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For folks trying to understand this, some context which may be useful: Checking accounts are loss leaders virtually everywhere, the exception being smaller com

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?"

dudul 8y ago
Just to add a 3rd question to balance the other two: "Are financial firms able to change the way they've operated for decades (centuries?) easily?"
- cascom 8y ago
  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)
- delecti 8y ago
  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.
  - kevin_thibedeau 8y ago
    Hence ACH. Greed and stupid combined.
  - mlthoughts2018 8y ago
    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.
- strangemonad 8y ago
  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.
  - kurtisc 8y ago
    Because HN is learning some bad habits from its mother site with regards to the purpose of votes.
    - edoceo 8y ago
      Can we get some more details? I don't understand.
iknowordidthat 8y ago
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.
- wool_gather 8y ago
  Was that them being terrible at math, or them covering their eyes and singing "lalalala" to pretend the math didn't exist?
  - kinkrtyavimoodh 8y ago
    That distinction is irrelevant to the current discussion if the outcome of both scenarios is 'unmathy'
  - barrow-rider 8y ago
    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.
  - guelo 8y ago
    If they ignore the math for whatever reason I would call that being bad at math.
    - marnett 8y ago
      plenty were personally enriched. the personal financials checked out from all angles.
- biomene 8y ago
  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.
scarejunba 8y ago
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?"
notyourday 8y ago
If RobinHood's MBAs are about to learn a lesson of what a fatwallet/slickdeals effect is.
- brewdad 8y ago
  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.
  - jcfrei 8y ago
    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.
DINKDINK 8y ago
>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. [1]https://seekingalpha.com/article/4205379-robinhood-making-millions-selling-millennial-customers-high-frequency-traders https://seekingalpha.com/article/4205379-robinhood-making-mi...
- dec0dedab0de 8y ago
  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.
  - keredson 8y ago
    > Aren't all orders eventually public anyway? 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.)
    - ycombobreaker 8y ago
      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".
  - Nasrudith 8y ago
    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....
C1sc0cat 8y ago
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 Cant see this lasting long
lettergram 8y ago
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).
- RobAtticus 8y ago
  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. https://www.americanexpress.com/personalsavings/high-yield-savings-account.html https://www.americanexpress.com/personalsavings/high-yield-s...
  - clintonb 8y ago
    American Express Bank has been around for at least 2-3 years.
    - my_usernam3 8y ago
      In the world of banking, thats "started" to me.
    - zrail 8y ago
      I believe AmEx started their savings accounts at the same time or very shortly after converting to a bank holding company during the 2008 crisis.
- snowwrestler 8y ago
  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.
Aunche 8y ago
> 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.
- mikeryan 8y ago
  Moviepass was bought by what is, primarily, an analytics firm. Though apparently so is Robinhood. https://seekingalpha.com/article/4205379-robinhood-making-millions-selling-millennial-customers-high-frequency-traders https://seekingalpha.com/article/4205379-robinhood-making-mi...
  - pbreit 8y ago
    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.
  - tptacek 8y ago
    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.
- dawnerd 8y ago
  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.
mikeash 8y ago
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? 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.
- deminature 8y ago
  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.
  - mikeash 8y ago
    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.
    - deminature 8y ago
      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.
      - VRay 8y ago
        They might be able to actually make a profit off the float in this case, too Or maybe they're going to be able to sell people's transaction histories...
    - dragonwriter 8y ago
fady 8y ago
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.
aczerepinski 8y ago
Another thing to remember is they can change the rates later and many people will leave their money there anyway. Source: I still have some money in a ~0% online savings account that I opened because it was 5% at the time.
rahimnathwani 8y ago
How did you reach your $60 estimate for debit card interchange revenue? 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-interchange-fee.htm https://www.federalreserve.gov/paymentsystems/regii-average-...
adrr 8y ago
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%.
jjtheblunt 8y ago
Excellent and coherent comment.
solaxun 8y ago
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....
- alexhutcheson 8y ago
  The banks incur lots of operational expenses processing transactions, paying for an ATM network, handling customer support calls, dealing with fraud, etc.
  - solaxun 8y ago
    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).
- delta-neutral 8y ago
  +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?
jkravitz61 8y ago
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...
rabidonrails 8y ago
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. Similar to YouInvest and Chase.
lvs 8y ago
Lol. When small banks start offering high interest retail accounts, it means they need deposits fast.
tialaramex 8y ago
> Are financial firms likely to be bad at math? 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.
stcredzero 8y ago
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.
guelo 8y ago
You should have put a disclaimer that you work at a competing fintech company.
- bhahn 8y ago
  Why is there a disclaimer necessary? I don't read any specific bias against Robinhood
FlimGrimoire 8y ago
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.
- JamesBarney 8y ago
  2000/2008 didn't happen because someone did basic accounting math incorrectly.
  - c1b 8y ago
    I think you could argue that the rating agencies did the math incorrectly, at least in 2008.
    - krferriter 8y ago
      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.
    - JamesBarney 8y ago
      This was an incentives issue. They were paid by the companies they rate. So in order to not lose market share they had to certify junk.
- jdmichal 8y ago
  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: https://www.wired.com/2009/02/wp-quant/ https://www.wired.com/2009/02/wp-quant/
deleted 8y ago
[deleted]
zem 8y ago
> 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.
- ramraj07 8y ago
  So did you get the job?
  - zem 8y ago
    sadly no, though I did the second time around
- sandworm101 8y ago
  >> 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.
  - dclusin 8y ago
    For every criminal savant there's probably at least 10 script kiddies exploiting older people, prostitutes, and every other vulnerable group imaginable.
pdshrader 8y ago
(Hijacking top comment for visibility) 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.
- x0x0 8y ago
  1 - I have no specific information 2 - just because you didn't share doesn't mean your friends didn't
pishpash 8y ago
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.
anthonys 8y ago
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.
test6554 8y ago
So if you do just park $249,384.70 there, are they going to just let you withdraw interest of $616.05 each month without any risk or fees?

dudul 8y ago

Just to add a 3rd question to balance the other two: "Are financial firms able to change the way they've operated for decades (centuries?) easily?"

cascom 8y ago
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)
delecti 8y ago
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.
- kevin_thibedeau 8y ago
  Hence ACH. Greed and stupid combined.
- mlthoughts2018 8y ago
  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.
strangemonad 8y ago
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.
- kurtisc 8y ago
  Because HN is learning some bad habits from its mother site with regards to the purpose of votes.
  - edoceo 8y ago
    Can we get some more details? I don't understand.

iknowordidthat 8y ago

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.

wool_gather 8y ago
Was that them being terrible at math, or them covering their eyes and singing "lalalala" to pretend the math didn't exist?
- kinkrtyavimoodh 8y ago
  That distinction is irrelevant to the current discussion if the outcome of both scenarios is 'unmathy'
- barrow-rider 8y ago
  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.
- guelo 8y ago
  If they ignore the math for whatever reason I would call that being bad at math.
  - marnett 8y ago
    plenty were personally enriched. the personal financials checked out from all angles.
biomene 8y ago
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.

scarejunba 8y ago

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?"

notyourday 8y ago

If RobinHood's MBAs are about to learn a lesson of what a fatwallet/slickdeals effect is.

brewdad 8y ago
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.
- jcfrei 8y ago
  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.

DINKDINK 8y ago

>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. [1]https://seekingalpha.com/article/4205379-robinhood-making-millions-selling-millennial-customers-high-frequency-traders https://seekingalpha.com/article/4205379-robinhood-making-mi...

dec0dedab0de 8y ago
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.
- keredson 8y ago
  > Aren't all orders eventually public anyway? 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.)
  - ycombobreaker 8y ago
    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".
- Nasrudith 8y ago
  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....

C1sc0cat 8y ago

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 Cant see this lasting long

lettergram 8y ago

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).

RobAtticus 8y ago
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. https://www.americanexpress.com/personalsavings/high-yield-savings-account.html https://www.americanexpress.com/personalsavings/high-yield-s...
- clintonb 8y ago
  American Express Bank has been around for at least 2-3 years.
  - my_usernam3 8y ago
    In the world of banking, thats "started" to me.
  - zrail 8y ago
    I believe AmEx started their savings accounts at the same time or very shortly after converting to a bank holding company during the 2008 crisis.
snowwrestler 8y ago
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.

Aunche 8y ago

> 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.

mikeryan 8y ago
Moviepass was bought by what is, primarily, an analytics firm. Though apparently so is Robinhood. https://seekingalpha.com/article/4205379-robinhood-making-millions-selling-millennial-customers-high-frequency-traders https://seekingalpha.com/article/4205379-robinhood-making-mi...
- pbreit 8y ago
  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.
- tptacek 8y ago
  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.
dawnerd 8y ago
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.

mikeash 8y ago

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? 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.

deminature 8y ago
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.
- mikeash 8y ago
  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.
  - deminature 8y ago
    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.
    - VRay 8y ago
      They might be able to actually make a profit off the float in this case, too Or maybe they're going to be able to sell people's transaction histories...
  - dragonwriter 8y ago

fady 8y ago

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.

aczerepinski 8y ago

Another thing to remember is they can change the rates later and many people will leave their money there anyway. Source: I still have some money in a ~0% online savings account that I opened because it was 5% at the time.

rahimnathwani 8y ago

How did you reach your $60 estimate for debit card interchange revenue? 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-interchange-fee.htm https://www.federalreserve.gov/paymentsystems/regii-average-...

adrr 8y ago

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%.

jjtheblunt 8y ago

Excellent and coherent comment.

solaxun 8y ago

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....

alexhutcheson 8y ago
The banks incur lots of operational expenses processing transactions, paying for an ATM network, handling customer support calls, dealing with fraud, etc.
- solaxun 8y ago
  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).
delta-neutral 8y ago
+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?

jkravitz61 8y ago

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...

rabidonrails 8y ago

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. Similar to YouInvest and Chase.

lvs 8y ago

Lol. When small banks start offering high interest retail accounts, it means they need deposits fast.

tialaramex 8y ago

> Are financial firms likely to be bad at math? 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.

stcredzero 8y ago

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.

guelo 8y ago

You should have put a disclaimer that you work at a competing fintech company.

bhahn 8y ago
Why is there a disclaimer necessary? I don't read any specific bias against Robinhood

FlimGrimoire 8y ago

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.

JamesBarney 8y ago
2000/2008 didn't happen because someone did basic accounting math incorrectly.
- c1b 8y ago
  I think you could argue that the rating agencies did the math incorrectly, at least in 2008.
  - krferriter 8y ago
    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.
  - JamesBarney 8y ago
    This was an incentives issue. They were paid by the companies they rate. So in order to not lose market share they had to certify junk.
jdmichal 8y ago
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: https://www.wired.com/2009/02/wp-quant/ https://www.wired.com/2009/02/wp-quant/

deleted 8y ago

[deleted]

zem 8y ago

> 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.

ramraj07 8y ago
So did you get the job?
- zem 8y ago
  sadly no, though I did the second time around
sandworm101 8y ago
>> 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.
- dclusin 8y ago
  For every criminal savant there's probably at least 10 script kiddies exploiting older people, prostitutes, and every other vulnerable group imaginable.

pdshrader 8y ago

(Hijacking top comment for visibility) 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.

x0x0 8y ago
1 - I have no specific information 2 - just because you didn't share doesn't mean your friends didn't

pishpash 8y ago

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.

anthonys 8y ago

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.

test6554 8y ago

So if you do just park $249,384.70 there, are they going to just let you withdraw interest of $616.05 each month without any risk or fees?