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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
by 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 agoI 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 agoRight, 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 agoThey 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 agoThey 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> Right, but that incentive is only substantial if you’re going to park a lot of money there, You are assuming that customers make this decision rationally; marketing very often leverages the fact that humans very often don't do that.
- icedchai 8y agoI'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...
- yclept 8y agoWould you really move your emergency funds into a less secure more likely problematic service though?
- icedchai 8y agoI 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.
- kevinmchugh 8y agoSIPC says they don't think they have to insure this.
- pjc50 8y agoNice way to humblebrag there.
- fullshark 8y agoAgreed, 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.
- deminature 8y agoPerhaps 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.
- rchaud 8y agoSeems 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.
- deminature 8y agoMillennials 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.
- theturtletalks 8y agoYep 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.
- jimbokun 8y agoAnd many won't leave, because many of us are lazy.
- shawn-butler 8y ago> There's no reason to change bank unless there's some substantial incentive Or you bank at Wells Fargo or some other institution whose corrupt practices spill out into public.
- JoBrad 8y agoI’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.
- jorams 8y agoAlternatively: If you get free money for parking your cash there, why risk that money by trading? 3% guaranteed earnings is a very good deal without any downside, while the risks involved with trading that money are substantial.
- theturtletalks 8y agoThat's higher than index funds returns as of late.
- SeanAppleby 8y agoHolding 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.
- buttcoinslol 8y agoI bought a decent chunk of VTI @ 133.00 this week, glad I had some roth contributions left
- cercatrova 8y agoMost 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.
- r00fus 8y agoThe danger for the user is that the $10k or $100k they store there may be ripe for {$urgent FOMO} buy. So Robinhood wants users to have their cash on hand ready to jump into the market. Will be too tempting to many.
- TuringNYC 8y agoNo 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.
- nodesocket 8y agoTheir 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.
- theartfuldodger 8y agoYou should look into their recent problems. Locking option traders out of their accounts ( potentially millions lost) They have no customer service and a decently easy collection of horror stories related to their lack of customer service.
- sireat 8y agoKind 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"
- buttcoinslol 8y ago> 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.
- jonknee 8y ago
- pascalxus 8y agohere 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.
- notyourday 8y agoCash balances ensured by SIPC are safe to the coverage amount. 100% safe actually.
- Scoundreller 8y agoI’m sure they said that about Cyprus and Iceland too.
- deleted 8y ago[deleted]
- yorwba 8y agoAs 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.
- Scoundreller 8y agoThe UK and Dutch depositors in the Icelandic banks got bailed out by the UK and Dutch taxpayer. Iceland's government/deposit insurance did not pull through. Cyprus wasn't much different either. https://www.telegraph.co.uk/finance/financialcrisis/11877219/Did-people-who-put-money-into-Icesave-get-it-back.html https://www.telegraph.co.uk/finance/financialcrisis/11877219... https://www.telegraph.co.uk/finance/financialcrisis/9965943/British-solution-saves-Laiki-UK-deposits-from-Cyprus-haircut.html https://www.telegraph.co.uk/finance/financialcrisis/9965943/...
- naravara 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? 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.
- X-Istence 8y agoI'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.
- tomrod 8y agoTheir treasury approach is probably very risky. 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.
- anthonys 8y agoMargin lending?
- pishpash 8y agoThe 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.