Robinhood, the start-up upending stock trading, goes after banks with a 3% savings account

By Kate Rooney

Robinhood App

Popular stock trading app Robinhood, which disrupted Wall Street with zero-fee transactions, is taking aim at an even bigger market: banks.

The five-year old company unveiled "Robinhood Checking & Savings" on Thursday, which offers checking and savings accounts with no fees and pays an interest rate roughly thirty-times the national average. Customers will earn 3 percent annually on money in either accounts, paid out on a daily basis.

"We as a company are going make the financial services industry more inclusive and are going to do it with zero commissions, a lower cost structure, and by relentlessly automating and building an engineering-first company," Robinhood's co-CEO Baiju Bhatt told CNBC in an interview. "We're charging no fees, period."

The no-fee model is what you might expect from Robinhood. The Menlo Park, California-based company took Wall Street brokerages by storm by offering stock trading for free. The model put pressure on incumbents like Charles Schwab and TD Ameritrade, who charge $4.95 and $6.95 respectively for equity trades.

That price war is still intensifying. J.P. Morgan Chase unveiled its own free trading app in August, sending shares of TD Ameritrade and other public online brokers lower that day.

The start-up is now taking the disruptive no-fee model to checking and savings accounts, a fundamental way retail banks make money.

Banks use customer deposits to make loans and also profit from account fees, ATM fees, penalty charges and foreign transaction fees — none of which exist in Robinhood's model. Thursday's announcement launches the fintech company further into the consumer banking ring with Wall Street heavyweights like Bank of America, Wells Fargo and CitiGroup.

Robinhood's rate is well-above the average 0.08 yield on U.S. checking accounts and the 0.10 percent average on savings accounts, according to the latest data from Marcus, Goldman Sachs' consumer banking arm, is one of the highest-yielding banks in the savings products category with a 2.05 percent annual percentage yield.

"If we roll this product out, and it's adopted by millions who love it and use, we will have one of the fastest growing financial services companies in history," Bhatt said.

Robinhood saw massive growth in 2018 alone, jumping from 5 to 6 million customers in a matter of months and was recently valued at $5.6 billion.

Robinhood App

Bhatt, who co-founded Robinhood in 2013 with Vlad Tenev, said that the yield is not a "teaser rate." Given the direction from the Federal Reserve, which is slowly raising interest rates, Bhatt said their the 3 percent rate should be sustainable.

They are not necessarily going to make money on these checking and savings products right away. Robinhood is taking a page out of Amazon's playbook by shunning profits for growth.

"Amazon built an entire business around a strategy that makes that long-term investments in financial services," Bhatt said. "We fully intend to make money off of this but we do not need it to be profitable on day one."

The start-up will split revenue from debit card transactions in a partnership with MasterCard. It will also earn interest off of customer assets it holds, which are invested in government-grade securities like U.S. Treasuries.

For stock trades, it generates revenue by taking a fraction of a cent per dollar from each trade order as well as collecting interest on customer deposits. Robinhood also makes money on a paid subscription service called Robinhood Gold launched in September 2016.

Robinhood has faced criticism over its revenue model, especially considering its founding ethos which some have categorized as "anti-Wall Street." According to a report from Bloomberg, the company makes almost half of its revenue from selling its customers' orders to high-frequency trading firms, or market makers, like Citadel. The practice known as payment for order flow is not uncommon on Wall Street. Almost all retail brokerages employ it.

Robinhood issued a statement after the report, saying "like the rest of the industry, participates in rebate programs which help customers get additional price improvement for their orders by creating competition amongst the exchanges and liquidity providers who fill the orders, often resulting in superior execution quality."

Robinhood also said in the statement it does not sell personally identifiable data of any kind to execution venues.

"Robinhood does not, has not, and will not sell customer information," the company said.

In a low-interest rate environment, even non-millennial customers are hungry for any sort of yield. The higher-than-average rate could usher in a new age group that doesn't typically care about a "cool" factor associated with Robinhood, Bhatt said.

"We started company with idea that we could make investing accessible to a younger audience," Bhatt said. "Today it's less tightly concentrated among millennials."

The company is launching an entirely new app on Thursday that will house its stock trading alongside the checking and savings accounts. Robinhood's debit cards with Mastercard will be available in January 2019 on a "first-come, first-serve" and are being rolled out in a limited amount. Robinhood also partnered with Costco, Walgreens and CVS among others to give customers access to 75,000 free ATMS across the country.

Robinhood CEOs Baiju Bhatt and Vlad Tenev.
Robinhood CEOs Baiju Bhatt and Vlad Tenev.

The announcement, which had been two years in the making, is possible in large part because of its regulatory status. The company is a member of FINRA, a Securities and Exchange Commission registered broker-dealer, and is a member of the Securities Investor Protection Corporation, or SIPC. Robinhood accounts are SIPC-insured up to a $250,000.

Its recent self-clearing announcement was another way to cut costs by getting rid of a key middleman and set Robinhood up to be able to scale faster and expand into more areas of financial services, the CEO said.

The company has been open about its ambitions. Bhatt has said going public is something "we think is very much in the future." In November, Robinhood hired Amazon veteran Jason Warnick as its first-ever chief financial officer.

"Five to 10 years from now, you should be able to open up Robinhood and get anything you could get by walking into your local Bank of America, with a better customer experience and better pricing," Tenev told CNBC in October.