28 on trading fees. I was moving furniture at the time and only made $80 on a good day so that was a lot of money for me then.
No day trader makes 2% a day without putting all their capital at risk. You can pick up nickels in front of steamroller till that one day it runs you over. I day trade for a living and consider an extremely good month making 5% of total capital in my trading account.
If you short high beta tech stocks on margin as you mentioned in your post, you'll get wiped out really fast. Go to Wallstreetbet subreddit and pull up the thread where a guy lost 1.5mm this year, he lost it shorting high beta tech stock that did a swing of 10% in the wrong direction forcing a margin call and a liquidation.
If you wanted to capture the downside of a stock, you can buy puts without a margin account. You should probably really understand the market better before you expose yourself to a larger risk than the money you put in.
"I hope this gets challenged in court at some point. The rules went into effect on September 28, 2001 as a knee-jerk reaction to the dot bomb and 9/11:"
The rules were approved in February 2001, so they can't have been a response to 9/11, kneejerk or not.
Intraday trading is much less risky than holding a position overnight. A lot of movement happens in the first and last 30 mins of trading, and over lunch. You can exit unproductive positions quickly, whereas if you couldn't day trade you'd only be able to sit and watch how the cards are falling.
Can't you just set autosell conditions to do the equivalent of the function with less time sensitivity? If you can't handle a $10 drop cut out at a $5 and lock in savings if it rises by $15.
Well 2001 was before trading bots for one thing, so most stocks had a daily heartbeat that was easy to follow. Several days a week the volatility on AAPL was easily +/- 1% each day, so we just bought low and sold high. I averaged 2% per day roughly 4 out of 5 days per week, losing 2-5% on the occasional day I was wrong. Also it was easy to predict when people would sell their stock on Fridays before 3 day weekends for example, so we'd sell Thursday afternoon or whatever.
Also we bought right after the dot bomb happened on 9/29/2000 when most all the tech stocks fell by half or more in one day, so there was a constant upward trend where people wanted to start gambling in stocks again over the next year:
You have to remember that these events aren't random. I personally feel that they're controlled by whoever holds the purse strings, so a handful of extremely wealthy illuminati were getting nervous towards the end of the dot com and housing bubbles and made the call to pull the plug so they could re-buy after everything crashed (see: It's a Wonderful Life).
We're overdue for that with the mobile and web 2.0 bubble. The main difference today is that older folks like me remember the lean times so more startups today have pulled themselves up by their bootstraps and are somewhat immune to these market manipulations vs propped-up brands like pets.com in the 90s. But don't think for a second that crashes (or booms) like these with a 50% move in one day can't happen again.
As long as I'm on my soapbox, I wish that I could dabble in a little machine learning and look for correlations that tend to swing together or oppositely one another. No matter how much the bots tend towards noise, there are still markets that are connected that should be easy to spot. I don't know what else I would try though because I stopped following the market after the housing bubble when people started trading foreign currency and Bitcoin etc. I could have bought $20,000 worth of bitcoin when it was $10 so it's all just monopoly money to me now. I feel that chasing easy money is maybe distracting us from real human progress. But what do I know, I'm just the poor sap stuck in the universe where I never made it big hahah.
Indeed these rules are yet another way to gatekeep wealth. They are essentially welfare for the already rich, who can buy their way out of regulation via the fact they already own money.
Uh, no. The average person can't make 2% per day by day trading. What a ridiculous claim. If that were true, financial firms would hire average people to run their mutual funds and beat their current performance tenfold.
That is because they sell their order flow to the market makers. They get a rebate on every trade. I bet that is how they make a majority of their revenue.
> SIPC insurance provides protection for your cash balance and securities holdings if Robinhood fails financially, but does not cover investment losses due to declines in the value of securities themselves.
Emphasis mine.
If you put $250,000 into an FDIC-protected checking account, that account holds cash and FDIC protects the full amount of that cash.
If you put $250,000 in an SIPC-protected brokerage account, that account holds both cash and securities, and SIPC does not protect you from a decline in the market value of those securities. So imagine the stock market drops and you go to your "checking account" and that has dropped too! To me, the concept of such a "checking account" violates my basic assumptions of how I think about my cash holdings vs. my security holdings.
I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow.
It also seems like there could be weird tax implications if your "checking account" has to liquidate securities to cover a big check you wrote.
I think that just keeps people from making claims against the stocks they bought going down in price. A checking account holding dollars isn't going to lose protection because Robinhood the company invested in some stocks.
Aside from that, it appears they're investing this money in short-term treasuries rather than stocks, making up the difference in merchant fees for debit card transactions, and maybe treating this as a loss leader. They've partnered with Sutton Bank since they don't have their own banking license.
>So imagine the stock market drops and you go to your "checking account" and that has dropped too! To me, the concept of such a "checking account" violates my basic assumptions of how I think about my cash holdings vs. my security holdings.
FWIW, some Vanguard bond mutual funds (most of the investment-grade ones) allow you to write checks against them, and those funds can lose value.
I can't find an easy link that says which specific ones, but here's their policy:
Note: this isn't a general checking account that permits debit card usage, and each check must be for at least $250. But right now, you can use their Prime money market fund, which aims to avoid loss of capital ("breaking the buck" is very rare) and write checks against it, and it yields ~2.3%
What are securities in this context? Is that not something that you personally choose to invest in?
Because if it is, then this is basically the same. Your cash is fully insured, but obviously your investments run investment risk.
If Robinhood automatically converts your money into securities, then it's a different matter. It sounds unlikely to me that any bank account would work that way, but I don't know how Robinhood works.
Not an expert in this domain but I'll cover the basics: ecurities are a euphemism for stocks and similar. Banks have been loaning out the money you deposit since the beginning of time; it's how they make money. They don't keep all the cash that people have deposited on hand, which is why a "run on the bank" was problematic in the past. They basically keep enough cash around ("reserves") so that the average withdrawals don't get them into trouble. And yes, you are certainly not choosing the investments that the bank makes with your money. And they're not "your" investments: the bank pays you a small fee (3% in this case) and then takes risks with your money to make a higher return and keep the difference.
I'd recommend reading up on the Federal Reserve (The Creature from Jekyll Island), the modern financial system (any of Michael Lewis's books, especially Boomerang and The Big Short), and maybe the first global banking families (The Medicis: Power, Money, and Ambition in the Italian Renaissance). We're talking about the power structure of the world here and it's good to be informed on the main points.
So what does that mean here? Are you saying that the part of your money that the bank uses to invest, is not insured? If so, then what does the insurance for the remainder even mean? Money that the bank doesn't touch doesn't need to be insured, because it's always there. The whole point of such an insurance is to reimburse you in case the bank loses your money due to their bad investment. If that's not covered but only the part that they never touch, then the whole insurance becomes meaningless.
I still suspect that the securities mentioned are your own securities rather than the bank's, which makes it totally sensible that they're not covered by the insurance.
My understanding is that yes, you're not covered if the bank suffers losses and passes them on to you. The entire industry is one giant moral hazard due to complete lack of skin in the game on the part of the banks. They don't own the money and aren't responsible for catastrophic losses (see the '08 and previous bailouts), but they control it and keep the upside. You're right, that insurance sounds like garbage, but I haven't bothered to dig into the details. Caveat emptor!
"Own nothing, but control everything." -John D. Rockefeller
edit: good note from /u/snowwrestler below:
> > It's not the cash/securities that Robinhood holds as part of their business, it's the one they hold for you. You may well choose to hold 100% cash or 100% securities.
> If I'm holding 100% securities, a) SIPC offers me no protection from losses, b) I better be making more than 3% return, and c) I would not call that situation "a checking account."
I think the loss case they're protecting you for is more
"I bought 100 shares of Acmecorp, then Robinhood shuttered their doors and said they sold the shares to fund their yacht."
The SIPC's job there is to reimburse you for 100 shares of Acmecorp as of now; they're not going to let investors cherry-pick and say "but they mishandled the account during the one day it was at its peak and I want that price!"
That's my question. I understand how SIPC protects the cash in my brokerage account, and I understand how I can use that cash to generate returns. And brokerages have offered "cash management accounts" with checks and ATM cards for years.
I don't understand what a "checking account" is that guarantees 3% interest and is covered by SIPC instead of FDIC.
I don't think understand that correctly. There's no such thing as a SIPC-protected checking account that holds securities. A checking account holds cash.
There's SIPC protection for your cash and securities (stocks etc.) that Robinhood holds for you, up to 250,000$ each. For obvious reasons, the value of a security in dollars fluctuates and therefore such losses cannot be insured. What is being recovered is the securities themselves, not their dollar value at a time of your choosing.
> I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow.
It's not the cash/securities that Robinhood holds as part of their business, it's the one they hold for you. You may well choose to hold 100% cash or 100% securities.
Actual banks hold only a small fraction of cash deposits in reserve, many of their assets may just as well turn out to be made up of bad loans, bad junk bonds and bad stocks. That's how banks can fail even without a bank run.
> It's not the cash/securities that Robinhood holds as part of their business, it's the one they hold for you. You may well choose to hold 100% cash or 100% securities.
If I'm holding 100% securities, a) SIPC offers me no protection from losses, b) I better be making more than 3% return, and c) I would not call that situation "a checking account."
Okay, it seems like you don't understand the very basics.
A checking account holds 100% cash (dollars), not securities. That cash is insured by SIPC up to $250,000, just like the cash in your bank account is only insured up to $250,000.
Securities is things like stocks. Stocks are subject to significant gains, but also significant losses. That's the investment risk you have to take. There's no way around it. There can't be a government insurance against it. You can buy "insurance" against losses by purchasing options to sell at a specific price, or you can reduce risk by diversifying your portfolio.
I don't know the details of how securities are valued for recovery in the context of SIPC, but the point is that you will receive (parts of) your securities, not cash. Therefore, if for example you hold Microsoft stock at the time of bankruptcy of Robinhood, you are not entitled to be reimbursed any losses that may have occured as a result of Microsoft's stock price dropping in the meantime. Conversely, you do not owe any gains that the stock price may have made.
"If I'm holding 100% securities, a) SIPC offers me no protection from losses"
Sure it does. The point of SIPC is that if your broker goes under, and you had, say, 100 shares of MSFT and $100 in cash, you get those things even if your broker somehow comes up short. Now, what 100 shares of MSFT is worth in dollars is unrelated to SIPC and depends on the stock market.
The purpose of SIPC is to protect against a breakdown in financial abstractions at one particular level.
Robinhood's checking account only holds your cash, just like any other checking account. I'm not sure why you think you can hold securities in a checking account, or why you keep calling it a "checking" account. It's just a normal checking account, FDIC and SIPC are the same protection when you are holding cash.
I don’t think that’s accurate. It’s primarily to make it clear to people that securities can lose 100% of their value. There is no guarantee.
But cash in a checking account is not going to suddenly start showing negative returns.
The only example I can think of what you’re referring to is the new Betterment checking account which is basically like a security masquerading as a riskier savings account.
I am not sure about that. It's how you are holding the money and not Robinhood. When I put 100,000 in cash in Robinhood and I am not converting it into to some Robinhood tokens that get appreciated by 3% every year. I keep it in USD. So it should be cash as per the SIPC definitions.
> When the return is higher, the risk must have gone up too, somehow.
I want to emphasize this point. You are never* getting returns for free, you are getting paid to take on some risk. If someone is trying to sell you "risk-free" returns that are higher than widely-known market rates, they are lying to you by downplaying, omitting or obfuscating the risk associated with those returns, and warning bells should be going off in your head. Proceed with caution.
* You can of course find better risk-adjusted returns than the market by way of information asymmetry in your favor. Suffice it to say that is not the case with a consumer financial instrument aimed at "the masses" (not high net worth individuals).
Sure, but you can buy US treasury bills, and then your risk is "lose some money if the US government defaults", which is very low.
We all live every day with risks far greater than that risk level.
If you look at the current treasury yields, they are very close to 3%. Add the interchange revenue, and RobinHood can pull a 3% guarantee while still making a (narrow) profit.
If treasury yields go down, then no problem: RobinHood can instantly adjust their returns downward. If they go bankrupt because of an unlikely combination of events - lots of deposits coupled with a very sharp and unexpected decline in treasury yields - SIPC will pick up the pieces and make sure you get your cash and securities up to $500k.
My understanding is that any cash and securities you own when they go out of business is covered up to the limit. So if you have $250k in your RobinHood checking/saving, that will be guaranteed by SIPC.
DISCLAIMER: I am not a financial adviser and nothing I ever post is financial advice.
> Sure, but you can buy US treasury bills, and then your risk is "lose some money if the US government defaults", which is very low.
There are all kinds of other risks associated with buying US treasury bills besides the US government defaulting, which is why you get paid - but you're right, the risk is low so you get paid a low amount. You have opportunity costs during the time that your money is locked up in treasuries. You also incur some inflation risk. If we are specifically talking about T-bills then we're talking about treasuries with maturities of less than one year, meaning that particular risk is low. There is interest rate risk. If you have an emergency and need to convert back into cash before the maturity date hits, you have to sell them on the market, where you may lose money if interest rates have increased. If you're investing in the treasuries via an ETF or via a broker, you are incurring additional counterparty risk.
> If you look at the current treasury yields, they are very close to 3%.
The 10-year bond is 2.91%, the 20-year bond is 3.05%. Investing in a 10 or 20 year bond is obviously different than having a checking account which can be emptied at any time without penalty and without having to go to the market to find a buyer, so there's a large maturity mismatch that's being incurred by your counterparty, RobinHood (assuming they are in fact investing in long-dated treasuries).
> If they go bankrupt because of an unlikely combination of events - lots of deposits coupled with a very sharp and unexpected decline in treasury yields - SIPC will pick up the pieces and make sure you get your cash and securities up to $500k.
The part where they pick up the pieces could take weeks or months; if you need the cash before then, you're in trouble. If you can afford to wait, you're right, no big deal. I don't expect RobinHood to go bankrupt tomorrow, but if they were wiped out as part of a wider financial crisis, it's possible that under those conditions you'll need access to your cash quicker than you think.
Every dollar-denominated investment incurs inflation risk, including any sort of cash account like a dollar saving/checking account.
> If you're investing in the treasuries via an ETF or via a broker, you are incurring additional counterparty risk.
That counterparty risk is exactly what SIPC insures.
> Investing in a 10 or 20 year bond is obviously different than having a checking account which can be emptied at any time without penalty and without having to go to the market to find a buyer, so there's a large maturity mismatch that's being incurred by your counterparty, RobinHood
But RobinHood can make certain reasonably safe assumptions about the flow of capital into their various accounts, and adjust based on that.
For example, while they're growing, every withdrawal will be matched by a great amount of deposits. So they'll always have the cash in hand to satisfy withdrawals.
Of course, if they ever stop growing, that assumption no longer holds. But the very nature of startups is to bet on growth, even at the risk of potential bust (since failing to grow rapidly means failure).
> The part where they pick up the pieces could take weeks or months; if you need the cash before then, you're in trouble. If you can afford to wait, you're right, no big deal. I don't expect RobinHood to go bankrupt tomorrow, but if they were wiped out as part of a wider financial crisis, it's possible that under those conditions you'll need access to your cash quicker than you think.
Absolutely. I would keep an emergency fund in an FDIC-insured bank account somewhere else.
> Every dollar-denominated investment incurs inflation risk, including any sort of cash account like a dollar saving/checking account.
You're right, inflation risk isn't particularly relevant when comparing treasuries vs checking accounts or cash. Those are all exposed.
> For example, while they're growing, every withdrawal will be matched by a great amount of deposits. So they'll always have the cash in hand to satisfy withdrawals.
Ha, if we can just assume they'll have money pouring in faster than withdrawals, even when markets experience turmoil, there's very little to worry about! I don't know exactly how sure we can be about that - or at least, for how long.
> Absolutely. I would keep an emergency fund in an FDIC-insured bank account somewhere else.
Wise, and it sounds like we're on the same page. All I was arguing is that there is some risk here that's being glossed over by selling it as just-another-checking-account-except-you-get-more-money. Maybe small/unlikely risk, but you're not getting 3% for free. You can always just go buy some IEF or TLT or actual treasuries too.
What is your theory, that every single other financial institution has willingly taken on a bunch of expenses they don't need to?
This comment just reinforces my feeling that Robinhood's business model is to extract money from credulous customers who think they are too cool for regular banks.
Banks who petition the Fed for FDIC insurance face much stricter reporting rules, capital reserve requirements, and limits on the riskiness investments they can make with client deposits from FINRA and the SEC. If you wanted, you could view the lack of FDIC insurance as a sign of a riskier institution overall, but like any other investment it might be worth it for the higher rate.
Just FYI, AFAIK, the standard 10 percent fractional reserve rate is no longer law after legislation post 08 crash bankers slipped through. So that old rule is very often not the case at a bank anymore.
Right. They don't have the same level of commitment from the US government.
SIPC is like Fannie Mae, where the US implies a backing without making a promise. When push comes to shove the US Government gets to choose whether to do a bailout on a case-by-case basis.
FDIC is not like that at all. The US explicitly and unconditionally backs them.
Look at it in political terms. FDIC is guaranteeing everyone's savings, rich or poor. You just can't let that fail. SIPC is guaranteeing a bunch of investments. If the class in power takes a dim view of bailing out a bunch of "wealthy speculators", the ball can definitely be dropped.
You shouldn’t store more than $250k in cash in any kind of bank or brokerage due to the insurance limit (unless the bank has account insurance beyond $250k.) Investments are different, of course.
Edit: I forgot about the details of the limit. Thank you all.
EDIT: According to the link shared by mortenjorck this is incorrect. A banker explained this to me a while ago, and I just took their word for it. I might have to call my mom now. I'll leave this up so that anyone else with the same misconception will know its wrong
It's actually per bank, per type of account. So $250k in savings accounts, $250k in checking, $250 in Money Market, etc.
This is incorrect according to the FDIC’s website:
> All single accounts owned by the same person at the same bank are added together and insured up to $250,000
Revocable trusts, joint accounts, and other types of accounts with multiple custodians are covered separately, but checking, savings, and so on are not.
With a little bit of work, you can probably spread your money into a few of those categories without much problem and have more than $250k coverage, but it's not as easy as just having checking and savings.
Brokerages love fat cats and most provide free high quality additional insurance up to at least 5-10M. What happens if brokerage fails? My bet is its insurance, reinsurance or gov't would bail investors out (ask Lehman clients many of whom had accounts a LOT bigger than 250k). My guess is that it is safe to keep at least 5M in a single brokerage, but decide for yourself.
Can you provide some references? This is an honest question, I am just stunned that this did not cause major account fragmentation (fat cats splitting millions into 500k chunks). Just googling (which, granted, is not truth) seems to point to major news outlets confirming that customer accounts were safe.
To clarify, I am talking about customers who held money at LB invested in mutual funds or securities. If the account had a mix M of securities before LB collapsed they would have the same mix once the dust settled and LB account was forced to whatever other brokerage. If this is incorrect (not for some advanced hedge funds, etc. but for retail customers) I would love to know.
If you are talking about folks who held LB stock or bonds, they sure did lose money when the company went bankrupt, but that is not unexpected. Stocks fluctuate in price and some go all the way to zero; for every Google there are a few KMarts, Sears or Enrons.
This came after a quick search, which seems to confirm that if a client had, say, 100 shares of Amazon in a brokerage account at LB he would still have those: a brokerage must separate retail customers investments in other securities from its own money and funds.
However, reading more I am not as sure that individual investors holding money in LB investing in other (non-LB) securities did not suffer. I am not an expert and cannot always distinguish between reputable sources and conspiracy theorists. Can someone provide some good references?
IANAL, but I doubt FDIC vs SIPC matters for an average consumer. If either fails it would almost certainly cause a major run on banks and/or a systemic money transfers failure. Thus it is much cheaper for the gov't to print more money than suffer such consequences.
And if the gov't really wanted to weasel out of FDIC there are plenty of loopholes. For example, I think FDIC can take a long time (up to 10 years?) to pay and is not adjusted for inflation, so inflate, wait and pay pre-inflate amounts is an option (stupid, but technically possible).
Is it possible, that Robinhood is using high interest rate checking accounts not to make any money directly from them, but to encourage people to keep all their spare money one-click away from its investment products? In that case, checking accounts become just a business cost to Robinhood.
Checking accounts are loss leaders for most banks, even with low interest rates.
And big brokerages have offered this type of account for decades. It's usually called a "cash management account" and works just like a checking account--takes direct deposit, provides checks and an ATM card, etc.
Robinhood's innovation might simply be in calling it a "checking account" so the interest rate looks huge (it's actually small compared to expected investing returns) and marketing it to young people who are suspicious of big financial companies.
> to encourage people to keep all their spare money one-click away from its investment products
These are not mutually exclusive. Robinhood could write this off as CAC that's mitigated by investments into (relatively) safe and low-yield investments. Robinhood could spend a million on Google/FB ads, or they could have an X% chance of losing an amount equal to (3%-bond yield) where X is reasonably low. The (mitigated) loss gives them access to capital and access to customers. If the 3% is permanent, there is no reason for anyone to store their money in a different checking account, as inflation will eat into their savings if those savings aren't invested. Extremely smart move on their part.
In an email to Barron’s the head of the SIPC cast doubt on
the idea that it would insure checking or savings accounts.
“SIPC protects cash that is deposited with a brokerage firm
for one limited purpose...the purpose of purchasing
securities,” wrote Stephen P. Harbeck, the president and CEO
of SIPC. “Cash deposited for other reasons would not be
protected.”
That's pretty standard for a lot of these new-tech-wave style brokerage psuedo-banks. Betterment, Wealthfront, etc which also have a form of savings accounts (don't believe they offer checking accounts like rh is doing here) are SIPC only as well.
Betterment has their Smart Saver[1], which offers a 2.09% rate and attempts to position it as vastly better than FDIC-insured accounts by comparing to some terrible “national average” instead of the ~2% rates that Ally, Capital One & others offer. It’s still an investment account with the risk, tax implications & liquidity challenges that such an account has.
Their misleading marketing around this is driving me away from them.
Yep, I use Bettement for index funds and their “smart saver” idea is absolute trash. It’s a shady marketing term that is likely going to hurt a lot of people eventually. I don’t even really understand the appeal when most high yield savings accounts give you 2% now (I use Amex FSB).
Yeah, most of these firms use pretty bad metric comparisons for their marketing efforts to inflate how much better it is when in reality it's par for the course with Ally and others. Now that doesn't mean it's bad. Having used it there aren't that many challenges (I'd argue less because information is clear and the interface is nice to work with) and it's all bonds and the risk is low. Unless you have an argument bonds are risky compared to cash sitting against inflation. It's still all SIPC insured.
> Smart Saver’s built-in portfolio is the Betterment Portfolio Strategy’s allocation at 0% stocks, 100% bonds.
The one big downside could be is if you need cash _now_ it can take a few days (5?) before being able to use it.
Robinhood definitely had down time yesterday, but I'd like to make a note that /r/Robinhood overreacts to things like crazy.
I'm pretty sure 95% of the people in there are under 20 and daytrading options with less than $5000.
I'm bringing this up because, while some people did lose money yesterday because of Robinhood's downtime, there we also a lot of people claiming to have lost money, but were blatantly lying.
I'm not trying to let RH off the hook, but /r/robinhood makes it sound like RH was robbing them at gun point.
Look at the comments I linked to. That's not downtime. People's transaction history is being rolled back. Some people still have fake positions showing. Another had all his positions sold. Another got bonus buying power.
The inconsistencies in the comments are striking. Looks like a complete lotto of what happened to people's accounts. That inspires zero in their back end processes.
>makes it sound like RH was robbing them at gun point.
It pretty much is. With options timing is everything and being locked out is a disaster. Especially with the current volatility
Presumably it'll all get straightened out eventually but wow I'm definitely not putting in hard earned money on RH
>makes it sound like RH was robbing them at gun point.
>It pretty much is.
It really really isn't. This is the type of exaggeration why I find that sub insufferable.
Robinhood's stability issues are well known and normal for a fast growing, early stage startup. You as a user need to understand the limitations of the platform and incorporate them into your trading strategy.
Swing trading options on RH is like carving a turkey with a chainsaw. Sure, you can do it, but it's not the right tool for the job.
This isn't someone startup app going wonky that needs a server reboot. It's peoples money & expectations for reliability are much higher. Justifiably so.
>limitations of the platform
This isn't a 'limitation'!?!?! Their system crapped out and caused chaos
>Swing trading options on RH is like carving a turkey with a chainsaw
Agreed. This isn't about which broker is best for what strategy. This is about a broker failing to fulfil its core purpose - reliably executing orders
It totally is. The company is exactly 5 years old and has only had customers on their platform for 3.5 years. The company only has like 300 employees. It's a start up through and through.
For reference, Coinbase and Acorns are older than Robinhood.
> This isn't a 'limitation'!?!?!
It's totally a limitation in terms of availability of the platform. They are not promising 100% uptime and no reasonable person should be expecting that from an app barely out of the beta stage.
If your trading strategy can't handle a few hours of downtime, you should find a platform that has an SLA guaranteeing uptime.
> This is about a broker failing to fulfil its core purpose - reliably executing orders
It's also about understanding that shit happens, especially with startups.
I'm not trying to let RH off the hook here, but people using their platform need to understand that they are a new company growing quickly and things will break. If your lively hood depends on things not being broken then you are going to have a bad time.
Robinhood has gone down before and will go down again, don't use it if you can't handle that truth. To use an old adage "Fool me once shame on you, fool me twice shame on me"
I got lucky and they just canceled a sale I had pending. It wasn't in danger of selling anyway, so no harm to me. If I were playing options every day I'd probably switch to TW or IB, because if you're playing that game you kinda need more stability than RH can provide.
Yeah, WSB is far more grown up about being childish. They know they're playing stupid games and winning stupid prizes, they are willingly doing it for the thrills. A lot of the folks on r/robinhood are genuinely naive and need to keep their hands away from the options toggle.
Almost always. IIRC there are some trivially small exceptions – you can make I believe 3 trades a day before being classified as PDT – and I believe entry and exit of a single position count as two separate trades.
But there are a lot of everyday people rigorously swing trading with smallish accounts. I've had some really interesting chats with uber drivers who do this, since they're sitting around in front of a phone all day anyway.
Actually, it's three trades in a 5 day period AFAIK. Less than one a day or you will be marked as PDT. Also worth knowing is if you are selling multiple shares or contracts then it might get filled in separate orders, which will count as separate trades. People get burned all the time thinking they're safe from PDT.
"Dude, have you tried ifood? After you ingest it your daily workout becomes 3% more effective."
"Sounds interesting. Is it FDA approved?"
"Well, no, it's FCC approved. You see, legacy foods are ripe for disruption because regulatory has capture created an artificial barrier to new marketplace entrants. With ifood we're able to end run that barrier by..."
My bank is offering a 3.01% 18 month CD, and a quick perusal of current 12 month rates shows ~2.8% isn't hard to get: https://www.depositaccounts.com/cd/
Exactly the correct point... it's not possible. You have to keep your money in there for a while (minimum thresholds)- there are probably caveats that you need to turnover a certain % of your Mastercard (since part of that 3% is on chargebacks). short term (1 year) treasuries are yielding 2.7%... so the only way to get 3% is to take more risk. Risky proposal to park your money with robin hood.
Well, it's FDIC insured when I checked, so you can get your money back if things go south. I wouldn't park all of my cash there, but I would consider putting a chunk of my savings there.
i suspect its a combination of (1) 6 month treasuries are yielding ~2.5% (2) they are getting revenue share from interchange fees on spending that they are passing on in the form of interest as opposed to some cash back/rewards program
I’d imagine Sutton Bank, issuing their debit cards, is small enough to be Durbin-exempt which means they can charge full credit card interchange rates instead of the few cents per transaction the big guys are capped at. They can also collect data about their customers to offer lending products down the road like Mint does, so it can even be a marketing expense.
> I'd expect anyone educated enough to actively trade with robinhood
You don't have to be educated to actively trade, with RH or otherwise. You just need cash and confidence.
(Note, I'm not saying that is enough to be successful or make active trading worthwhile, but the customer pool isn't limited to people who should be actively trading.)
True. I use a credit card for almost every purchase I make in order to rack up the rewards points/dollars. My debit card only gets used at the ATM for times I need cash.
In the past year, I think I've used my debit card for one purchase at a local small business where my purchase amount was under $10 but I didn't have any cash on me. I wanted to ensure the business didn't lose money after the swipe fees, so I used my debit card and PIN.
This is purely anecdotal from e.g. the finance subreddits/websites I read, but Robin Hood seems to be the first trading experience for a lot of its users (likely because the mobile experience is so seamless compared to something like ETrade). I meant educated as in "holds a higher education degree", not necessarily in the way of trading.
This whole checking account / savings account, credit card/ debit card system that Americans have to deal with is so cumbersome and backwards.
For Europeans that don't know: Most Americans have (at least) those two accounts, and those two cards. They usually spend from their checking account with their credit card, and save on the savings account. When they spend on their credit card, they sometimes "earn" points, depending on what agreement their bank has with the major retailers. Salary is inserted on the checking account. Some people still receive salary on old fashioned paper checks. Some people still pay in stores using paper checks. Almost everyone, has a lot of paper dollars in their wallet since there are plenty of places in which you need it. Now, on regular intervals, for example at the end of the month, Americans then transfer money from their savings account to their checking account if the salary is not enough to cover. If they forget, they pay high interests and fees. Generally speaking, it's a hassle to transfer money to people you know and fees are hefty. When you use your credit card, no pin code is usually needed. There are regularly issues with your credit card being abused.
In the three European countries I have lived in, people have one account, and one card. Depending on your agreement with the bank, it can dip into negative (in which case you pay some interest, but usually not much). If it dips below the agreed max, let's say minus EUR 5,000, then you can't withdraw more until you receive your salary or until you insert money otherwise. People have one card attached to that card. When the balance on the account is positive, it is essentially a debit card. When the balance on the account is negative, it's a credit card. Usually, no points are earned on any spending. In most of Europe, you use your pin code if you use your credit card. Where in America, you regularly spend time on the phone talking to robots and objecting to expenditures you didn't make, that's almost never the case in Europe. People transfer electronically without any fees from account to account. If you go out, and your friend pays dinner, you can transfer your half directly from your smart phone using just his phone number (so essentially just using the contacts on your phone). You don't need Apple or Google pay or similar. It's your bank's app. No fee is charged.
Credit and Debit cards are different things. Debit cards are the European style 'put in a pin and money is debited directly from your bank checking account'.
Credit cards are a revolving line of credit from a bank - you're spending against the LOC, and settle up on a monthly basis (to some extent - there's interest and pay-over-time involved in most as well).
The difference in accounts: banks offer substantially higher (although, basically still really low due to todays market) interest on money sitting in savings accounts, and restrict the use and availability of that money. Banks backed by the Federal reserve have to maintain a minimum ratio of deposited money to loans, and these restrictions/incentives are how they keep those in line and stay legal.
And for what it's worth, 99% of my spending is on a credit card, which I pay off monthly. I can't remember the last time I used cash or paper checks.
We also have many different ways to transfer money around, etc. using apps and things.
The main difference is that if someone steals your debit card info and goes on a spending spree, that money is gone from your account until the fraud folks at your bank can deal with it.
This may result in overdrafts from other automatic payments or not being able to pay for things you need, until the money is restored to your account.
I used a debit card to pay for dinner. Merchant accidentally charged me 15 times.
Noticed the next day - called bank. '7-10 business days to resolve', or I could go get the merchant to refund it (which I did immediately).
That money came directly out of my checking account, and was 'gone', functionally until I got them to credit it back.
Same thing happens on my credit card: the credit card company floats the missing cash for at least 30 days, at no loss to me while it 'gets worked out'.
And that's with everybody (merchant, bank, etc.) agreeing it was an accident. If it was actually fraudulent, I dunno how long it'd take...
Similar experience here. Now I exclusively use credit cards for all purchases, my debit card is only for pulling cash out of a machine or sometimes grocery purchases where I am going to get cash back. Better to have the banks money on the line than mine.
In addition to what the other commenter said, I think in practice, doing a chargeback is a lot less painful than calling you your bank and asking for your money back. Of course definitely depends on bank and credit card issuer.
I'm not trying to defend the warts of the US banking system, but...
"Credit card" would be a third account that is purely debt-based. It's optional, and you can spend directly from your checking account with a "Debit card" instead. It's just not advisable, due to the broken-ass card system you described.
"Savings account" is optional, but earns interest. Does your single EU account earn reasonable interest? Long term deposit ("CD" and "Term Share") rates are currently around 3%, with savings paying 2%.
Combining checking and savings accounts can be done in the US in 2018. The 3 major online banks all allow you to setup an automatic "overdraft transfer", so you can deposit into your savings account, spend out of the checking, and have money automatically move between them. The remaining caveat is that you're limited to six of those movements from the savings per statement, which makes aggregating small transactions on a credit card handy.
I expect the caveat with this Robinhood offering will be a cap on the balance that earns 3%. You can find plenty of checking accounts with high nameplate interest (search for Kasasa), but they all demand some level of ongoing mindshare activity [0] and limit the amount they'll actually pay out, rather than functioning as true savings/moneymarket.
[0] Usually a certain number of debit card transactions per month, to better feed the surveillance databases.
I would rather not live under an inflationary regime where one needs to continually seek returns just to tread water, but since I don't have a choice about that I'd rather somewhat keep up. Especially for sums that end up in liquid accounts "temporarily" and then drag out longer than expected.
And Canada has another slightly in between device that's super useful and mostly inaccessible in the US.
Going negative in an easy to transact, straightforward pay-for-amount-and-duration-of-debt from your bank has no US equivalents.
Having an unsecured line of credit along with your checking account is extremely convenient if you generally try to invest your savings and very occasionally need to go under temporarily.
It's not like a credit card. The super multi-faceted it-can-very-conditionally-be-used-to-consolidate-cash-debts-with-low-introductory-APR-but-is-also-a-purchase-transactional-tool-with-a-grace-period-except-when-you-break-it-then-you-get-20%-APR-and-get-charged-retroactive-debt-from-the-time-of-transaction-plus-all-your-subsequent-transations-all-have-no-grace-periods-until-you-do-something-magical-to-reset-the-state-of-your-account-and-all-that-except-when-you-do-any-cash-advances-in-which-case-all-bets-are-off is unexplainable and uncalculatable for normal people.
It's not like a loan because loans need paperwork and issuing per instance per purpose. And each time you use it triggers effects on your credit score. A line of credit is always there and free if you don't use it and you can use it on a whim for any arbitrary reasons.
It's not like taking money out of your investments because liquidating assets and possibly transferring between your brokerage and banking accounts can take a week. A line of credit can be cash in your checking account in milliseconds.
Edit: correction, it's not really inaccessible in the US, just a fringe product with 12% APR and other catches like no debt monthly fees vs 5% and no catch in Canada.
Charles Schwab Bank[1] has something similar called an "Overdraft Line of Credit". You can overdraw your checking account, up to the line of credit amount (which can be as high as $10,000). There are no overdraft fees. You just pay a relatively-high interest, which for me is 13.99%. Nothing else. No catches, no hidden fees or surcharges.
No other U.S. bank that I'm aware of offers this feature. This feature is fairly hidden on their website. I read about it somewhere, and asked about it through their chat. The gave me a link to a PDF application form. I had to print out the PDF, fill it out with a pen, and mail it out (you can't apply online). I was approved a week or two later.
[1] It's the Bank that offers this -- not the brokerage service of Charles Schwab. There's a second overdraft service offered through Charles Schwab itself -- this overdraft service is a margin loan secured by equities in your brokerage account. You can actually combine both overdraft services. The Schwab Bank Overdraft Line of Credit application form asks which type of overdraft line of credit to use first.
"Generally speaking, it's a hassle to transfer money to people you know and fees are hefty."
This hasn't really been true for a long time. Most banks participate in Zelle, which lets you transfer money for free to just about anyone via your phone. Every national or regional bank I can think of is a member. Venmo also does this.
"in America, you regularly spend time on the phone talking to robots and objecting to expenditures you didn't make"
Regularly? I am a heavy credit card user and I've had a card compromised once about 10 years ago. I talked to a human at the bank to clear it up and they had a new card in my mailbox the next day.
The whole "points" thing is an oddity, I'll grant. But we're used to it and it's highly advantageous to the consumer if you pay off your cards every month. It's worth about $1000 per year to me.
One point of your depiction of the US system I haven't seen other replies address: You can easily and for no fees (though not quickly) transfer money to other people with paper checks. That's the main reason they are used these days. I haven't seen anyone (try to) pay using a paper check at a store in years. Most banks allow for electronic deposits of checks with smartphones so it's not even that inconvenient. Not to say this is an ideal state of affairs (checks can take days to clear and not everyone has access to accounts that can write paper checks) but it's not quite as dire as you portray it.
Europe doesn't have credit cards, it's all debit cards. And I see a US system much more advantageous than in Europe. In many European countries cards aren't as widely accepted as in US.
What? Generalizations about Europe always seem to fail. Credit cards are widely used in Europe. In some European countries cash is starting be used rarely and payment is mostly done with a card or a phone.
One might argue that one benefit of the European system is that credit card processing fees imposed on the retailers are regulated, which ultimately causes credit card "points" to be uncommon. This in turn makes life simpler because there is no need to game the credit card benefits system. You can, however, get up to 0.5% cash back at least where I live.
I can confirm that credit cards are not used by a majority of people in France. Debit cards are the norm.
Credit cards are mostly used by businesses but individuals rarely have them as they are hard to get in the first place.
In France, it is also customary to use your checking account with an allowed overdraft amount.
That means you can end up with a balance of -500 euros but do not have to pay fees unless you go over this agreed amount.
This amount is negotiated with the bank when you open your account and can vary depending on your monthly salary.
Unlike a credit card though where you can spend as long as you have money left on your card, the bank can cancel your overdraft and ask you to reimburse the money at any time.
You do not earn points with the overdraft and contrary the Credit card system where having a credit card and spending some money actually increases your credit rating so long as you pay the money back in time, using your overdraft is considered a bad thing by most banks.
They are still going to give you the overdraft because if you go over the agreed amount then the fees become staggering.
I'm sorry, but your post is completely wrong. If this was an essay on American retail banking, you'd receive an F.
> Most Americans have (at least) those two accounts, and those two cards. They usually spend from their checking account with their credit card, and save on the savings account.
This is not true. A), most Americans do not have two accounts. The card used on your checking account is a debit card, and it does not allow you to have a negative balance without incurring a penalty fee. A credit card is a completely separate instrument that allows you to spend from $0 to -$<credit limit> with the understanding that
> When they spend on their credit card, they sometimes "earn" points, depending on what agreement their bank has with the major retailers.
This, broadly speaking, is not true. The bank rarely, if ever, has any direct dealings with the retailers. This is mostly done through the payment network (Visa, MasterCard, etc., which Europe has as well).
> Salary is inserted on the checking account. Some people still receive salary on old fashioned paper checks. Some people still pay in stores using paper checks. Almost everyone, has a lot of paper dollars in their wallet since there are plenty of places in which you need it.
This is not true. Income is deposited wherever you indicated to your employer. This can be separated between savings accounts, retirement accounts, checking accounts, investment accounts, or even deposited directly to prepaid cards. Check paying is exceptionally rare among people under 50 (except for some holdouts, like apartment complexes), and virtually nobody carries wads of paper dollars around anymore. Many trendier stores in cities are now 100% cash free and do not handle paper money at all. Checks might still be issued, but most banks offer instantaneous deposit via smartphone.
> Now, on regular intervals, for example at the end of the month, Americans then transfer money from their savings account to their checking account if the salary is not enough to cover. If they forget, they pay high interests and fees.
This isn't true. For one, the only reason to transfer money from your savings account to your checking account is if you need to make a purchase with your saved funds, i.e. you've spent in excess of your means for that month. The purpose of a savings account is... to save. The idea is the number of withdrawals from the savings account are limited (by law). In return, the bank can offer you higher interest on your deposits because the money is less mobile. In the past, these interest rates were decent (over 4% APY was not uncommon). Since the financial crisis, savings accounts from major banks have offered insulting low rates (in some cases 0.05%).
You pay fees for drawing a negative balance in your checking account. Every bank now has the ability to link both savings and credit accounts to automatically cover these "overdrafts" automatically, with no user input.
> Generally speaking, it's a hassle to transfer money to people you know and fees are hefty. When you use your credit card, no pin code is usually needed. There are regularly issues with your credit card being abused.
This is somewhat true, but most banks are good at catching fraud before it becomes an issue for the customer. Europe, I might add, is not immune to credit card fraud despite using PIN codes for credit transactions. Debit transactions in the US commonly require a PIN code and have for decades, however this PIN code is not attached to the card chip like on European cards.
Beyond this, it isn't like Europe is some alien planet. There are definitely countries in Europe which offer the Checking/Savings/Credit structure.
> Income is deposited wherever you indicated to your employer. This can be separated between savings accounts, retirement accounts, checking accounts, investment accounts, or even deposited directly to prepaid cards.
As an American, I agree with all of the corrections in your comment except for this one.
I'm willing to accept that your employment history is different than mine but I've never had an employer that supported this and I'd be really surprised if most Americans did.
My employers have given me a choice: paper paycheck or direct deposit of the full amount. Full stop.
That's odd. I've always had the option for partial direct deposit (redirect a fixed $ amount or redirect a fixed % from each check to different accounts). Even my college job at a café had that option (to be fair, the checks were from the state comptroller's office, so the same system used to pay all state employees).
My last employer even let me choose if I wanted monthly, bimonthly, or biweekly paychecks.
[Edit: I shouldn't say that it's odd. It just runs counter to my experiences is all.]
What is your experience like? I live in NYC and I find that comment to match my experience today. The only thing missing is that some (perhaps many, but certainly not all) people use one or more of Venmo, Square Cash, Zelle, or Apple Pay to send money from person to person, but default to cash or checks if they don't have a service in common.
>Banks are going to have to decide whether they want to raise their rates to compete, or face bleeding customers.
I'm sure the big boy banks are here stay. Most of them are in the category of, "too big to fail" (as the crisis a decade ago highlighted) and upstarts like Robinhood are but a blip-in-the-radar than a real threat to the established players, imo.
To big to fail doesn’t really protect them if they lose their costumers. A bank with tons of customers that’s bleeding cash due to a market crash is salvageable(and remember the investment in bailing them out payed off), a bank that’s bleeding cash because it doesn’t have any customers is not salvageable and no longer “big”, so it will fail.
Also consumer checking accounts aren’t really that important to bigger banks or even bigger credit unions. Banks own a large portion of property that doesn’t fall into a checking account. For instance if you own a home and pay a mortgage to Wells Fargo, they control a far greater amount of your wealth than whoever you bank with.
Also, business banking and loans in general will never be something that happens on an Robinhood. At least not in this generation. These types of entities require a man in a suit in an office.
Eh lets not overstate it too much- this isn't the first time it has happened, paypal and a few other "internet banks" back in the early-mid 2000s was offering 5% interest rates when big banks weren't offering much. The big banks are as strong as ever.
Generally, you really shouldn't be keeping much in a bank anyway, invest most of your money, even if only in ultra safe bonds.
You can sell bounds, they can be fairly liquid, and the yields are higher, with a locked in rate for that time. Personally I am a bit concerned about the safety of keeping money at RH as well after their big F up last week.
The real point though was that IMHO aside from your emergency money, you should really have as little in cash as possible. My other callout was that high interest rates didn't appear to steal any significant business from big banks in the past.
When banks in the UK have offered 3% (Tesco bank did this) it was for the first 12 months and the number of new accounts was eventually limited.
from what I understand Tesco bank had purchased bonds/securities/whatevs with a 5% interest rate, so made 2% off the deal. (and a slew of new customers worth x each to the bank)
Tesco's 3% is ongoing, it is limited to £1500 though, I've had one for 5? Years. Was only guaranteed for 12 months, and guaranteed it again when they had their security breach a few years back.
They have limited account opening at various times though.
* maintain a 0.5% spread above the best nationally available rate as rates rise elsewhere as an ongoing customer-acquisition cost
* just stick to 3% even as other banks raise their rates higher over time, assuming that 3% is good enough and their product is sticky enough that people won't move
Federal Reserve rates have been steadily increasing for awhile, and LIBOR is above 3% short term. If they use this depository capital influx to loan money to options / future traders on their own platform they'll make money, and they won't be paying it to other institutions.
30 year US treasuries are now also above 3%, and we may see that continue with shorter-term instruments so there's a hedge there as well.
I don't know where you're located, but in the US, interest rates used to be much higher. So yes, you got great rates on savings accounts, but you also paid 8%+ on your mortgage.
Also 3% is astronomical for Euro zone. Here you typically have 0.01-0.1% on saving accounts (only for 100k Euro and below), and negative rate on checking accounts (most people usually pay 7-12 Euro per month for checking accounts and 20-40 Euro per year for Visa card).
It's not a fair comparison. Interest rates have bounced back (to some extent) and interchange fees are quite a bit higher in the US.
I haven't checked everywhere in the eurozone but a lot of major banks have online brands/products that are typically free. You should be able to have at least a checking account and a debit card without paying any fees. "Neobanks" are also a lot more developed than in the US: see N26, Revolut, Ferratum, ...
Savings accounts yield nothing, but that has nothing to do with retail banks :) That said, you can find fixed-term deposits between 1 and 2%: https://www.raisin.com/
There's a slew of online-only banks out there currently offering accounts with around 2% interest. Banks that have a brick-and-mortar presence have a lower margin so they offer lower interest rates.
Unless your monthly turnover is massive you could probably afford to lock some of that away for a year and get higher interest rates.
Or look into an offset mortgage.
Even bog standard instant access accounts are above that, and have the added benefit of not potentially losing all your money when you debit card gets nicked.
Most banks that will give you a current account will want to see £xxxx deposited every month (e.g, your salary) to earn any interest (if they even offer interest, it's rare on a current account).
I could open multiple, but then every month I'd need to spend time transfering money to each to earn the interest. Im not sure that would even count towards deposited every month, they might want to see a direct debit that is actually a salary. I'm not sure.
Further, I have an ISA (which is the UK tax free saving accont), that earns under 1% too and I'm limited to £20k a year into that account.
I have another account that pays ~2.x% per year, but on that one I'm limited to £250 a month.
> I could open multiple, but then every month I'd need to spend time transfering money to each to earn the interest.
This is a 30 second job setting up a free ongoing standing order, one to deposit then one to move the money elsewhere the day after every month automatically. This is sufficient to meet the pay-in requirements of all the banks.
> they might want to see a direct debit that is actually a salary
Salaries aren't paid by direct debit, that's something else - an agreement that allows a company to withdraw a variable amount from your account.
Some banks have a requirement that you have x direct debits setup (normally 1 or 2), you can work around that with something like https://littledebits.co.uk/Direct-Debits-and-Charity
Cash ISAs serve minimal purpose with the new personal savings allowances. If you're a higher rate tax payer you get £500 tax free, £1000 if you're a lower rate cash payer. I'd question why you're holding so much cash if you're getting a return higher than that, there's often better places for your money.
> Im not sure that would even count towards deposited every month, they might want to see a direct debit that is actually a salary. I'm not sure.
For what it's worth, here in Australia they have similar offers. At one bank, I said I wasn't interested because of the regular 'salary' deposit requirement, and that bank offered to set me up with two accounts and a regular automated transfer between them to meet the minimum monthly deposit requirement. Though honestly, the fact they offered to do that concerned me even more.
As you say there's a few current accounts that will give you decent rates on smaller amounts but you'll have to set up the minimum pay-ins as standing orders (which works on almost all of them, I've had a fair few). You can also do the whole switching-for-bonuses thing which is much easier than it used to be and will give you an OK return but is more work than most people are willing to put in.
However, if you're looking for something slightly better than what you've got now there are currently a fair few 1.5%ish easy access accounts available that you could just dump your savings in and make a fair bit more than you're currently getting. You can get 2-3% if you're willing to lock some up for a year+.
ISAs are irrelevant for most people since the personal savings allowance came in - if you're earning less than £500/£1000 per year in interest (depending on income) then you won't pay tax anyway.
moneysavingexpert.com has excellent round ups of this sort of thing.
Some workplaces can split your direct deposit from payroll into multiple accounts. _If_ you can hit the deposit limits that way. The bank doesn't need to know it is not your entire salary.
The time isn't an issue - you can set up standing orders yourself with most UK online banking sites. If they require a direct debit that's another matter.
"Robinhood expects to turn a profit thanks to a lean 300-employee operation, earning a margin on investing your money in US treasuries, and a revenue share with Mastercard on interchange fees charged to merchants when you swipe"
For all the folks suggesting that this is funded by selling your data: is there reason to expect that other banks with lower rates aren’t also selling your data? They may be less technically apt, but banks aren’t usually ones to leave money on the table.
PSA: those using Robinhood for trading, they use the FIFO/first-in-first-out method for determining your cost basis when you sell. This can have unexpected tax consequences.
Any I have seen allow you to set what you want as the default for your sales and also chose to use a different style on each sale. Default setting for accounts I have seen is selling high cost first (as that will result in the lowest taxes).
Selling high cost first is likely the best strategy but if say you had some that was long term versus short term capital gain that might lead you to make a different decision on a particular case. Also if you had a choice to sell something that is about to be a long term gain versus one that you bought much more recently you might want to sell the more recent purchase first (in the event you were going to sell again say in a month - which could let you claim a long term gain for the 2nd sale). So there are reasons to make different choices in individual cases.
FDIC insurance exists for a reason. It prevents runs on the bank. There will be a time of financial crisis in the future and anyone with a Robin Hood account will flee for an FDIC guaranteed account. The run on liquidity will probably destroy the institution.
3% on checking sounds too good to be true. What's the catch?
For example, I didn't see anything about how funds are insured. If Robinhood were to somehow lose depositor funds, what recourse would account holders have?
It said that they invest your money into US treasuries. I assume since they are doing this instead of providing mortgage/loan services and having to employ an army of loan and compliance officers, this would theoretically make it possible to profit based on the long term treasury rate since it's just a buy and hold strategy and doesn't really require much overhead (comparatively) even when being done on a large scale.
The 30 year treasury rate is barely over 3% so I'm honestly not sure how they can make any sort of real money on this. I would expect the rate to change over time, especially if the 30 year dips under 3%. But it seems theoretically possible given the absence of brick-and-mortar spaces and all the overhead and costs that comes along with that.
EDIT - I forgot about the interchange fee sharing when you use the debit card. So that is where the profit would be. Seems like the goal is to target roughly the 30 year treasury rate and pass that through to the customer and they can breakeven. And the profit comes from actually using the debit card. Not to mention potentially selling that user data.
Like all "tech" companies - they're selling your data. They already do it in their brokerage accounts. Now imagine the value of knowing what you spend every single dollar on, how often you're shopping at a competitor, what time of day you're most likely to swipe your card, etc.
They're SIPC insured (like a brokerge account) instead of FDIC insured (like a bank account) which is a subtle difference and ever-so-slightly riskier for the consumer but not terribly different.[1] The biggest/riskiest difference is that the insurance here is provided by a group-funded non-profit as opposed to the federal government.
But mostly it's about making up the difference with your data.
While that's a possible money source for sure, Robinhood currently makes their profit on their brokerage accounts mostly by earning interest on deposited cash.
Banks make boatloads of money without needing to sell data, but rather selling loans. Not even needing to loan money, offering 3% interest, with how high treasury notes are these days, is _really_ easy for banks to do. The problem is that generally banks also have really high overhead, something Robinhood doesn't.
> Now imagine the value of knowing what you spend every single dollar on, how often you're shopping at a competitor, what time of day you're most likely to swipe your card, etc.
I'm curious what the harm here is. Are they going to blackmail people who shop at their competitors?
It's basically Facebook on steroids in terms of how much information they're going to have on their users. And, unlike Facebook, this "free" platform self-selects only the most valuable users (for marketing purposes): those with disposable income.
Because one is from a bank with a high interest rate but a shitty privacy policy and the other is from a bank with a better privacy policy but a lower interest rate.
Not like this. American Express might have paid marketing "partnerships" but Robinhood is taking it the next level.
The Gramm-Leach-Bliley Act requires "financial institutions" to give customers the opportunity to opt-out of information sharing with third-parties. GLBA doesn't permit customers to opt-out of information sharing with affiliates. Tucked on the second page of Robinhood's privacy notice[1] (which is curiously absent from their "disclosures" webpage) you'll see they have an affiliate "Chronos Research."
I mean I guess if you opt out its different, but visa/mastercard etc by default sell all your data. Here is just a tiny amount of the data I can buy/use.
The catch is that when Robinhood goes bust because of the risky investments they're making to get you that 3% yield, and they take the SIPC down with it, then the government bails out the SIPC and Robinhood you lose purchasing power through currency devaluation.
This article has some of the worst pr-speak I've seen in an "article." It sounds like it was pasted straight from a press release.
The only thing this company is doing that tons of other online banks isn't is 3%. A lot of smaller banks are offering 2%+ so I would guess it is likely other banks will match this 3%
https://www.depositaccounts.com/
Lot of misinformation in the marketing. This is not a checking nor savings account. Checking and savings accounts are FDIC insured which gurantees $1 in / $1 out. This is a brokerage account, and if the way robinhood invests the cash goes down, so does your “checking” account. The company could choose to cover the losses but insurance will not if robinhood fails.
I wouldn't mind switching to them, but they don't integrate with financial tracking systems like Mint. I find the ability to get a birds eye view of my finances too valuable. Sticking with Ally and their 2% for now. Do wish they integrate with Mint or Personal Capital.
So it looks like this is covered by SIPC [0] not FDIC.
That’s pretty bad so the account get zeroed out by identity theft, or embezzlement, or robin hood going bankrupt. These are all terrible risks for checking accounts (or money market even). This is basically investing in RobinHood in an easy manner.
There is a wait-list of more than 45,000 people when you sign up for the checking. An email is sent out after you register and it says the feature arrives in early 2019.
But they're claiming each card design is in "limited" supply with ~650K each. Something doesn't make sense there. If they can't process 45K signups why have 3M cards up for grabs?
Sorry if this is ignorant but how does the ATM system for this work? Who owns the ATMs at Target and 7-11? Is there a limit to how much cash you can deposit? I'd like to use this but I will be processing a lot of cash in the future and worry about depositing thousands of dollars at an ATM.
They're probably partnering with Cardtronics (which includes Allpoint) which has a really wide ATM network, partially owned and partially thru partnerships with other banks, credit unions, etc.
I would be very unconfortable depositing large amounts of cash at an ATM unless it was a first-party (owned by my bank) ATM with the newest tech that can scan bills as they go in.
Even then I think for cash I might be more comfortable handing it to a teller and getting a receipt.
These third party low-rent ATMs at convenience stores don’t even take deposits. They are withdrawal only.
Not to come across like this is an attack, but do you have any evidence/rationale behind that fear? I've never heard of ATMs mishandling money, although I haven't researched it before.
This is anecdotal, and not explicitly about ATMs, but I have had those "Pay your bills here" machines at 7/11 and other convenience stores mishandle my money a couple times. It would report I paid $150 instead of $200, missing a single $50 note.
This was resolved after about 2 hours on the phone with the company who manages the machines, but I still don't use them anymore.
Years ago depositing cash into envelopes which would slide into the machine, once or twice I had the deposit amount “adjusted” after the fact.
How can you prove if it was you or them that miscounted?
Modern “envelope-less” machines do not have this risk.
Counting cash by hand is surprisingly error prone. I ran a snack bar in high school and I would hand-count a large pile of grubby $1s before bringing to the bank. About once a week the total from their counting machine would not match my tally. I think even once it was the machine that got it wrong.
If you’re face to face with a human you can error correct before the pile of cash disappears.
Debit card skimmers are very common in ATMs, as are cameras to catch people entering their PIN. Although I have never seen an ATM where you can deposit money at a grocery or convenience store, and so I’m not sure what the potential attacks are for such a situation, I would imagine that tampered-with ATMs could capture other information or remove money from your account.
See https://krebsonsecurity.com for a ton of articles about various skimmers and scanners that have appeared in ATMs and gas pumps.
Yeah most online banks like this don't accept cash deposits via ATM. If you need a cash deposit it's done either via depositing at a traditional bank and transferring, or getting a money order and cashing that via mobile check deposit.
I use Simple, which is similarly online-only. They recommend depositing cash by getting a money order, which you can deposit via online check deposit by taking a picture of it.
I doubt the ATMs at Target/7-11 can take cash deposits. I've only seen that feature on bank branch ATMs.
It'd be non-starter if I was, say, a landscaper and often received cash payments from clients.
I've had no trouble personally going basically cash-free. If someone gives me cash for some reason, I just buy the next grocery run with it to use it up.
The limit on deposit is based on FDIC limits and how much you want to risk. The amount FDIC insures today is $250,000 https://www.fdic.gov/deposit/deposits/
>With Robinhood, you’ll earn 3% on your money in both Checking & Savings, and interest compounds and is paid out daily. That’s an extra $240 a year for the average American household with $8,000 in the bank
Does not compute. If it compounds daily then yearly total is above 3%
It's standard to talk in annualized interest rates to make simple comparisons between accounts. A daily interest rate of 0.008 % will compound up to just over 3 % of effective annual rate.
If the daily interest rate is 0.008 then the annualized rate is 2.92%, not 3%. The standard is to multiply by the number of periods, not to take compounding into the calculation.
Why would the standard be to calculate a number that has no use and isn’t rooted in reality? If the rate is 3% annually and paid out daily, the the daily rate is the number that compounded yields 3% annually....
Because it makes it easy to calculate how much is distributed. Just take the annual rate, divide by number of periods, and multiply by the amount of principle.
That's true of the nominal rate. A nominal 3% divides to an effective daily rate of 0.0082 %. But the effective rate is (1 + Nominal Rate / n)n - 1 or just over 3.2%.
Assuming the transfer from the checking account to the brokerage account is instant, this can give you a lot more liquidity to your stocks. Traditionally, I have to set aside few thousand dollars that I'm absolutely sure I won't need anytime soon, transfer it to a brokerage account, wait few days, remember to check if then money is in, buy the stock, then reverse the process to sell the stock. The round trip of money in checking account to owning a stock took few days but now it can be done under a minute for free.
Investing day to day with the money in your checking account is probably not a recommended personal finance practice but I definitely have more money in my checking account than I probably need this month because moving money is too painful.
I skimmed both of your links and they both sound like https://en.wikipedia.org/wiki/Payment_for_order_flow, which is regulated. Specifically, they can't give you a worse price than what the NMS provides, so you're not getting a worse price. What's the issue here?
Robinhood is a small operation that’s skimming pennies off your transactions to fund its operation. The alternative is banks who are doing the sambut times a hundred and banks are making a ton of money off their customers even with 100 times as many employees as robinhood.
They are not bad guys’s. They are still making money(surprice!?), but they are much much more modest about it than traditional banks. This account is a fine example. They don’t need to give you a 3% deal, but they are doing it anyway because it’s benefitting both them and their costumers.
So, they're exploiting users in some of the ways banks are, but not all ways currently. Other banks do all of the things listed above already, have been for decades.
For users asking questions about how this will tell you a lot.
Users of Robinhood Checking and Savings earn 3% interest annually on each of their Checking and Savings balances. Robinhood does not charge account maintenance, account minimum, overdraft, ATM, transaction, foreign transaction, transfer, or card replacement fees for Robinhood Checking and Savings. Robinhood Checking and Savings is offered through Robinhood Financial LLC. Robinhood Checking and Savings is an added feature to existing Robinhood accounts and is not a separate account or a bank account. The Robinhood Debit Card is issued by Sutton Bank pursuant to a license from Mastercard International, Inc. Neither Sutton Bank nor Mastercard International, Inc. are members of FINRA or SIPC.
The only fine print at the bottom of their signup page simple says;
“Users of Robinhood Checking and Savings earn 3% interest annually on each of their Checking and Savings balances.”
I would have thought a more precise disclosure would be required. But it certainly does not say anything about fixed, guaranteed, etc.
Presumably when you get to actually creating an account there will be more specific terms which must allow them to adjust the rate in the future.
But it does not seem to be a kind of “teaser” rate. It seems like, I’m guessing, that everyone with a Robinhood Checking account will get the same rate, if they change it in the future it would be a product-wide adjustment.
Most banks in Europe do similar promos, but promo rates are 10x-100x lower, and normal rates rarely exceed 0.1% on saving accounts. Promo rates do typically last 3-6 Months and only for new customers.
M1 has a checking/savings account coming in 2019 Q1, so this seems to be getting into the territory of tablestakes rather quickly. I'm kinda ready to say good riddance to my brick-and-mortar bank, other than maybe maintaining it at a low level for any in-branch needs (and as a source to transfer into robinhood).
As a user of the Robinhood brokerage for all of my "fun investment money" I'm a fan of this. I do wonder how the big banks are going to respond however as this is blatantly a "shots fired" kind of event.
You joke, but a lot of savvy people hoard $100k with BoA through their brokerage in the form of ETFs specifically for the bonuses to credit card rates (and the free equity trades).
Yeah, I know. I'll probably roll over my 401k into an IRA at Merrill Edge for the free trades and 75% perk on their cash back cards.
I was just highlighting the horrible rates that banks currently provide in the customer's favor even if you are a loyal patron holding a substantial (for the vast majority of people) sum of money.
Oddly enough I suspect the result will be lobbying for stricter financial privacy regulations. Almost half of Robinhood's revenue is from selling data.[1] Big banks won't be able to compete on that front and most of the big players don't participate/make enough money on order flow sales that they'd miss it if it were prohibited. So the banks will do what they do best: lobby congress & regulators to legislate & regulate their competition away. Though in this case, I would argue that's in the best interest of the consumer.
I don't think this means what you think it means...
Every single broker like Robinhood sells order flow to electronic trading firms. This flow is then executed faster due to improved market access. All of that to say that you're probably getting better execution because Robinhood wasn't stupid enough to try to go through some crappy broker or build their own order entry system.
Also, the order data can not be mapped back to you. That simply isn't how the stock market works at all. Every single other broker (Schwab, Merril Lynch, etc) does this.
Source: I work for one of those big market making electronic trading firms, the kind you try to demonize but fail fundamentally to understand.
> I don't think this means what you think it means...
You might work in IT for a market making electronic trading firm (it's not big, I looked them up). I'm a securities regulation attorney. I've worked for banks, hedge funds, and RIAs. This is so far away from best execution that any attempt to argue that this is to the consumer's benefit shows you fundamentally do not understand the fiduciary duties that brokers are supposed to owe to their clients. You're parroting the party line without fully understanding how the system works (and why should you? you're just a distributed systems engineer) yet you have the audacity to tell me in another comment that I've "read Flash Boys" without doing any research and don't understand how the stock market works.
In options maybe, not in equities. Bank of America doesn't, Vanguard doesn't, none of the firms I've worked at do. Bernie Madoff basically invented the "strategy" and most firms aren't exactly looking to emulate him.
The FSA (U.K. equivalent to the SEC) effectively banned the practice a few years ago (2010 maybe?) which curtailed the practice a lot. I'm not sure about other states but the Massachusetts AG's office started looking into it last year, too. Its essentially a kickback paid in exchange for information that allows the "smart money" institutional investors to front-run the "dumb money" retail investors.
This comment couldn't be further from the truth. You sound like you've read flash boys without reading the rebuttal that shows how it is entirely wrong.
Your cash in Robinhood is insured up to $250,000 by the Securities Investor Protection Corporation (SIPC). SIPC protects cash deposits in your account in the unlikely event that Robinhood fails.
Up to what amount?
SIPC insurance covers your checking, savings and investments. Your cash and securities in Robinhood are protected up to a total of $500,000 by the SIPC, $250,000 of which can be in cash, the rest in securities. SIPC insurance provides protection for your cash balance and securities holdings if Robinhood fails financially, but does not cover investment losses due to declines in the value of securities themselves.
Is this different from bank insurance?
Similar to FDIC insurance, SIPC protects cash in your account if the financial firm fails. FDIC insurance covers deposits in FDIC-insured federal banks. SIPC insurance covers cash and securities at SIPC-member brokerage firms. Robinhood Securities, LLC is a member of SIPC. Additional information can be found at sipc.org.
Apparently, SIPC doesn't provide blanket coverage[1].
So no coverage against, i.e. fire, flood, robbery or embezzlement [2]. The first 3 may not be relevant with digital bank that doesn't handle cash, but the last one might be.
EDIT: I misread the second reference. apparently FDIC does not insure against theft or embezzlement, but according to the first link FDIC does provide blanket coverage unlike SPIC. it's still not clear to me what blanket coverage means in this instance.
My understanding (which is limited, so someone please jump in if I'm wrong) is that SIPC does not protect against a decline in value of your assets.
I'm wondering:
First, whether Robin Hood is lending out deposits to margin traders. If not, what are they doing with the money? I don't think that they are, as the article implies, making > 3% on US treasuries.
Second, if that investment loses money, are those losses passed on to account holders? If not, someone must be insuring that investment. Who?
No, and that is one of the reasons their rate is so high. To receive FDIC insurance from the government, FINRA and the SEC generally have much tighter restrictions on what they allow the banks to do with the deposits and what they force the bank to keep in capital reserves, both of which are a drag on interest rates.
This is a marketing bait and switch. One of two things must happen:
1) They lower the interest rate down the line after they've acquired a bunch of customers
2) They limit the offer to certain customers who are lucrative
If they sustain this offer for the general public, they will 100% go out of business.
The 5 year treasury rate is currently set at 2.75%. Traditionally, people use treasury bonds as a place to park safe money, but the SIPC insurance makes this just as safe (up to $250K).
> The checking and savings products are not technically bank accounts. They are separate balances held within a Robinhood brokerage account. Your checking and savings funds are not FDIC-insured, but they are protected by insurance from the Securities Investor Protection Corporation, up to $250,000 in cash, according to Robinhood's FAQs.
Is there any risk to the SIPC insurance vs FDIC-insured?
Monzo has blown up in the UK, and I know their team is growing at a crazy rate. While they aren't profitable yet, they plan to sell financial services through their marketplace (insurance, mortgages etc.) which seems to be a major source of potential income for them (source: https://monzo.com/blog/2017/11/16/monzo-marketplace/)
I love how this is breaking the mold, paying 3% on checking.
But when you look at it, it's actually not particularly useful. You want to put money in, and take money out right? In this account, you basically can only withdraw money in 3 ways:
1) use their debit card (inc ATM)
2) transfer money out to a bank via their brokerage account
3) have them mail a check (up to $2500 per day)
This excludes all sorts of common use cases:
1) auto pay credit cards
2) link to venmo / other app
3) use other debt cards (e.g., Target)
4) give a check to someone in person
5) make larger payments (e.g., mortgage)
...etc...
My guess is these restrictions are there to protect themselves financially. As they reach a certain mass of users, they may relax and be able to take on more risk.
Til they lose your money I guess just like the options yesterday (actually, that really stinks for some developer somewhere and was completely horrible so wishing the engineers some good vibes over that and hopefully work out).
Can someone provide some examples where you would lose money in an SIPC insured account(like in Robinhood, presumably backed by low risk securities) that would otherwise be safe in a FDIC insured account?
My bank just launched an “online only” division which gives me savings at 2.65%, the option to attach checking, and no fees to speak of. The rate is a little lower but still pretty solid. The only caveat is I can’t access that account through their branches; it’s just through their website.
I don’t think the whole “we don’t have branches so we can pass along the savings to you” thing is as defensible as it was 5 years ago. Other businesses can do the math and move in that direction if pressured to do so, and it seems like some of the bigger banks already are.
To anyone knowledgeable with SIPC, what happens in the event that many firms go bankrupt at the same time (e.g. global financial collapse) and SIPC doesn't have enough funds to cover losses across all firms? As far as I'm aware, FDIC (for bona fide bank accounts) is backed by the full faith and credit of the U.S. Government (even though, on its own, it may not have enough funds to cover all liabilities, Congress can and will authorize additional funding to cover said liabilities), but I'm not sure if that's true for SIPC.
Maybe I'm doing it wrong but the "no foreign transaction fees" is just as exciting. Using my BofA card on trips always results in a welcome home set of charges I could do without.
Happy Charles Schwab customer of over 10 years here. I've never once paid a fee on my checking account. Heck, one time I forgot about a one-time bill that caused me to overdraft (first overdraft since around 2005). Instead of charging me the overdraft fee, they sent me an email asking me to make sure the money was in the account by Monday (email received on Thursday) and there would be no fees charged.
This isn't the same though. The wording is transaction fees, not ATM fees. It's far more convenient to pay with your card where possible rather than tracking down a foreign atm that you can use.
> Maybe I'm doing it wrong [...] Using my BofA card
I think I've spotted the problem. Seriously though, look into your available local Credit Unions. There are plenty of good credit cards with no foreign transaction fees as well (some of which are from larger banks).
I can get ~8% APY on VND in Vietnamese bank accounts with a time deposit of around 6-12 months. This sounds wonderful until you realize...
Inflation is around 4% [1], the account is only insured up to about $3500 (if you are lucky) and VND keeps deflating in value against USD. Never mind the US tax filings take another chunk.
Can anyone explain to me how they are able to offer 3% when 1 year treasury notes are less than 3% right now?
If they use longer term bonds, they will face potential losses as those tend to be volatile relative to interest rate changes. If they use higher-yielding corporate bonds, they face default risk.
There's something critical that's not being explained here which is important, and I wouldn't want to put my money in something like that without understanding it thoroughly.
> Can anyone explain to me how they are able to offer 3% when 1 year treasury notes are less than 3% right now?
It's a deal to get more trading accounts opened, both directly (people coming to RH for these accounts, which are not separate from trading accounts) and indirectly (e.g., it's a waitlisted feature that you move up in the waitlist by referring people to RH.)
They don't need to make money on the savings feature considered in isolation.
I’m not sure why other banks haven’t followed. One month treasury rate is already up to 2.3% now and banks can certainly lend it out at higher than treasury rate.
Because there is basically no competition. Plenty of credit unions around my area offer 3% or sometimes 4% checking, but the best bank rate I could find was under 1%.
But credit unions and especially new small players like Robinhood aren't going to threaten PNC or BoA or Chase. So why would they give up free money if they don't have to?
Which credit union offers 4% on all money with them? I know of a few CUs that will offer much higher interest on the first X dollars. Ex: inspiruscu.org
There is usually a cap on those high interest rates - at my CU, its $25k. They pay 2% though, not 4% - it used to be a pretty good deal, but these days its easy to get a money market fund elsewhere that pays more than that with no maximum.
I don't know of any that offer 4% on all money, but one near me offers 3% on the first $3k. After $3k though, you might as well get a CD or invest it in something higher return than a checking account.
Yeah when I started looking at one of my local credit unions I almost jumped at the 10% interest rate before I realized it was only 10% on the first $1k then less than 1% on everything after that
I hear this argument a lot, but is a checking account really the best place to invest your money? In my view it's better to get 10% on $1k than 0.1% on unlimited, and then take anything over that $1k (or whatever you need in your checking account) and put it in a real investment.
Remember we're talking about checking accounts, not mutual funds. It's not a real investment. You might as well get something even if it's small.
I'm by no means an expert in this, but here's my rough understanding. Banks don't really touch the money in your consumer savings account. It's just used to expand their reserve. As a result, your money can only grow at the Fed fund rate. This is the interest rate of what a bank would get from lending money overnight and is targeted at 2-2.25% right now. The highest interest rate a bank can support without operating at a loss is about 2%, which is what most online-only banks like Marcus and Ally offer.
Basically, Robinhood is subsidizing this 3% interest rate with investor dollars. Of course, there having a higher reserve lets banks lend out more money, but I'm not sure that's worth paying a 1% premium over.
I've using their brokerage services -- no fee on stock and option trading -- and I'm ready to move my primary ETrade account to Robinhood soon.
Capital One currently offers 5-yr CD for 3.15%. I just signed up for Citi Priority to save a few pennies on "foreign transaction fees," but it pays paltry 0.03%. That 3% sounds to good to be true, but it's probably not impossible.
Its not too good to be true. These are simply the effects of true non crony capitalism at work. Decentralisation of everything is forcing the crony status quo capitalistic system to change, thus pushing the boundaries of progress further than before. This is simply the beginning.
Until Robinhood exhausts its runway, is acquired by a traditional finance firm, or is run out of business by FINRA complaints because they kill options trading for hours at a time for their users during market hours [1].
For those interested in maximizing their interest rate on their cash holdings, I like https://www.maxmyinterest.com/ which has deals with many banks for high interest accounts. They make it very easy to move your money around to get the maximum ... uh ... return.
For those where no FDIC insurance is a dealbreaker, I recently signed up for SoFi Money https://www.sofi.com/money/fees/ which is FDIC insured up to 1.5m, offers 2% APY checking, and unlimited ATM fee rebates from any ATM in the world.
3 percent is insane and not sustainable. One year treasuries are at 2.7 percent. I could short treasuries and put all my money in Robinhood... ripe for arbing. How are they making money? My first inclination is to think parking my money with them is super risky...
Edit: Looking at today's market and interest rates.
This is great to see. It's even better than the current 1-year CD's I've seen for 1 year. And since this is a checking/savings account there's no time aspect to locking up your cash.
If my bank can't compete with this then I will be moving some cash savings into a new Robinhood account.
I actually like the newish Sofi Money debit card. It offers 2% for checking (so not as good but better than any other checking account at the moment), but the real benefit to me is unlimited ATM fee rebates at any ATM worldwide (which doesn't seem to be true of RH's product).
Monzo in the UK is a great example of non-bricks and mortar bank. I know that UK financial startups always find it hard to break into America simply because banking laws are crazy over there. But I would expect a lot of the UK Fintech to think about trying to break america soon.
I registered for this and I am in line. To get prior access. I am asked to refer my friends.
Just wondering how robinhood shows all my friends though I have not connected robinhood to any of my social network. I feel this as a big privacy issue and it’s concerning a lot.
My credit union has 3% yield on checking. However it has requirements (direct deposit, minimum debit uses, etc) and only applies on up to $15,000. I'll be curious to see how
Robinhood's will work out though since there's no cap.
Earlier today I simply visited the early access page for Robinhood, and this evening I got an invitation to join it, without having submitted my email address. Presumably it was a blanket spam mailing? Kinda scary.
I really, really like these new startups in this space: I super admire Robinhood and N26. I use them both and have nothing but good things to say about my time with them. I’d love to work for either of them too
If you're looking for a good liquid place to park cash and you don't have a Robinhood invite, check out Dollar Savings Direct. They currently pay 1.8% interest on their savings accounts.
Synchrony Bank, Goldman Sachs Bank, Barclays Bank, HSBC Direct pay 2.05%.
Ally Bank, American Express National Bank, Discover Bank pay 2%.
Google "high yield savings" for lists that are updated monthly.
However, this Robinhood offer is for a "checking" account, which while not actually a checking account, still offers the liquidity of one. Savings accounts have a limited number of monthly transfers you're allowed, and you can't use one with a debit card as your main payment account.
Wow, it's crazy how sometimes search queries have a "magic" quality to them. I spent a good 1-2 hours trying to find the place with the best rate when I discovered Dollar Savings Direct, but never came across a list like the one you find when searching for "high yield savings".
Or even better, open a brokerage account with checking functionality, and put it all in a money market fund yielding ~2.15%, which also will automatically increase rates with about a month lag to any increases the fed does.
While 3% is a good deal, there have been internet-only banks for quite some time now, all of whom look pretty much like this. Radius and Axos are two examples that have been around for a while.
Is it really? I search for the best interest rates on savings accounts fairly regularly and I haven’t seen 3% since the Great Recession. Radius only offers 2.05% and Axos a mere 1.3%. A quick survey reveals a handful of places offering 2.25%, and I don’t see anything higher.
> Earn up to 2.05% APY on balances of $25,000 & up and meet your savings goals faster. Don’t quite have $25,000? Radius High-Yield Savings still earns 1.50% APY on balances of $2,500 to $24,999.99.
I'm sure there is a catch. Normally whenever banks offer good interest rates there is some maximum amount you can invest, or it's only valid for a year, or etc. etc. etc.
It seems like RH is positioning themselves to become the provider of choice for all things financial to consumers. It'll be interesting to see how that evolves.
FreeTrade in UK is mostly the same. By the way, the transaction is not always free: it is only free of commission if the operation is delayed until 4 PM (when all batched operations of multiple customers are processed).
Crazy. The current organization I work for has easily over 1000 people customer support agents working 24/7. Large home heating oil provider in the US.
Most calls are "where's the driver" and has honestly been partially automated but older clients still like to call.
Either way, it takes humans to make sure the 600k customers don't fall through the cracks.
Uni student here. Most people put money in a checking account to use to pay bills/food/etc. You shouldn't be using your savings account money for this.
“These fees like overdraft fees — they’re not fees millionaires are paying. It’s ordinary folks paying. It’s actually more expensive for those that have less money and it’s cheaper for those that have more money. We think that isn’t right and we think that’s bad business” Bhatt gripes.
================
It's been pretty good business for many banks for years. ???
Checking accounts are loss leaders virtually everywhere, the exception being smaller community banks. Their primary revenue stream was, once upon a time, net interest income, but these days due to the extremely low interest environment and alternate sources of funding the revenue stream is more weighted towards fees (primarily NSFs, although that was hit a few years ago) and debit card interchange.
Robinhood also likely expects to not become the park-your-money account of choice for older dentists but rather to become the spend-your-money account for their millennial userbase. With high velocity of money and low balances the interest expense is minimal and, to the extent they use debit cards, the interchange revenue can be material. (In a stylized example where someone makes $2k a month and spends $200 on debit card purchases and $1.8k on rent/etc the interest cost for the year is ~$30 and the debit card interchange for the year is ~$60, even ignoring potential interest revenue.)
This is roughly in the same line as their core strategy, which is spending what would otherwise be a marketing budget on keeping commissions at zero, making money on the other ways brokerages make money. If you do not understand how a brokerage makes money, I encourage you to peruse the annual reports of e.g. eTrade or TD Ameritrade, which will happily explain their revenue sources and why commissions are a surprisingly small portion.
Metacomment: geeks who believe they have outmathed a financial firm should ask themselves "Are financial firms likely to be bad at math?" and "Are financial firms incapable of hiring their own geeks?"
reminds me of the first time i interviewed at google, and one of the interviewers asked "if you could set up your own project and get a team to work on it, what would you do?". i answered that i would get a bunch of maths phds together and have them work out graph-theoretic ways of detecting link farms (this was 2004, and i had actually been wondering for a while why google hadn't done exactly that).
the interviewer (who was a pretty senior person) asked "why do you think the spammers don't have their own phd mathematicians to defeat such measures?". i was only a few years out of grad school at the time, and it was honestly the first time i thought about the fact that people who were both smart and educated might nonetheless go into a shady and declasse activity like running spam sites. i consider it a valuable lesson to this day.
The financial firm, bookmaker and casino just needs to outmath the 99.9% of customers who are not trying to beat them to win, and evict the 0.01% of customers whose outmathing is so good it is causing them problems.
99.9% of customers who are not trying to beat them to win
0.01% of customers whose outmathing is so good it is causing them problems.
The rest are customers who are outmathing them, but not enough to cause them problems. And by problems I mean problems worth spending their time on.
The crooks I've met have been the smartest and most insightful people I've met in tech. I know one guy who, after years with a CC scam operations when to work for an online merchant. His knowledge of payment systems and payment processor policies was encyclopedic. The big issue was whether he was trustworthy. Lucky he had never been convicted of anything.
Thus, your response should have been: link farms with their own phds is only more reason to instantiate your plan
Go on a blackhat SEO forum. Look at the number of sellers, the number of listings, the number of positive feedback and the cost of some packages (you can easily go on and spend 50$ or a 1000$+ for a single package). There's a LOT of money in blackhat SEO. That's just the people offering to do it for you.
Then look at the dozens of software packages for sell that are constantly being updated and have both one-time fees and ongoing subscription pricing.
Then go look at the people selling just various social media accounts which mass-creation of gets harder and harder.
Then there's people that sell VPS access. They'll buy the software tools and host them all on a VPS and rent to you weekly or monthly so you can shell out tens of dollars or hundreds of dollars a month instead of needing to cough up thousands just to get all of the software for the month.
And that's just what's readily available with paypal or a credit card on the clearnet.
I never would have thought about the shady side had you not told this story. Makes me start to wonder what else I’m missing...
I agree that the high rate is reasonable in that scenario, but the high rate is also actively fighting to ensure that scenario doesn’t happen.
I don’t see people here thinking that Robinhood is bad at math. They’re all asking, “what’s the catch?” Because it sure seems like there must be one.
Which should tell you a lot. I've been through the "Millennial Bank" wringer.
Honestly, checking accounts are all the same. Especially because I use a credit card paid in full every month. It's a holding pool till next month's CC bill is due. Until the US treats debit cards with the same protections as credit, I won't let my debit card near a gas pump or wander off with a waiter or be used online.
I don't know that there's an opening really. That so-called opening keeps popping up since like 2005 and gets "filled" by a SV-backed MVNO-For-Banking and it's just........a checking account provided by some.other actual bank repackaged with a (nice) angular front end and on the AllPoint ATM network with crappy chat customer support.
From the Robinhood website fine print “Robinhood Checking and Savings is an added feature to existing Robinhood accounts and is not a separate account or a bank account.”
So, yes, opening a Robinhood Checking & Savings account does mean that they will open a trading account, because they aren't actually different accounts. (And it's a waitlisted feature where you get moved up the waitlisted by referring others to RobinHood, so it's a clear way of getting the overall service in front of more users.)
Yeah but people do grow up. And I don't know about you, but I've got some super long term relationships with some banks. They are in it for the long game.
(I mean it would be great if there were a bank that did all its customer service over text chat, but that's too much to ask for, right?)
And I’d really wish they’d just stop
The branches have only been to my benefit, never really required, just faster.
I think Simple was supposed to be that. I wonder how they'll respond to this, given that they only recently moved to 2% ($2k minimum).
Or maybe they're going to be able to sell people's transaction histories...
You are assuming that customers make this decision rationally; marketing very often leverages the fact that humans very often don't do that.
Or you bank at Wells Fargo or some other institution whose corrupt practices spill out into public.
I remember the days when Citibank would give out 4% interest about a decade ago. now of course, it's about 0%. It's just classic bait and switch.
That's not a bait in switch, interest rates plummeted globally to the point a lot of people were happy to even get 0%!
Iceland's government/deposit insurance did not pull through.
Cyprus wasn't much different either.
https://www.telegraph.co.uk/finance/financialcrisis/11877219...
https://www.telegraph.co.uk/finance/financialcrisis/9965943/...
This are cash balances, not money market funds or any other funds.
He later stated that the SEC would need to take the lead on clarifying the matter though.
I have a one-year emergency fund with Robinhood that is invested in index funds (secondary emergency fund as the primary emergency fund is in cash). I think I'll keep my primary emergency fund in the PNC high yield savings account for now until all that gets worked out.
Robinhood's checking page says "Robinhood Checking and Savings is an added feature to existing Robinhood accounts and is not a separate account or a bank account."
Account has 3 parts:
1. Marketable securities -- value is NOT insured.
2. Cash on hand -- value IS ensured.
3. Money market fund -- value is NOT insured.
(3) may or may not be offered and if (3) is offered it has to be elected by the account holder. Money cannot flow from (1) to (3) or from (3) to (1) bypassing (2) due to securities regulations -- one cannot pay for one security with another security, a settled cash must be used.
If the APY is on (2) they will get killed by the fatwallet/slickdeals crowd. If the APY is on (3) it is more complicated but debit/check transactions against (3) are very expensive to clear so I don't quite see what the play is.
Are you unaware that interest rates today are drastically different than a decade ago?
A decade ago, the rate was 1.00%. (And three days later, it was 0.00-0.25%.)
The product is already being renamed as a "money management fund"
So Robinhood wants users to have their cash on hand ready to jump into the market. Will be too tempting to many.
Think of it like being a health insurance salesman who puts your office at the top of a long flights of stairs. You can have a lower risk pool because the only clients who come to see you are the ones who can climb a bunch of stairs to get there.
In other words, they advertise to a user-base that doesn't have much in the way of savings so they're avoiding people who would keep high balances anyway.
Besides, most people who do have large balances tend to park them in money market funds anyway. They can usually hit between 2% to 3% annually and offer more flexibility in terms of being able to access the money without transferring balances around. Alternatively they'll be putting it in tax-deferred accounts.
If you have enough money coming in that you can accrue a lot of savings, a savings account isn't the most productive place to put it. It should be regarded as more of a rainy day fund or a place to park money that you're saving up for something specific, like a down payment.
1. I don't care about physical branches, I've been using online banking from the beginning. 2. I am at a stage in my life where I am slowly paying back all my debts and making just enough to set some cash aside every paycheck.
I don't have enough money to go looking at financial instruments such as money market funds or CD's, because they tend to lock my money up for a certain period of time.
I still need to be liquid. Some place where I can make 3% and have it just sit is fine for me, and allows me to access it in case of an emergency without paying fines or penalties for doing so, and with less hassle than some other financial instruments where it is locked up.
Once I have a buffer built up, and I feel comfortable with that buffer, maybe then I'll start looking at other places to potentially let my money make more money faster with a little higher risk and with less liquidity.
3% guaranteed earnings is a very good deal without any downside, while the risks involved with trading that money are substantial.
Also, presumably lots of people would rather put their beautiful minds towards things other than being anxious about how their savings are going. There is a lot to be said for just being able to park your money somewhere and not have to worry about it while you go live your life.
Usually you want to build a tractor (recurring deposits to a reference rate) at the 7 or 10 year treasury, to ensure that you have a stable supply of available deposits, and a short term rate too to handle "hot money".
You make money on the spread.
I really don't see how they are funding their interest rate.
What I don't understand is those people who willingly park their money in CDs at under 1% and the banks proudly advertising these rates.
This era of seemingly permanent low(or even negative) rates just somehow seem unnatural.
What happened to banker's 6-3-3 rule? "Lend at 6%, borrow at 3% and go golfing at 3:00PM"
The Bretton Woods agreement ended.
It's not too crazy, rates have gone up a ton without most bank accounts adjusting from being near 0%. The 10-year is currently just under 3% with the whole curve being really flat and lots of online banks offer over 2%. I currently get 2.05% with my Marcus account and Goldman Sachs isn't exactly known for giving things away (and with 3 month t-bills paying 2.41% they certainly aren't giving anything away!).
With the current 2 year treasury being 2.76%, they must making money on fees. I am seriously considering moving my savings from a Capital One money market account that earns 2% to this that earns 3%. That extra percent is decently significant.
They have no customer service and a decently easy collection of horror stories related to their lack of customer service.
Moviepass was also bought by a financial firm... Come to think of it, they have many similarities. Both companies are basically handing out free money and it's unclear how they would make any profit. People speculate that both companies would make money by "selling data." Unless if Robinhood is doing something very illegal, there is no way that they could make enough money that way.
That said, I do think that Robinhood knows what they're doing. They're getting a lot of publicity right now. In the worst case scenario, Robinhood can cut costs by slashing interest rates and putting a cap on the number of free trades you can do. Their worth would plummet, but later investors would be the ones who pay that price. Overall, Robinhood would still be better off.
https://seekingalpha.com/article/4205379-robinhood-making-mi...
† You could argue either way about whether IB gets paid to "internalize" orders or whether the order flow rebates they get are something else.
If they had been able to work out a profit share off concessions and cheaper tickets with AMC/Cinemark/Regal/etc they might be in a different setting right now.
[1] https://www.investopedia.com/terms/p/paymentoforderflow.asp
This means if there's a downturn in the market, they won't go bankrupt due to all the outstanding margin accounts (or have to do margin calls).
https://www.americanexpress.com/personalsavings/high-yield-s...
Big Finance knew it was hustling rubes, and then was able to ride the Gub'mnt Gravy Train when it became unsustainable.
In brief, models were constructed of the complex behaviors of packages of loans - CDOs. These models, trained under benign market conditions, did not account adequately for correlations that might make all their component loans default at once.
You can elaborate the story with a lot of context and granular detail, but the core of the crisis did have a strong element of "bad mathematics" -- bad mathematical modeling.
For more, see: https://www.maths.ox.ac.uk/system/files/attachments/1000332....
and references therein.
The paper concludes that while there were deficiencies with the modelling method (as there are with any model), input manipulation was at greater fault than inherent failures of the model itself.
"These results support the arguments of Donnelly & Embrechts[4] and Mackenzie & Spears[12], that Li and the Gaussian copula were not to blame for the Crisis...Instead it appears that the gaming of the model beyond its original assumptions, the outsourcing of CDO risk management to credit rating agencies, and the failure to perform holistic risk assessment seem far more to blame."
"The simulation results in this paper show that it is more important to focus on parameter estimation than copula choice. This leads to the observation that when it comes to mathematical financial modelling: in order to avoid a disaster, the cooking is more important than the recipe."
My point is that mathematical models were indeed being used and followed in this case, and that the issue really was with overextension of the model, and not just generic volatility of any market, as claimed by the GP comment.
>poor mathematical modeling of the statistical properties of collateralized debt obligations (CDOs) was the underlying cause of the bottom falling out of that market.
The model is hardly to blame when falsified inputs yield poor results.
I'm not "blaming the model" - probably everyone recognizes that all models have limits.
I call your attention again to the point of my original comment - the GGP comment was claiming that the best mathematicians in the world could not have foreseen the kind of conditions that caused the 2008 market failure. I'm arguing that it was possible, and that it was clear (mostly in retrospect) that the model assumptions were being violated most promiscuously.
In fact, the real reason I chimed in is that I think this crisis was a really awesome example of the power that quite abstract mathematical constructs have over our lives. I felt that point was missed in the generic comment about "who could have known" that kicked this thread off, and I sort of wanted to rescue that underlying mathematical issue.
The incorrect ratings were intentional and designed to look like they were correct so that no one would find out. It's easier to make sure no one finds out the number is wrong if you know what the correct number is and how to tweak factors here and there to influence it.
That's why it keeps happening. They get rich and get away with it every time.
https://www.wired.com/2009/02/wp-quant/
Were you trying to sneak in a comment about an impending explosion? :)
No. But you don't have to be bad at maths to play exploitably.
Many years ago now I was a hand-to-mouth graduate student. New credit card companies wanted to attract customers so they offered an easy approval card with 0% finance for 18 months. Need to use some of your new credit on existing debts? Rather than figure out all the specifics they just included a cheque book with the product, just write a cheque to pay any debts and it goes on your 0% balance.
Everybody I knew took out a card, write the full credit amount on a cheque, paid it into a fixed term savings account.
Account term ends, you pay off the 0% card, keep the interest, cut the card in half and you're done. Free money.
The people who ran those new card companies knew this might happen, they just didn't guess it would happen often enough to ruin them. Not our problem. A few years later the deals on offer explicitly did not have a way to cash out. Lesson learned.
"Making money others ways" aka stripping their clients of financial privacy by selling their clients' investment-decision data: "Robinhood Is Making Millions Selling Out Their Millennial Customers To High-Frequency Traders"[1] If your investment brokerage firm's strategy is to use you as a sucker, no marginal gain in interest rate is worth it.
[1]https://seekingalpha.com/article/4205379-robinhood-making-mi...
Matt Levine does great write ups on this stuff, would highly recommend: https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...
The reality is that market makers price non-retail flow more conservatively (ie: costing traders more) because they have to anticipate informed large block trades wiping them out. Since they don't have to do that for retail flow, their cost basis for those trades is lower, and they can (and do) split the proceeds of that reduced cost with brokerages.
It's overwhelmingly likely that any other brokerage you use does the same thing, and simply doesn't tell you or pass any of those savings on to you.
But who's that "someone else"? It's not the robinhood customer, because they're getting at least the best price on NMS[1]. So what's the issue? Would you rather pay $10/trade so your trade gets posted directly to the exchange and the profit goes to some random investment bank or daytrader rather than the HFT firm?
[1] https://en.wikipedia.org/wiki/Payment_for_order_flow#Legalit...
Currencies feed into the stock market, but it's not a closed system. If you think a company is undervalued in the stock market, and you buy shares, that raises the price of shares for that company. With a higher share price, that company can borrow money (by issuing shares) at better terms, and spend that money on growing more than they could have if they had not borrowed that money.
If the stock price is too low, the company may buy back shares of its own stock (thus enabling future borrowing). Alternatively, investors may buy up a majority of the stock of that company, thus acquiring control of that company, and either try to force the company to do a thing they expect to be profitable, or liquidate the assets of the company (which will then be distributed to shareholders in proportion to how many shares they hold).
So basically the stock market moves money to the companies based on how effectively they could spend borrowed money / how valuable they would be if liquidated.
This is why fiat currencies are so useful: you can change the length of the "ruler" to accommodate changes in the thing you're measuring, so the value of the increment remains stable.
Investing in the stock market is literally investing in the collective appreciation of the value of the companies that make up it.
Normally the investor would get the stock since they placed their order first. But since the HFT firm is paying for the order they get it instead. If things go well the HFT firm can sell to the investor at x+b, if things go poorly they cut their losses and sell at x.
The investor that didn't get the order and has to buy it from the HFT firm at x+b is the loser.
The money that funds this dance comes from the millennial who sold a stock worth x+c at x, but that would have happened regardless.
>They want to buy stock for $99.99 and sell it at $100.01 and clip two cents on each trade. If their orders are random—if sometimes people buy and sometimes they sell, with no pattern—then that works out well for the market makers. But their big risk is what they call “adverse selection”: Sometimes, when a customer buys 100 shares at $100.01, it then buys another 100 shares at $100.02, and another 100 shares at $100.03, and keeps going until it has bought 10,000 shares and pushed the price up dramatically. The market maker who sold it the first 100 shares—and who is probably now short and needs to go out and buy those shares at a higher price—has been run over.
>[...] [I]f a market maker can guarantee that it will only interact with retail customers—if it can filter out big orders from institutional investors—then its risk of adverse selection goes way down. The way the market maker does this is by paying retail brokers to send it their order flow, and promising those brokers that it will execute their orders better* than the public markets would. [...] It can offer a tighter spread than the public markets—and have money left over to pay the retail brokers—because it doesn’t have to worry about adverse selection. If the retail broker is, say, one designed to let young people day-trade for free on their phones, then those orders are probably particularly valuable, because they are probably particularly random.*
[0] https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...
There are valid criticisms of payment for order flow but privacy isn't one of them.
no. most orders are not executed on the public exchanges, but by internal matching via your broker and a market maker. (also most exchanges only support trades in multiples of 100 shares.)
I believe all customer trades/executions on actual securities should eventually be publicly visible, though there may be a small delay for them to "print to the tape".
1. I don't know why the title mentions "millenial" customers in particular, because every brokerage does this across all demographics,
2. This activity is not "selling out" customers. If you believe that customers are "suckers" because their order flow is sold to high frequency traders, you have a very fundamental misconception about high frequency trading and its role in market making,
3. There is no codified definition of, or law protecting, "financial privacy" in the sense of order flow. This data isn't connected to you as an individual, just as you can't see which individuals or companies are placing bids and asks in the order book just because you can see the amounts and prices. All trades in the market are publicly reported regardless of whether or not your order flow is sold.
It never ceases to amaze me how the term "high frequency trading" can compel people to pontificate about things they clearly don't understand. You'd think we'd have collectively moved on from the Flash Boys misconceptions by now. Yet here we are, with an article talking about high frequency traders as some kind of financial boogeyman in 2018.
Why/how is Robinhood now showing how far along I am compared to my friends on the waitlist? I dont believe I ever enabled any social sharing, and Robinhood's access to my contacts is shut off.
I do not feel comfortable sharing (and especially not broadcasting!) my financial decisions with people I am connected to on social media. This is pretty upsetting to me.
2 - just because you didn't share doesn't mean your friends didn't
Source: I still have some money in a ~0% online savings account that I opened because it was 5% at the time.
There are still banks who are trying to do this. You can rephrase it as, "lending money to winners." Even better if you can lend money to an underdog winner, enabling them to borrow even more in the future. Community banks are now left with only the underdog borrowers, as the low hanging fruit is swept up easily by the megacorporation banks.
Metacomment: geeks who believe they have outmathed a financial firm should ask themselves "Are financial firms likely to be bad at math?" and "Are financial firms incapable of hiring their own geeks?"
This is the POV of my wife, who manages underwriting: Community banks are having problems hiring the "A-Students" and "B-Students." This means that employees either make more mistakes, or need more rigorous support through custom software, which community banks can ill afford, and where the big megacorporation banks can handily outcompete them.
Similar to YouInvest and Chase.
I could be mistaken but business models built on interchange (I think) have been the downfall of a number of 'neo-banks' from the last 5-10 years. More recently I've seen people adopting a commercial-classified card (or other) for these types of plays for the sole reason of it attracting a higher rate of interchange vs a typical consumer debit card.
My rough calculation based on the data here[0] suggests it would be at least 60% lower than that:
$200 x 12 months = $2400 txn value $2400 / $35 = 69 transactions 69 * $0.35 = $24 interchange fees
What am I missing?
[0] https://www.federalreserve.gov/paymentsystems/regii-average-...
Cant see this lasting long
Furthermore, many boutique investment business exist for purposes of client services and plausible deniability on part of the client’s board.
I’ll give you a concrete example from when I worked in an asset management company. One client was a large pension fund for a state’s retired firefighters.
We showed them time and again a variety of enhancements to the basic portfolio construction product they bought from us, particularly in line with their overall goal of balancing investment in certain sectors across different asset managers to reduce risk.
They were not interested, not even on the basis of paying reduced fees for a simpler process. We also talked to them at length about why using a concentrated benchmark for that product (SP500) was a bad idea. Again, not interested.
After some months where our performance was pretty flat in that portfolio against SP500, pretty much as we told them we predicted it would be, they fired us.
In the client exit interview with two members of their board, they basically told us that each year they have to fire a certain number of the asset managers they do business with, in order to appear proactive and justify getting bonuses for taking action.
They obviously didn’t say this directly, but it was clear enough. They ended the call by saying they would be super excited to review re-investing with us later the next year, presumably at which time they have to do musical chairs with which asset managers they hired & fired to look proactive again.
Internally, some of my older mentors on the portfolio management team badically said this was the business. Nobody cares what math you use for investing at all. Everybody just uses super stupid linear regression based on outdated factor models from 40 years ago, all using the same data from the same big data vendors.
As long as you have hilariously over-credentialed PhDs selling linear regressions based on momentum or price-to-earnings, the clients are happy because you are cover-their-ass hire & fire insurance to them, nothing more.
It would not be hard at all for skilled amateurs to outperform these shops.
Of course they're greedy, but sometimes it's easier and more "natural" to make more money by rising fees, as opposed to deeply changing a modus operandi.
If Robinhood allows users to simply park their money, they could be in for a world of hurt.
Asking around, I consistently heard that Monzo's competitors like Revolut are going to be a future case study in scaling before great product/market fit. I don't know how many people have Revolut accounts, but nobody seems to be using their cards in public.
Little details really add up. For instance, Revolut didn't have contactless support for a while, which meant people could not use it on the Tube. Monzo made their cards pink, which creates a physical network effect.
The US seems to have a wave of startups trying to reinvent checking accounts right now. I wonder which, if any, will take the market:
- Varo (https://varomoney.com) - Product and brand don't look very polished and they haven't launched Android support, but they are doing the "hard thing" of getting a bank charter (rather than having a partner bank, like all of the others).
- Robinhood (https://robinhood.com) - Already offers investment products, so they can get a lot of users quickly. Unclear how good the product will be. (For example - can they support contactless payments with a clear card?)
- Chime (https://chimebank.com) - Seems to have the most mature and polished product. The killer feature they advertise is "get direct deposits faster", which doesn't seem world-changing to me.
My benchmark is Charles Schwab Bank, which offers no fees on any ATM, anywhere. It's what many millennials that I know use. But, it's a bad product and not very user-friendly. Simple tried to reinvent banking, but they never seemed to go beyond polishing the UI. I'm curious to see what the future holds, particularly as some foreign banks expand to the USA!
Why do you say it's a bad product? I use Schwab as my main account and it works great for me.
My direct deposits go there, but I moved all my investments over to Interactive Brokers since Schwab doesn't offer (to my knowledge) portfolio margin and Schwab's margin rates are usurious.
The opportunity here for a startup bank is to replace credit card spending in the USA. The potential earnings are huge if you can get consumers to spend on a debit card instead of a credit card (because the rake is higher).
To make a checking account capture the spending market in the USA, it needs to feel premium and focused - like the Amex app. The spending analysis needs to be great, the card needs easy control in the mobile app, and it needs to inspire confidence. It also needs to feel like a trusted, approachable brand.
Schwab makes most of their money on investments. I don't foresee them trying to give mass-market appeal to their checking account, separate from the investment account.
A case study in this field is Marcus, a savings app from Goldman Sachs. If Schwab spun out their checking account into a separate sub-brand with branding that appeals to millennials and had a spending-focused mobile app, I could see them doing really well: https://www.marcus.com/us/en/savings
Isn't that the wrong perspective on a financial product? I agree that good design is important, to a degree. Once a certain level is hit, you're not going to gain/lose very many customers based upon the UI.
I don't think anyone should favor one bank over another for emotional reasons Also, I'm not sure design differences qualifies as "emotional"; I think a better word would be "design" or "aesthetic".
If Bank A offers you a 4% interest rate on a loan and Bank B offers you a 4.1% interest rate on a loan, I think most people would pick Bank A over Bank B (assuming fee structures and customer service is more or less equal). Even if Bank B has a beautiful UI as opposed to Bank A's equally functional but okay looking UI.
If only those were the options. I'm considering dropping one of my banks after their mobile-first aesthetic redesign that made their website drastically less functional. (Less information density, more clicks to accomplish anything, extreme non-obviousness of how to access various features.) It's been a year or two, and functionality remains significantly degraded compared to their old website.
I think the converse is true. Card issuers earn 1 percent points higher interchange rates on credit cards (2.60%) than debit cards (1.60%).
Being able to make a large purchase on debit means you can afford it right now-- just as dropping a stack of $100 notes would signal.
In contrast, paying with credit can be a pose-- you look like you can afford the $1000 purchase, but it hides the dark secret that you'll be paying for it well into the next decade.
For me the killer is no foreign transaction fees. If Robinhood allows world wide ATM + no foreign transaction fees I'd switch in a heartbeat. I dont use Schwab for equities, I use Robinhood & Wealthfront
It's really a crap shoot if any specific retailer supports contactless, no major metro system that I know of support direct debit / credit contactless cards and no major bank or credit card company issues contactless cards.
If you want to use contactless in america, you add the card to apple / google / samsung pay and use your phone for NFC payments. I get a feeling that america will do a 'leapfrog' in contactless and go directly to smartphone only contactless cards than ever issue a contactless card in the mass market.
Why? (I think they're all run by the same company, HMSHost, who, AFAICT as a traveler, has a monopoly on airport food.)
In Canada we had none of that.
Citibank's Costco Visa card is contactless
I've already switched to Apple Pay anyway.
Chase is about to add it to all their cards.
Monzo is a licensed bank in the UK, and Revolut is not.
Still, Revolut has about 30% more customers in the UK than Monzo, and about 3x more in total, since it's available in the entire EU. And, unlike Monzo, which is still losing money, Revolut has been profitable since February 2018.
That's because Revolut does much more than Monzo. It provides multiple premium account types, virtual credit cards for online payments, business accounts with open API access, credit, insurance, and soon – fee-free stock trading like Robinhood.
Simple closed my account with no notice or recourse, because they failed to notify me that I needed to update some information.
I honestly can't believe I trusted my money to people so incompetent at even the basics of business.
Square's Cash App + Cash Card is taking the lead here, IMO. Card, direct deposit, ATM usage, p2p payments, rewards program.
They've been the #1 app in finance all year on the Apple store, and were #1 in all free apps for a little while this past week. They are massively popular in the south, but the rest of the country may catch up, but I sort of wonder if silicon valley is gonna miss the rise since its out of sight for the time being. For growth and reach see for example:
Graph over time: https://trends.google.com/trends/explore?date=all&geo=US&q=c...
States where cash app dominates so far: https://trends.google.com/trends/explore?date=today%201-m&ge...
If Cash App introduced brokerage services it would be over for Robinhood.
When I talk to friends for p2p payments, people mostly use venmo, then messenger & apple pay and nobody uses square cash.
I had simple for a while and the UI was great, app is best of the ones I've seen but they never had anything else (they recently created a savings account) and no checks got annoying to deal with.
My Bank of the future would have these features:
- Full brokerage account with available trading and zero fee index funds
- Free checks
- Free wiring/ability to send money to other people's bank accounts
- Really good app (like simple's)
- Decent interest like Robinhood has here without having to separate things into a savings account
- No fees
- Credit card to rival Chase Sapphire Reserve or AMEX Platinum with tightly coupled integration into the existing app software.
- All ATMs are free (rarely use, but nice to have and Fidelity does it).
- Ability to get loans
Fidelity has nearly all of these things with some negatives:
- App is not that great/UI is bad
- Their credit card is bad and not well integrated into their software
- Interest is poor
Haven is a new startup that's has a pretty cool approach to helping people do the optimal thing with their money (like an automated r/personalfinance), but I'd rather just be able to do it directly with the people holding the money.
I'd take another look at Simple. I've been with them since the beginning and their recent enhancements are fantastic! Expenses tied to your pay schedule that automatically set money aside, same with goals. and then the big one for me was an interest bearing savings account, yielding 2%.
See more here:
https://www.simple.com/2percent
https://www.simple.com/features/expenses
They are a definite contender for your list.
The math itself doesn't matter. Have you seen recent Robinhood commercials popping up on TV? Their whole business is to encourage folks that should not be day trading to day trade.
Having your money parked there just facilitates knee-jerk-reaction and follow-the-crowd trading.
Trading for most people used to be deliberately obtuse. $7.5 commission per trade is criminal for most people, so is charging $50 a month to get a weekly email with basic technical analysis, but that's literally been the bread and butter of retail investing for decades and no one bats an eye to how deliberately ridiculous it all is.
Robinhood drops all the barriers from buying stocks, gives you a warning before they even let you touch options, and they are the evil here? This is like saying venmo is dumb because it lets people wipe out their checking account quicker than writing a check; don't blame the company for idiotic users. Robinhood doesn't even let you day trade more than 4x in a given week unless you have 25k in your trading account, just like every brokerage.
When Robinhood initiates options trading by asking you, "Do you think the stock is going to go up?" on a phone interface, they've decided that trading is now just for morons.
Imagine on iOS you randomly gets a pop up "do you think gold spot is gonna be above 1250 in 2 hours?" -> long tap the notification directly place an order
Naked, covered, and cash secured are terms used to describe how you are covering your downside when you are selling options.
When you buy an option, your downside is always the cash you spent on the option, so you don't have different types of purchases. When you buy you are just buying an option.
As for Robinhood, they don't allow for selling of naked options, only covered and cash secured.
Buying stock with dividends helps even more, now you get money back to invest into more stock :-D
Everything else is in index funds.
Also using the ridiculously upside down moral convention that they are somehow 'the good guys defeating the system' i.e. 'Robin Hood'.
"We wanted to do something after occupy Wall Street, you know. Something real. So, how about, get all the young people to, you know, put their money into Wall Street" is basically their 'storyboard motivation'. Which the CNN interviewer accepted without a hint of skepticism.
If it was 1996, these people would be speculating on Beanie Baby portfolios hedged with Charizard cards.
I was locked out for 29 hours with expiring strangles that would have had significant upside if closed at the right time, lost everything put into them by the time I could get back in.
Never received communication about the lock out or being allowed back in.
They have no phone support and during that whole period not a single email was responded to.
To imagine this company as a bank is one of the most ridiculous concepts ive heard of.
There's one guy on there who lost nearly a million bucks. And another one who I believe has lost more than that, and hasn't posted a single thing in three months, since he finally made it all the way to bankrupt. Makes you think a little, I wonder if he's still alive.
I did learn that options are super exciting and a great way to lose every last penny. I got lucky and came out ever so slightly ahead on my run through WSB, but I got out of it and now I'm back to normal stocks even with my play money.
Buying stocks isn't really investing, it's more akin to gambling like Poker, with all other investors at the table.
Many of those investors have massive computers, R&D firms, brilliant minds, 'inside information', and relationships with those companies and CEO's.
So what 'millenial' is going to trade better than those?
Zero. Or at least in the long run.
The only way to 'beat the man' is to have more knowledge than Wall St. and that is extremely rare.
So what 'Robin Hood' does is sign up fish to feed to sharks.
It might make sense to put a chunk of savings in a broad array of stocks (some in bonds, some in gold, some in cash etc.) - but 'trading' against Wall Street is about as smart as playing Poker against the best in the world thinking you're going to win.
Also don’t touch or put more than 3% in options or crypto. 80% of traders lose money with options and crypto doesn’t usually generate interest or dividends. Also crypto taxes were absolute difficult nightmare for me last year.
Congratulations, you just reinvented the S&P 500.
Less cynically, it’s building a book of investors who have likely never lost money in the stock market.
Knowing that RH gambles your money, it gives them plenty of profit :)
Even on the institutional side, the business is setup to encourage investors to change their mind as much as possible. More trading equals more soft dollars equals getting a larger budget for research. More trading/using more esoteric products means you’ll get more help from Cap Intro to raise money. It takes a lot of restraint to invest like Buffett.
See also E-Trade's "Don't get mad, get E-Trade" commercials[0], which are clearly intended to give people the impression that stock trading will make them Super-Yacht rich.
[0] https://www.youtube.com/playlist?list=PLHVKU2qFM7q2HuTv5RCU0...
http://www.finra.org/investors/day-trading-margin-requiremen...
The real story is that the plebes realized they could make 2% per day by day trading and selling short. I did this with my dad and we were up about $40k before 9/11 wiped out most people's gains (this was back when Apple stock was in the $12-20 range). Edit: my dad never sold short because he felt it was unsupportive of companies, but had he done it to balance each of the buy/sell targets I gave him, he would have been up $80k.
I remember being demoralized that I couldn't trade on margin because I would likely never be able to save $25k with my student loan and credit card debt. But if I read the rules correctly now, I don't even think you can sell short anymore unless you have $25k.
This keeps the real day trading profits back in the hands of the rich and I feel that it could/should be challenged as discrimination. Also it breaks the ZOI rule so doesn't sit right with me..
The rules were put in place to protect people from being lured into day trading by day trading service companies. The thought was to prevent people from spending their rent money thinking they were going to get rich day trading. Also, trading with small amounts of money pushes people into penny stocks, which is an even faster way for someone to lose all their money.
BTW, since the money is so easy you could always have traded futures which are exempt from PDT. https://www.tradingsetupsreview.com/futures-trading-best-opt...
One of the charts in etrade said we were up $40k over about a 4 month period and my dad had about $50k in play, trading on margin so working with about $100k. So the real return was more like 80% over 4 months, so I guess 240% for a year although I don't know if I'm doing that math right.
My biggest fear most days was honestly that there wasn't going to be enough volatility for the stock to move, meaning we threw away $7 to $28 on trading fees. I was moving furniture at the time and only made $80 on a good day so that was a lot of money for me then.
If you short high beta tech stocks on margin as you mentioned in your post, you'll get wiped out really fast. Go to Wallstreetbet subreddit and pull up the thread where a guy lost 1.5mm this year, he lost it shorting high beta tech stock that did a swing of 10% in the wrong direction forcing a margin call and a liquidation.
If you wanted to capture the downside of a stock, you can buy puts without a margin account. You should probably really understand the market better before you expose yourself to a larger risk than the money you put in.
The rules were approved in February 2001, so they can't have been a response to 9/11, kneejerk or not.
Can you please elaborate? I'm curious. Why was the money so "easy"? Simply because there were so many amateur traders?
Also we bought right after the dot bomb happened on 9/29/2000 when most all the tech stocks fell by half or more in one day, so there was a constant upward trend where people wanted to start gambling in stocks again over the next year:
https://money.cnn.com/2000/09/29/markets/techwrap/
You can see the drop here, I can't figure out how to share, but enter something like 9/28/2000 through 9/30/2000 in the date range:
https://finance.yahoo.com/quote/AAPL/chart?p=AAPL
You have to remember that these events aren't random. I personally feel that they're controlled by whoever holds the purse strings, so a handful of extremely wealthy illuminati were getting nervous towards the end of the dot com and housing bubbles and made the call to pull the plug so they could re-buy after everything crashed (see: It's a Wonderful Life).
We're overdue for that with the mobile and web 2.0 bubble. The main difference today is that older folks like me remember the lean times so more startups today have pulled themselves up by their bootstraps and are somewhat immune to these market manipulations vs propped-up brands like pets.com in the 90s. But don't think for a second that crashes (or booms) like these with a 50% move in one day can't happen again.
As long as I'm on my soapbox, I wish that I could dabble in a little machine learning and look for correlations that tend to swing together or oppositely one another. No matter how much the bots tend towards noise, there are still markets that are connected that should be easy to spot. I don't know what else I would try though because I stopped following the market after the housing bubble when people started trading foreign currency and Bitcoin etc. I could have bought $20,000 worth of bitcoin when it was $10 so it's all just monopoly money to me now. I feel that chasing easy money is maybe distracting us from real human progress. But what do I know, I'm just the poor sap stuck in the universe where I never made it big hahah.
They find gaps in the financial institutions' way of doing business and fill the space.
And,
https://www.google.com/amp/s/www.bloomberg.com/amp/news/arti...
> SIPC insurance provides protection for your cash balance and securities holdings if Robinhood fails financially, but does not cover investment losses due to declines in the value of securities themselves.
Emphasis mine.
If you put $250,000 into an FDIC-protected checking account, that account holds cash and FDIC protects the full amount of that cash.
If you put $250,000 in an SIPC-protected brokerage account, that account holds both cash and securities, and SIPC does not protect you from a decline in the market value of those securities. So imagine the stock market drops and you go to your "checking account" and that has dropped too! To me, the concept of such a "checking account" violates my basic assumptions of how I think about my cash holdings vs. my security holdings.
I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow.
It also seems like there could be weird tax implications if your "checking account" has to liquidate securities to cover a big check you wrote.
Aside from that, it appears they're investing this money in short-term treasuries rather than stocks, making up the difference in merchant fees for debit card transactions, and maybe treating this as a loss leader. They've partnered with Sutton Bank since they don't have their own banking license.
https://www.forbes.com/sites/jeffkauflin/2018/12/13/in-a-bol...
FWIW, some Vanguard bond mutual funds (most of the investment-grade ones) allow you to write checks against them, and those funds can lose value.
I can't find an easy link that says which specific ones, but here's their policy:
https://personal.vanguard.com/us/whatweoffer/accountservices...
Note: this isn't a general checking account that permits debit card usage, and each check must be for at least $250. But right now, you can use their Prime money market fund, which aims to avoid loss of capital ("breaking the buck" is very rare) and write checks against it, and it yields ~2.3%
https://investor.vanguard.com/mutual-funds/profile/VMMXX
So I won't buy any securities, just use it as a checking account, keeping the cash sitting there earning the 3% interest.
I wonder if there is a rule of Robinhood which prevents me doing this.
I just learned that this is how Betterment's "Smart Saver" account is as well.
> Is Robinhood a bank?
No. Robinhood offers Checking & Savings through a brokerage account and it offers the Robinhood debit card in partnership with Sutton Bank.
Because if it is, then this is basically the same. Your cash is fully insured, but obviously your investments run investment risk.
If Robinhood automatically converts your money into securities, then it's a different matter. It sounds unlikely to me that any bank account would work that way, but I don't know how Robinhood works.
I'd recommend reading up on the Federal Reserve (The Creature from Jekyll Island), the modern financial system (any of Michael Lewis's books, especially Boomerang and The Big Short), and maybe the first global banking families (The Medicis: Power, Money, and Ambition in the Italian Renaissance). We're talking about the power structure of the world here and it's good to be informed on the main points.
I still suspect that the securities mentioned are your own securities rather than the bank's, which makes it totally sensible that they're not covered by the insurance.
"Own nothing, but control everything." -John D. Rockefeller
edit: good note from /u/snowwrestler below:
> > It's not the cash/securities that Robinhood holds as part of their business, it's the one they hold for you. You may well choose to hold 100% cash or 100% securities.
> If I'm holding 100% securities, a) SIPC offers me no protection from losses, b) I better be making more than 3% return, and c) I would not call that situation "a checking account."
"I bought 100 shares of Acmecorp, then Robinhood shuttered their doors and said they sold the shares to fund their yacht."
The SIPC's job there is to reimburse you for 100 shares of Acmecorp as of now; they're not going to let investors cherry-pick and say "but they mishandled the account during the one day it was at its peak and I want that price!"
I don't understand what a "checking account" is that guarantees 3% interest and is covered by SIPC instead of FDIC.
There's SIPC protection for your cash and securities (stocks etc.) that Robinhood holds for you, up to 250,000$ each. For obvious reasons, the value of a security in dollars fluctuates and therefore such losses cannot be insured. What is being recovered is the securities themselves, not their dollar value at a time of your choosing.
> I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow.
It's not the cash/securities that Robinhood holds as part of their business, it's the one they hold for you. You may well choose to hold 100% cash or 100% securities.
Actual banks hold only a small fraction of cash deposits in reserve, many of their assets may just as well turn out to be made up of bad loans, bad junk bonds and bad stocks. That's how banks can fail even without a bank run.
If I'm holding 100% securities, a) SIPC offers me no protection from losses, b) I better be making more than 3% return, and c) I would not call that situation "a checking account."
A checking account holds 100% cash (dollars), not securities. That cash is insured by SIPC up to $250,000, just like the cash in your bank account is only insured up to $250,000.
Securities is things like stocks. Stocks are subject to significant gains, but also significant losses. That's the investment risk you have to take. There's no way around it. There can't be a government insurance against it. You can buy "insurance" against losses by purchasing options to sell at a specific price, or you can reduce risk by diversifying your portfolio.
I don't know the details of how securities are valued for recovery in the context of SIPC, but the point is that you will receive (parts of) your securities, not cash. Therefore, if for example you hold Microsoft stock at the time of bankruptcy of Robinhood, you are not entitled to be reimbursed any losses that may have occured as a result of Microsoft's stock price dropping in the meantime. Conversely, you do not owe any gains that the stock price may have made.
Sure it does. The point of SIPC is that if your broker goes under, and you had, say, 100 shares of MSFT and $100 in cash, you get those things even if your broker somehow comes up short. Now, what 100 shares of MSFT is worth in dollars is unrelated to SIPC and depends on the stock market.
The purpose of SIPC is to protect against a breakdown in financial abstractions at one particular level.
SIPC CEO rejects claims of coverage:
https://www.barrons.com/articles/activist-investors-on-the-m...
But cash in a checking account is not going to suddenly start showing negative returns.
The only example I can think of what you’re referring to is the new Betterment checking account which is basically like a security masquerading as a riskier savings account.
But I am not an expert and don't take my advice.
I want to emphasize this point. You are never* getting returns for free, you are getting paid to take on some risk. If someone is trying to sell you "risk-free" returns that are higher than widely-known market rates, they are lying to you by downplaying, omitting or obfuscating the risk associated with those returns, and warning bells should be going off in your head. Proceed with caution.
* You can of course find better risk-adjusted returns than the market by way of information asymmetry in your favor. Suffice it to say that is not the case with a consumer financial instrument aimed at "the masses" (not high net worth individuals).
Sure, but you can buy US treasury bills, and then your risk is "lose some money if the US government defaults", which is very low.
We all live every day with risks far greater than that risk level.
If you look at the current treasury yields, they are very close to 3%. Add the interchange revenue, and RobinHood can pull a 3% guarantee while still making a (narrow) profit.
If treasury yields go down, then no problem: RobinHood can instantly adjust their returns downward. If they go bankrupt because of an unlikely combination of events - lots of deposits coupled with a very sharp and unexpected decline in treasury yields - SIPC will pick up the pieces and make sure you get your cash and securities up to $500k.
My understanding is that any cash and securities you own when they go out of business is covered up to the limit. So if you have $250k in your RobinHood checking/saving, that will be guaranteed by SIPC.
DISCLAIMER: I am not a financial adviser and nothing I ever post is financial advice.
There are all kinds of other risks associated with buying US treasury bills besides the US government defaulting, which is why you get paid - but you're right, the risk is low so you get paid a low amount. You have opportunity costs during the time that your money is locked up in treasuries. You also incur some inflation risk. If we are specifically talking about T-bills then we're talking about treasuries with maturities of less than one year, meaning that particular risk is low. There is interest rate risk. If you have an emergency and need to convert back into cash before the maturity date hits, you have to sell them on the market, where you may lose money if interest rates have increased. If you're investing in the treasuries via an ETF or via a broker, you are incurring additional counterparty risk.
> If you look at the current treasury yields, they are very close to 3%.
The 10-year bond is 2.91%, the 20-year bond is 3.05%. Investing in a 10 or 20 year bond is obviously different than having a checking account which can be emptied at any time without penalty and without having to go to the market to find a buyer, so there's a large maturity mismatch that's being incurred by your counterparty, RobinHood (assuming they are in fact investing in long-dated treasuries).
> If they go bankrupt because of an unlikely combination of events - lots of deposits coupled with a very sharp and unexpected decline in treasury yields - SIPC will pick up the pieces and make sure you get your cash and securities up to $500k.
The part where they pick up the pieces could take weeks or months; if you need the cash before then, you're in trouble. If you can afford to wait, you're right, no big deal. I don't expect RobinHood to go bankrupt tomorrow, but if they were wiped out as part of a wider financial crisis, it's possible that under those conditions you'll need access to your cash quicker than you think.
Every dollar-denominated investment incurs inflation risk, including any sort of cash account like a dollar saving/checking account.
> If you're investing in the treasuries via an ETF or via a broker, you are incurring additional counterparty risk.
That counterparty risk is exactly what SIPC insures.
> Investing in a 10 or 20 year bond is obviously different than having a checking account which can be emptied at any time without penalty and without having to go to the market to find a buyer, so there's a large maturity mismatch that's being incurred by your counterparty, RobinHood
But RobinHood can make certain reasonably safe assumptions about the flow of capital into their various accounts, and adjust based on that.
For example, while they're growing, every withdrawal will be matched by a great amount of deposits. So they'll always have the cash in hand to satisfy withdrawals.
Of course, if they ever stop growing, that assumption no longer holds. But the very nature of startups is to bet on growth, even at the risk of potential bust (since failing to grow rapidly means failure).
> The part where they pick up the pieces could take weeks or months; if you need the cash before then, you're in trouble. If you can afford to wait, you're right, no big deal. I don't expect RobinHood to go bankrupt tomorrow, but if they were wiped out as part of a wider financial crisis, it's possible that under those conditions you'll need access to your cash quicker than you think.
Absolutely. I would keep an emergency fund in an FDIC-insured bank account somewhere else.
You're right, inflation risk isn't particularly relevant when comparing treasuries vs checking accounts or cash. Those are all exposed.
> For example, while they're growing, every withdrawal will be matched by a great amount of deposits. So they'll always have the cash in hand to satisfy withdrawals.
Ha, if we can just assume they'll have money pouring in faster than withdrawals, even when markets experience turmoil, there's very little to worry about! I don't know exactly how sure we can be about that - or at least, for how long.
> Absolutely. I would keep an emergency fund in an FDIC-insured bank account somewhere else.
Wise, and it sounds like we're on the same page. All I was arguing is that there is some risk here that's being glossed over by selling it as just-another-checking-account-except-you-get-more-money. Maybe small/unlikely risk, but you're not getting 3% for free. You can always just go buy some IEF or TLT or actual treasuries too.
Your typical bank has far more than RobinHood's 300 employees, and far greater expenses in general.
This is an example of a disruption.
This comment just reinforces my feeling that Robinhood's business model is to extract money from credulous customers who think they are too cool for regular banks.
For example Chase has over 10 banks within blocks of each other in downtown Chicago.
Hundreds of thousands, actually.
Wells Fargo had 262,700 employees in 2017. Bank of America, Chase, Citi - all had over 200,000 employees that same year.
These numbers have only gone up since then.
No private insurance company can provide such guarantees and keep then if the entire sector needs to be bailed out at the same time.
SIPC is like Fannie Mae, where the US implies a backing without making a promise. When push comes to shove the US Government gets to choose whether to do a bailout on a case-by-case basis.
FDIC is not like that at all. The US explicitly and unconditionally backs them.
Look at it in political terms. FDIC is guaranteeing everyone's savings, rich or poor. You just can't let that fail. SIPC is guaranteeing a bunch of investments. If the class in power takes a dim view of bailing out a bunch of "wealthy speculators", the ball can definitely be dropped.
Edit: I forgot about the details of the limit. Thank you all.
It's actually per bank, per type of account. So $250k in savings accounts, $250k in checking, $250 in Money Market, etc.
> All single accounts owned by the same person at the same bank are added together and insured up to $250,000
Revocable trusts, joint accounts, and other types of accounts with multiple custodians are covered separately, but checking, savings, and so on are not.
https://www.fdic.gov/deposit/covered/categories.html
It's not per type of account, it's per ownership category. Ownership categories are:
(1) Single accounts
(2) Certain self-directed retirement accounts
(3) Joint accounts
(4) Revocable trust accounts
(5) Irrevocable trust accounts
(6) Employee benefit (non-self-directed) plan accounts
(7) Corporation, partnership, or unicorporated association account
(8) Government accounts
https://www.fdic.gov/deposit/covered/categories.html
With a little bit of work, you can probably spread your money into a few of those categories without much problem and have more than $250k coverage, but it's not as easy as just having checking and savings.
https://www.fdic.gov/deposit/covered/categories.html
To clarify, I am talking about customers who held money at LB invested in mutual funds or securities. If the account had a mix M of securities before LB collapsed they would have the same mix once the dust settled and LB account was forced to whatever other brokerage. If this is incorrect (not for some advanced hedge funds, etc. but for retail customers) I would love to know.
If you are talking about folks who held LB stock or bonds, they sure did lose money when the company went bankrupt, but that is not unexpected. Stocks fluctuate in price and some go all the way to zero; for every Google there are a few KMarts, Sears or Enrons.
https://www.kiplinger.com/article/investing/T023-C000-S001-w...
However, reading more I am not as sure that individual investors holding money in LB investing in other (non-LB) securities did not suffer. I am not an expert and cannot always distinguish between reputable sources and conspiracy theorists. Can someone provide some good references?
And if the gov't really wanted to weasel out of FDIC there are plenty of loopholes. For example, I think FDIC can take a long time (up to 10 years?) to pay and is not adjusted for inflation, so inflate, wait and pay pre-inflate amounts is an option (stupid, but technically possible).
And big brokerages have offered this type of account for decades. It's usually called a "cash management account" and works just like a checking account--takes direct deposit, provides checks and an ATM card, etc.
Robinhood's innovation might simply be in calling it a "checking account" so the interest rate looks huge (it's actually small compared to expected investing returns) and marketing it to young people who are suspicious of big financial companies.
> to encourage people to keep all their spare money one-click away from its investment products
These are not mutually exclusive. Robinhood could write this off as CAC that's mitigated by investments into (relatively) safe and low-yield investments. Robinhood could spend a million on Google/FB ads, or they could have an X% chance of losing an amount equal to (3%-bond yield) where X is reasonably low. The (mitigated) loss gives them access to capital and access to customers. If the 3% is permanent, there is no reason for anyone to store their money in a different checking account, as inflation will eat into their savings if those savings aren't invested. Extremely smart move on their part.
Betterment has their Smart Saver[1], which offers a 2.09% rate and attempts to position it as vastly better than FDIC-insured accounts by comparing to some terrible “national average” instead of the ~2% rates that Ally, Capital One & others offer. It’s still an investment account with the risk, tax implications & liquidity challenges that such an account has.
Their misleading marketing around this is driving me away from them.
[1]: https://www.google.com/amp/s/www.betterment.com/resources/sh...
> Smart Saver’s built-in portfolio is the Betterment Portfolio Strategy’s allocation at 0% stocks, 100% bonds.
The one big downside could be is if you need cash _now_ it can take a few days (5?) before being able to use it.
https://old.reddit.com/r/wallstreetbets/comments/a5iwgh/robi...
I'm bringing this up because, while some people did lose money yesterday because of Robinhood's downtime, there we also a lot of people claiming to have lost money, but were blatantly lying.
I'm not trying to let RH off the hook, but /r/robinhood makes it sound like RH was robbing them at gun point.
Look at the comments I linked to. That's not downtime. People's transaction history is being rolled back. Some people still have fake positions showing. Another had all his positions sold. Another got bonus buying power.
The inconsistencies in the comments are striking. Looks like a complete lotto of what happened to people's accounts. That inspires zero in their back end processes.
>makes it sound like RH was robbing them at gun point.
It pretty much is. With options timing is everything and being locked out is a disaster. Especially with the current volatility
Presumably it'll all get straightened out eventually but wow I'm definitely not putting in hard earned money on RH
>It pretty much is.
It really really isn't. This is the type of exaggeration why I find that sub insufferable.
Robinhood's stability issues are well known and normal for a fast growing, early stage startup. You as a user need to understand the limitations of the platform and incorporate them into your trading strategy.
Swing trading options on RH is like carving a turkey with a chainsaw. Sure, you can do it, but it's not the right tool for the job.
This isn't someone startup app going wonky that needs a server reboot. It's peoples money & expectations for reliability are much higher. Justifiably so.
>limitations of the platform
This isn't a 'limitation'!?!?! Their system crapped out and caused chaos
>Swing trading options on RH is like carving a turkey with a chainsaw
Agreed. This isn't about which broker is best for what strategy. This is about a broker failing to fulfil its core purpose - reliably executing orders
It totally is. The company is exactly 5 years old and has only had customers on their platform for 3.5 years. The company only has like 300 employees. It's a start up through and through.
For reference, Coinbase and Acorns are older than Robinhood.
> This isn't a 'limitation'!?!?!
It's totally a limitation in terms of availability of the platform. They are not promising 100% uptime and no reasonable person should be expecting that from an app barely out of the beta stage.
If your trading strategy can't handle a few hours of downtime, you should find a platform that has an SLA guaranteeing uptime.
> This is about a broker failing to fulfil its core purpose - reliably executing orders
It's also about understanding that shit happens, especially with startups.
I'm not trying to let RH off the hook here, but people using their platform need to understand that they are a new company growing quickly and things will break. If your lively hood depends on things not being broken then you are going to have a bad time.
Robinhood has gone down before and will go down again, don't use it if you can't handle that truth. To use an old adage "Fool me once shame on you, fool me twice shame on me"
It reminds of when businesses grossing over a million dollars spend $5/month on their hosting and are offended when their site is down.
But there are a lot of everyday people rigorously swing trading with smallish accounts. I've had some really interesting chats with uber drivers who do this, since they're sitting around in front of a phone all day anyway.
I feel like most of that sub isn't technically day trading, but it feels like the average time holding a security is less than a week.
Too stressful for me.
Perhaps. Entirely irrelevant though for the topic at hand.
The broker needs to execute instructions reliable. Doesn't matter how retarded the thinking behind the instructions is
"Sounds interesting. Is it FDA approved?"
"Well, no, it's FCC approved. You see, legacy foods are ripe for disruption because regulatory has capture created an artificial barrier to new marketplace entrants. With ifood we're able to end run that barrier by..."
"Goodbye."
5-year CDs are well over 3%.
Could be a bit of both.
You don't have to be educated to actively trade, with RH or otherwise. You just need cash and confidence.
(Note, I'm not saying that is enough to be successful or make active trading worthwhile, but the customer pool isn't limited to people who should be actively trading.)
In the past year, I think I've used my debit card for one purchase at a local small business where my purchase amount was under $10 but I didn't have any cash on me. I wanted to ensure the business didn't lose money after the swipe fees, so I used my debit card and PIN.
... they are paying out money to the depositor instead of the shareholders
For Europeans that don't know: Most Americans have (at least) those two accounts, and those two cards. They usually spend from their checking account with their credit card, and save on the savings account. When they spend on their credit card, they sometimes "earn" points, depending on what agreement their bank has with the major retailers. Salary is inserted on the checking account. Some people still receive salary on old fashioned paper checks. Some people still pay in stores using paper checks. Almost everyone, has a lot of paper dollars in their wallet since there are plenty of places in which you need it. Now, on regular intervals, for example at the end of the month, Americans then transfer money from their savings account to their checking account if the salary is not enough to cover. If they forget, they pay high interests and fees. Generally speaking, it's a hassle to transfer money to people you know and fees are hefty. When you use your credit card, no pin code is usually needed. There are regularly issues with your credit card being abused.
In the three European countries I have lived in, people have one account, and one card. Depending on your agreement with the bank, it can dip into negative (in which case you pay some interest, but usually not much). If it dips below the agreed max, let's say minus EUR 5,000, then you can't withdraw more until you receive your salary or until you insert money otherwise. People have one card attached to that card. When the balance on the account is positive, it is essentially a debit card. When the balance on the account is negative, it's a credit card. Usually, no points are earned on any spending. In most of Europe, you use your pin code if you use your credit card. Where in America, you regularly spend time on the phone talking to robots and objecting to expenditures you didn't make, that's almost never the case in Europe. People transfer electronically without any fees from account to account. If you go out, and your friend pays dinner, you can transfer your half directly from your smart phone using just his phone number (so essentially just using the contacts on your phone). You don't need Apple or Google pay or similar. It's your bank's app. No fee is charged.
Credit and Debit cards are different things. Debit cards are the European style 'put in a pin and money is debited directly from your bank checking account'. Credit cards are a revolving line of credit from a bank - you're spending against the LOC, and settle up on a monthly basis (to some extent - there's interest and pay-over-time involved in most as well).
The difference in accounts: banks offer substantially higher (although, basically still really low due to todays market) interest on money sitting in savings accounts, and restrict the use and availability of that money. Banks backed by the Federal reserve have to maintain a minimum ratio of deposited money to loans, and these restrictions/incentives are how they keep those in line and stay legal.
And for what it's worth, 99% of my spending is on a credit card, which I pay off monthly. I can't remember the last time I used cash or paper checks.
We also have many different ways to transfer money around, etc. using apps and things.
This may result in overdrafts from other automatic payments or not being able to pay for things you need, until the money is restored to your account.
Same thing happens on my credit card: the credit card company floats the missing cash for at least 30 days, at no loss to me while it 'gets worked out'.
And that's with everybody (merchant, bank, etc.) agreeing it was an accident. If it was actually fraudulent, I dunno how long it'd take...
"Credit card" would be a third account that is purely debt-based. It's optional, and you can spend directly from your checking account with a "Debit card" instead. It's just not advisable, due to the broken-ass card system you described.
"Savings account" is optional, but earns interest. Does your single EU account earn reasonable interest? Long term deposit ("CD" and "Term Share") rates are currently around 3%, with savings paying 2%.
Combining checking and savings accounts can be done in the US in 2018. The 3 major online banks all allow you to setup an automatic "overdraft transfer", so you can deposit into your savings account, spend out of the checking, and have money automatically move between them. The remaining caveat is that you're limited to six of those movements from the savings per statement, which makes aggregating small transactions on a credit card handy.
I expect the caveat with this Robinhood offering will be a cap on the balance that earns 3%. You can find plenty of checking accounts with high nameplate interest (search for Kasasa), but they all demand some level of ongoing mindshare activity [0] and limit the amount they'll actually pay out, rather than functioning as true savings/moneymarket.
[0] Usually a certain number of debit card transactions per month, to better feed the surveillance databases.
Going negative in an easy to transact, straightforward pay-for-amount-and-duration-of-debt from your bank has no US equivalents.
Having an unsecured line of credit along with your checking account is extremely convenient if you generally try to invest your savings and very occasionally need to go under temporarily.
It's not like a credit card. The super multi-faceted it-can-very-conditionally-be-used-to-consolidate-cash-debts-with-low-introductory-APR-but-is-also-a-purchase-transactional-tool-with-a-grace-period-except-when-you-break-it-then-you-get-20%-APR-and-get-charged-retroactive-debt-from-the-time-of-transaction-plus-all-your-subsequent-transations-all-have-no-grace-periods-until-you-do-something-magical-to-reset-the-state-of-your-account-and-all-that-except-when-you-do-any-cash-advances-in-which-case-all-bets-are-off is unexplainable and uncalculatable for normal people.
It's not like a loan because loans need paperwork and issuing per instance per purpose. And each time you use it triggers effects on your credit score. A line of credit is always there and free if you don't use it and you can use it on a whim for any arbitrary reasons.
It's not like taking money out of your investments because liquidating assets and possibly transferring between your brokerage and banking accounts can take a week. A line of credit can be cash in your checking account in milliseconds.
Edit: correction, it's not really inaccessible in the US, just a fringe product with 12% APR and other catches like no debt monthly fees vs 5% and no catch in Canada.
No other U.S. bank that I'm aware of offers this feature. This feature is fairly hidden on their website. I read about it somewhere, and asked about it through their chat. The gave me a link to a PDF application form. I had to print out the PDF, fill it out with a pen, and mail it out (you can't apply online). I was approved a week or two later.
[1] It's the Bank that offers this -- not the brokerage service of Charles Schwab. There's a second overdraft service offered through Charles Schwab itself -- this overdraft service is a margin loan secured by equities in your brokerage account. You can actually combine both overdraft services. The Schwab Bank Overdraft Line of Credit application form asks which type of overdraft line of credit to use first.
This hasn't really been true for a long time. Most banks participate in Zelle, which lets you transfer money for free to just about anyone via your phone. Every national or regional bank I can think of is a member. Venmo also does this.
"in America, you regularly spend time on the phone talking to robots and objecting to expenditures you didn't make"
Regularly? I am a heavy credit card user and I've had a card compromised once about 10 years ago. I talked to a human at the bank to clear it up and they had a new card in my mailbox the next day.
The whole "points" thing is an oddity, I'll grant. But we're used to it and it's highly advantageous to the consumer if you pay off your cards every month. It's worth about $1000 per year to me.
One might argue that one benefit of the European system is that credit card processing fees imposed on the retailers are regulated, which ultimately causes credit card "points" to be uncommon. This in turn makes life simpler because there is no need to game the credit card benefits system. You can, however, get up to 0.5% cash back at least where I live.
Credit cards are mostly used by businesses but individuals rarely have them as they are hard to get in the first place.
In France, it is also customary to use your checking account with an allowed overdraft amount.
That means you can end up with a balance of -500 euros but do not have to pay fees unless you go over this agreed amount.
This amount is negotiated with the bank when you open your account and can vary depending on your monthly salary.
Unlike a credit card though where you can spend as long as you have money left on your card, the bank can cancel your overdraft and ask you to reimburse the money at any time.
You do not earn points with the overdraft and contrary the Credit card system where having a credit card and spending some money actually increases your credit rating so long as you pay the money back in time, using your overdraft is considered a bad thing by most banks.
They are still going to give you the overdraft because if you go over the agreed amount then the fees become staggering.
They basically prey on poor people.
> Most Americans have (at least) those two accounts, and those two cards. They usually spend from their checking account with their credit card, and save on the savings account.
This is not true. A), most Americans do not have two accounts. The card used on your checking account is a debit card, and it does not allow you to have a negative balance without incurring a penalty fee. A credit card is a completely separate instrument that allows you to spend from $0 to -$<credit limit> with the understanding that
> When they spend on their credit card, they sometimes "earn" points, depending on what agreement their bank has with the major retailers.
This, broadly speaking, is not true. The bank rarely, if ever, has any direct dealings with the retailers. This is mostly done through the payment network (Visa, MasterCard, etc., which Europe has as well).
> Salary is inserted on the checking account. Some people still receive salary on old fashioned paper checks. Some people still pay in stores using paper checks. Almost everyone, has a lot of paper dollars in their wallet since there are plenty of places in which you need it.
This is not true. Income is deposited wherever you indicated to your employer. This can be separated between savings accounts, retirement accounts, checking accounts, investment accounts, or even deposited directly to prepaid cards. Check paying is exceptionally rare among people under 50 (except for some holdouts, like apartment complexes), and virtually nobody carries wads of paper dollars around anymore. Many trendier stores in cities are now 100% cash free and do not handle paper money at all. Checks might still be issued, but most banks offer instantaneous deposit via smartphone.
> Now, on regular intervals, for example at the end of the month, Americans then transfer money from their savings account to their checking account if the salary is not enough to cover. If they forget, they pay high interests and fees.
This isn't true. For one, the only reason to transfer money from your savings account to your checking account is if you need to make a purchase with your saved funds, i.e. you've spent in excess of your means for that month. The purpose of a savings account is... to save. The idea is the number of withdrawals from the savings account are limited (by law). In return, the bank can offer you higher interest on your deposits because the money is less mobile. In the past, these interest rates were decent (over 4% APY was not uncommon). Since the financial crisis, savings accounts from major banks have offered insulting low rates (in some cases 0.05%).
You pay fees for drawing a negative balance in your checking account. Every bank now has the ability to link both savings and credit accounts to automatically cover these "overdrafts" automatically, with no user input.
> Generally speaking, it's a hassle to transfer money to people you know and fees are hefty. When you use your credit card, no pin code is usually needed. There are regularly issues with your credit card being abused.
This is somewhat true, but most banks are good at catching fraud before it becomes an issue for the customer. Europe, I might add, is not immune to credit card fraud despite using PIN codes for credit transactions. Debit transactions in the US commonly require a PIN code and have for decades, however this PIN code is not attached to the card chip like on European cards.
Beyond this, it isn't like Europe is some alien planet. There are definitely countries in Europe which offer the Checking/Savings/Credit structure.
As an American, I agree with all of the corrections in your comment except for this one.
I'm willing to accept that your employment history is different than mine but I've never had an employer that supported this and I'd be really surprised if most Americans did.
My employers have given me a choice: paper paycheck or direct deposit of the full amount. Full stop.
My last employer even let me choose if I wanted monthly, bimonthly, or biweekly paychecks.
[Edit: I shouldn't say that it's odd. It just runs counter to my experiences is all.]
Each credit card is another monthly fee, and you can't do international (Netflix) purchases without one.
In contrast with the EU (single card) system.
Yes, it is awful.
Banks are going to have to decide whether they want to raise their rates to compete, or face bleeding customers.
The best part is that the money comes from merchants and credit card companies, and is being returned to consumers.
Robinhood truly is living up to their name: stealing from the rich and giving to the poor.
I'm sure the big boy banks are here stay. Most of them are in the category of, "too big to fail" (as the crisis a decade ago highlighted) and upstarts like Robinhood are but a blip-in-the-radar than a real threat to the established players, imo.
In fact, if they lose their customers they will no longer be "too big to fail".
RH likely won't sustain this interest rate, and it's more akin to a temporary promotional play to acquire new traders.
Also, business banking and loans in general will never be something that happens on an Robinhood. At least not in this generation. These types of entities require a man in a suit in an office.
Generally, you really shouldn't be keeping much in a bank anyway, invest most of your money, even if only in ultra safe bonds.
The real point though was that IMHO aside from your emergency money, you should really have as little in cash as possible. My other callout was that high interest rates didn't appear to steal any significant business from big banks in the past.
I can only imagine everyone in /r/churning jumping on this if they have an invite.
from what I understand Tesco bank had purchased bonds/securities/whatevs with a 5% interest rate, so made 2% off the deal. (and a slew of new customers worth x each to the bank)
Hopefully something similar is funding this
But the half baked eu ruling on merchant fees screwed savvy investors and the banks found another way to charge merchants.
They have limited account opening at various times though.
If both banks invest in whatevs (local currency) paying 5%, then they get 5%, pay you 3% and make 2%.
Are you trying to reference relative inflation?
Or something about the USD makes it difficult to invest?
It will be interesting to see if they
* maintain a 0.5% spread above the best nationally available rate as rates rise elsewhere as an ongoing customer-acquisition cost
* just stick to 3% even as other banks raise their rates higher over time, assuming that 3% is good enough and their product is sticky enough that people won't move
30 year US treasuries are now also above 3%, and we may see that continue with shorter-term instruments so there's a hedge there as well.
I haven't checked everywhere in the eurozone but a lot of major banks have online brands/products that are typically free. You should be able to have at least a checking account and a debit card without paying any fees. "Neobanks" are also a lot more developed than in the US: see N26, Revolut, Ferratum, ...
Savings accounts yield nothing, but that has nothing to do with retail banks :) That said, you can find fixed-term deposits between 1 and 2%: https://www.raisin.com/
The US 10-year is on the other hand is near 3%.
I'd love a checking account, with no fees that pays 3% on the whole balance.
My average balance on my current account is around £20k. My interest would be £600 a year at 3%, as opposed to £25 or so I get now.
Or look into an offset mortgage.
Even bog standard instant access accounts are above that, and have the added benefit of not potentially losing all your money when you debit card gets nicked.
I could open multiple, but then every month I'd need to spend time transfering money to each to earn the interest. Im not sure that would even count towards deposited every month, they might want to see a direct debit that is actually a salary. I'm not sure.
Further, I have an ISA (which is the UK tax free saving accont), that earns under 1% too and I'm limited to £20k a year into that account.
I have another account that pays ~2.x% per year, but on that one I'm limited to £250 a month.
Interest rates are abysmal right now in the UK.
This is a 30 second job setting up a free ongoing standing order, one to deposit then one to move the money elsewhere the day after every month automatically. This is sufficient to meet the pay-in requirements of all the banks.
> they might want to see a direct debit that is actually a salary
Salaries aren't paid by direct debit, that's something else - an agreement that allows a company to withdraw a variable amount from your account. Some banks have a requirement that you have x direct debits setup (normally 1 or 2), you can work around that with something like https://littledebits.co.uk/Direct-Debits-and-Charity
Cash ISAs serve minimal purpose with the new personal savings allowances. If you're a higher rate tax payer you get £500 tax free, £1000 if you're a lower rate cash payer. I'd question why you're holding so much cash if you're getting a return higher than that, there's often better places for your money.
Check https://www.bankaccountsavings.co.uk/
For what it's worth, here in Australia they have similar offers. At one bank, I said I wasn't interested because of the regular 'salary' deposit requirement, and that bank offered to set me up with two accounts and a regular automated transfer between them to meet the minimum monthly deposit requirement. Though honestly, the fact they offered to do that concerned me even more.
However, if you're looking for something slightly better than what you've got now there are currently a fair few 1.5%ish easy access accounts available that you could just dump your savings in and make a fair bit more than you're currently getting. You can get 2-3% if you're willing to lock some up for a year+.
ISAs are irrelevant for most people since the personal savings allowance came in - if you're earning less than £500/£1000 per year in interest (depending on income) then you won't pay tax anyway.
moneysavingexpert.com has excellent round ups of this sort of thing.
https://support.robinhood.com/hc/en-us/articles/360001226966
Selling high cost first is likely the best strategy but if say you had some that was long term versus short term capital gain that might lead you to make a different decision on a particular case. Also if you had a choice to sell something that is about to be a long term gain versus one that you bought much more recently you might want to sell the more recent purchase first (in the event you were going to sell again say in a month - which could let you claim a long term gain for the 2nd sale). So there are reasons to make different choices in individual cases.
For example, I didn't see anything about how funds are insured. If Robinhood were to somehow lose depositor funds, what recourse would account holders have?
The 30 year treasury rate is barely over 3% so I'm honestly not sure how they can make any sort of real money on this. I would expect the rate to change over time, especially if the 30 year dips under 3%. But it seems theoretically possible given the absence of brick-and-mortar spaces and all the overhead and costs that comes along with that.
EDIT - I forgot about the interchange fee sharing when you use the debit card. So that is where the profit would be. Seems like the goal is to target roughly the 30 year treasury rate and pass that through to the customer and they can breakeven. And the profit comes from actually using the debit card. Not to mention potentially selling that user data.
They're SIPC insured (like a brokerge account) instead of FDIC insured (like a bank account) which is a subtle difference and ever-so-slightly riskier for the consumer but not terribly different.[1] The biggest/riskiest difference is that the insurance here is provided by a group-funded non-profit as opposed to the federal government.
But mostly it's about making up the difference with your data.
[1]https://www.schwabmoneywise.com/public/moneywise/essentials/...
Banks make boatloads of money without needing to sell data, but rather selling loans. Not even needing to loan money, offering 3% interest, with how high treasury notes are these days, is _really_ easy for banks to do. The problem is that generally banks also have really high overhead, something Robinhood doesn't.
I'm curious what the harm here is. Are they going to blackmail people who shop at their competitors?
better to buy gold/silver/real estate IMHO.
The Gramm-Leach-Bliley Act requires "financial institutions" to give customers the opportunity to opt-out of information sharing with third-parties. GLBA doesn't permit customers to opt-out of information sharing with affiliates. Tucked on the second page of Robinhood's privacy notice[1] (which is curiously absent from their "disclosures" webpage) you'll see they have an affiliate "Chronos Research."
[1]https://d2ue93q3u507c2.cloudfront.net/assets/robinhood/legal...
https://imgur.com/a/VCUoIRW
It is listed directly on their Checking & Savings page, it has it's own featured section, you only have to scroll twice to see it.
> Every Robinhood account is SIPC insured up to $250,000 in cash and protected by modern encryption so you can rest easy and save confidently.
That’s pretty bad so the account get zeroed out by identity theft, or embezzlement, or robin hood going bankrupt. These are all terrible risks for checking accounts (or money market even). This is basically investing in RobinHood in an easy manner.
[0] https://en.wikipedia.org/wiki/Securities_Investor_Protection...
Even then I think for cash I might be more comfortable handing it to a teller and getting a receipt.
These third party low-rent ATMs at convenience stores don’t even take deposits. They are withdrawal only.
This was resolved after about 2 hours on the phone with the company who manages the machines, but I still don't use them anymore.
How can you prove if it was you or them that miscounted?
Modern “envelope-less” machines do not have this risk.
Counting cash by hand is surprisingly error prone. I ran a snack bar in high school and I would hand-count a large pile of grubby $1s before bringing to the bank. About once a week the total from their counting machine would not match my tally. I think even once it was the machine that got it wrong.
If you’re face to face with a human you can error correct before the pile of cash disappears.
See https://krebsonsecurity.com for a ton of articles about various skimmers and scanners that have appeared in ATMs and gas pumps.
I doubt the ATMs at Target/7-11 can take cash deposits. I've only seen that feature on bank branch ATMs.
I've had no trouble personally going basically cash-free. If someone gives me cash for some reason, I just buy the next grocery run with it to use it up.
http://www.allpointnetwork.com/
Does not compute. If it compounds daily then yearly total is above 3%
Investing day to day with the money in your checking account is probably not a recommended personal finance practice but I definitely have more money in my checking account than I probably need this month because moving money is too painful.
"Robinhood Is Making Millions Selling Out Their Millennial Customers To High-Frequency Traders" [1]
"Robinhood Investing App Secretly Makes Millions Selling Millennials' User Data To HFT Firms" [2]
[1]https://seekingalpha.com/article/4205379-robinhood-making-mi...
[2]https://www.zerohedge.com/news/2018-09-15/robinhood-investin...
They are not bad guys’s. They are still making money(surprice!?), but they are much much more modest about it than traditional banks. This account is a fine example. They don’t need to give you a 3% deal, but they are doing it anyway because it’s benefitting both them and their costumers.
There are other alternatives, e.g., credit unions.
Users of Robinhood Checking and Savings earn 3% interest annually on each of their Checking and Savings balances. Robinhood does not charge account maintenance, account minimum, overdraft, ATM, transaction, foreign transaction, transfer, or card replacement fees for Robinhood Checking and Savings. Robinhood Checking and Savings is offered through Robinhood Financial LLC. Robinhood Checking and Savings is an added feature to existing Robinhood accounts and is not a separate account or a bank account. The Robinhood Debit Card is issued by Sutton Bank pursuant to a license from Mastercard International, Inc. Neither Sutton Bank nor Mastercard International, Inc. are members of FINRA or SIPC.
“Users of Robinhood Checking and Savings earn 3% interest annually on each of their Checking and Savings balances.”
I would have thought a more precise disclosure would be required. But it certainly does not say anything about fixed, guaranteed, etc.
Presumably when you get to actually creating an account there will be more specific terms which must allow them to adjust the rate in the future.
But it does not seem to be a kind of “teaser” rate. It seems like, I’m guessing, that everyone with a Robinhood Checking account will get the same rate, if they change it in the future it would be a product-wide adjustment.
https://checking.robinhood.com
>Robinhood Checking and Savings is an added feature to existing Robinhood accounts and is not a separate account or a bank account.
This enables shifting of revenue from other fees to help support the 3% rate.
(https://old.reddit.com/r/M1Finance/comments/9hk0dc/m1_team_a... has some light details on the M1 banking product for anyone interested)
I was just highlighting the horrible rates that banks currently provide in the customer's favor even if you are a loyal patron holding a substantial (for the vast majority of people) sum of money.
[1]https://www.bloomberg.com/news/articles/2018-10-15/robinhood...
Every single broker like Robinhood sells order flow to electronic trading firms. This flow is then executed faster due to improved market access. All of that to say that you're probably getting better execution because Robinhood wasn't stupid enough to try to go through some crappy broker or build their own order entry system.
Also, the order data can not be mapped back to you. That simply isn't how the stock market works at all. Every single other broker (Schwab, Merril Lynch, etc) does this.
Source: I work for one of those big market making electronic trading firms, the kind you try to demonize but fail fundamentally to understand.
You might work in IT for a market making electronic trading firm (it's not big, I looked them up). I'm a securities regulation attorney. I've worked for banks, hedge funds, and RIAs. This is so far away from best execution that any attempt to argue that this is to the consumer's benefit shows you fundamentally do not understand the fiduciary duties that brokers are supposed to owe to their clients. You're parroting the party line without fully understanding how the system works (and why should you? you're just a distributed systems engineer) yet you have the audacity to tell me in another comment that I've "read Flash Boys" without doing any research and don't understand how the stock market works.
Okay, bud.
> Almost all retail brokerages employ the practice
The FSA (U.K. equivalent to the SEC) effectively banned the practice a few years ago (2010 maybe?) which curtailed the practice a lot. I'm not sure about other states but the Massachusetts AG's office started looking into it last year, too. Its essentially a kickback paid in exchange for information that allows the "smart money" institutional investors to front-run the "dumb money" retail investors.
Here let me link it to you: https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-...
I used to work with Peter Kovac, the author of that book, and can personally vouch for his integrity. He's a really humble and stand up guy.
This is just marketing to attract the millennial crowd and get them to gamble their money away on stocks(benefiting robinhood of-course).
https://support.robinhood.com/hc/en-us/articles/360001469903
Is my money insured?
Your cash in Robinhood is insured up to $250,000 by the Securities Investor Protection Corporation (SIPC). SIPC protects cash deposits in your account in the unlikely event that Robinhood fails.
Up to what amount?
SIPC insurance covers your checking, savings and investments. Your cash and securities in Robinhood are protected up to a total of $500,000 by the SIPC, $250,000 of which can be in cash, the rest in securities. SIPC insurance provides protection for your cash balance and securities holdings if Robinhood fails financially, but does not cover investment losses due to declines in the value of securities themselves.
Is this different from bank insurance?
Similar to FDIC insurance, SIPC protects cash in your account if the financial firm fails. FDIC insurance covers deposits in FDIC-insured federal banks. SIPC insurance covers cash and securities at SIPC-member brokerage firms. Robinhood Securities, LLC is a member of SIPC. Additional information can be found at sipc.org.
So no coverage against, i.e. fire, flood, robbery or embezzlement [2]. The first 3 may not be relevant with digital bank that doesn't handle cash, but the last one might be.
EDIT: I misread the second reference. apparently FDIC does not insure against theft or embezzlement, but according to the first link FDIC does provide blanket coverage unlike SPIC. it's still not clear to me what blanket coverage means in this instance.
[1] https://www.schwabmoneywise.com/public/moneywise/essentials/...
[2] https://www.fdic.gov/consumers/consumer/information/fdiciorn...
I'm wondering:
First, whether Robin Hood is lending out deposits to margin traders. If not, what are they doing with the money? I don't think that they are, as the article implies, making > 3% on US treasuries.
Second, if that investment loses money, are those losses passed on to account holders? If not, someone must be insuring that investment. Who?
Neither does FDIC, right? Still doesn't explain what FDIC "blanket" coverage offers that SPIC doesnt
https://www.fool.com/investing/brokerage/2014/05/11/what-sip...
>SIPC does not protect customer funds placed with a broker-dealer just to earn interest.
In this case, doesn't that mean the people who just use Robinhood has a checking / savings account aren't covered?
[0]: https://support.robinhood.com/hc/en-us/articles/360001469903
1) They lower the interest rate down the line after they've acquired a bunch of customers
2) They limit the offer to certain customers who are lucrative
If they sustain this offer for the general public, they will 100% go out of business.
The 5 year treasury rate is currently set at 2.75%. Traditionally, people use treasury bonds as a place to park safe money, but the SIPC insurance makes this just as safe (up to $250K).
Is there any risk to the SIPC insurance vs FDIC-insured?
Monzo has blown up in the UK, and I know their team is growing at a crazy rate. While they aren't profitable yet, they plan to sell financial services through their marketplace (insurance, mortgages etc.) which seems to be a major source of potential income for them (source: https://monzo.com/blog/2017/11/16/monzo-marketplace/)
But when you look at it, it's actually not particularly useful. You want to put money in, and take money out right? In this account, you basically can only withdraw money in 3 ways: 1) use their debit card (inc ATM) 2) transfer money out to a bank via their brokerage account 3) have them mail a check (up to $2500 per day)
This excludes all sorts of common use cases: 1) auto pay credit cards 2) link to venmo / other app 3) use other debt cards (e.g., Target) 4) give a check to someone in person 5) make larger payments (e.g., mortgage) ...etc...
My guess is these restrictions are there to protect themselves financially. As they reach a certain mass of users, they may relax and be able to take on more risk.
I don’t think the whole “we don’t have branches so we can pass along the savings to you” thing is as defensible as it was 5 years ago. Other businesses can do the math and move in that direction if pressured to do so, and it seems like some of the bigger banks already are.
I'll be staying a Schwab customer.
I think I've spotted the problem. Seriously though, look into your available local Credit Unions. There are plenty of good credit cards with no foreign transaction fees as well (some of which are from larger banks).
Stop using debit cards because they don’t have the same fraud protection as credit cards.
Inflation is around 4% [1], the account is only insured up to about $3500 (if you are lucky) and VND keeps deflating in value against USD. Never mind the US tax filings take another chunk.
There is always a catch.
[1] https://tradingeconomics.com/vietnam/inflation-cpi
If they use longer term bonds, they will face potential losses as those tend to be volatile relative to interest rate changes. If they use higher-yielding corporate bonds, they face default risk.
There's something critical that's not being explained here which is important, and I wouldn't want to put my money in something like that without understanding it thoroughly.
It's a deal to get more trading accounts opened, both directly (people coming to RH for these accounts, which are not separate from trading accounts) and indirectly (e.g., it's a waitlisted feature that you move up in the waitlist by referring people to RH.)
They don't need to make money on the savings feature considered in isolation.
Easy. They're making a calculated decision to lose money on the interest rate, in order to build a relationship and make money on other services.
But credit unions and especially new small players like Robinhood aren't going to threaten PNC or BoA or Chase. So why would they give up free money if they don't have to?
Remember we're talking about checking accounts, not mutual funds. It's not a real investment. You might as well get something even if it's small.
Basically, Robinhood is subsidizing this 3% interest rate with investor dollars. Of course, there having a higher reserve lets banks lend out more money, but I'm not sure that's worth paying a 1% premium over.
"In an email to Barron’s the head of the SIPC cast doubt on the idea that it would insure checking or savings accounts."
source: https://www.barrons.com/articles/robinhood-app-is-offering-a...
Capital One currently offers 5-yr CD for 3.15%. I just signed up for Citi Priority to save a few pennies on "foreign transaction fees," but it pays paltry 0.03%. That 3% sounds to good to be true, but it's probably not impossible.
[1] https://i.imgur.com/VTZifUQ.png
Edit: Looking at today's market and interest rates.
If my bank can't compete with this then I will be moving some cash savings into a new Robinhood account.
Just wondering how robinhood shows all my friends though I have not connected robinhood to any of my social network. I feel this as a big privacy issue and it’s concerning a lot.
* Marcus' interest rate is also adjustable and is lower than 3%.
* Marcus has no ATM access/debit card.
* Getting money out of Marcus requires it to be transferred to another checking account.
Ally Bank, American Express National Bank, Discover Bank pay 2%.
Google "high yield savings" for lists that are updated monthly.
However, this Robinhood offer is for a "checking" account, which while not actually a checking account, still offers the liquidity of one. Savings accounts have a limited number of monthly transfers you're allowed, and you can't use one with a debit card as your main payment account.
> Earn up to 2.05% APY on balances of $25,000 & up and meet your savings goals faster. Don’t quite have $25,000? Radius High-Yield Savings still earns 1.50% APY on balances of $2,500 to $24,999.99.
People routinely have their money stuck in Robinhood with no response from support.
Cannot recommend using them.
Most calls are "where's the driver" and has honestly been partially automated but older clients still like to call.
Either way, it takes humans to make sure the 600k customers don't fall through the cracks.
Edit: referral link, but no real benefit (i.e. monetary) to me for posting it.
https://share.robinhood.com/cs-chasew284
I literally haven’t seen a check used anywhere the last 25 years. I doubt any place I frequent would accept one.
In fact I don’t know a single bank which issues checks...
I assume most university students these days wouldn’t even know what a check was, if given one.
So where is the market? The past? I mean... you’d need a time machine to use these, right?
In America, the barebones basic place to keep your money is referred to as a 'checking account'.
Why bring in the term “checking” if it’s not related to checks? I’d call that being intentionally confusing.
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It's been pretty good business for many banks for years. ???