Fintech company Robinhood, known for offering commission-free investing via its trading platform, is taking aim at big banks with its latest offering of checking accounts and savings accounts that earn a three percent interest rate.
The move to offer a savings rate that is 75 basis points higher than the most competitive rates and well beyond those offered by big banks, such as Wells Fargo and Bank of America, comes at an opportune time when the stock market is fueling a risk-off sentiment. U.S. equities investors have been racked by bouts of volatility the last couple of months, causing them to seek safe havens, which could lead to more savings account deposits that yield a competitive rate.
Moreover, Robinhood is offering accounts with no fees, no minimum account balances, no foreign transaction fees, and no overdraft fees.
“We believe you should earn more on your money, and shouldn’t be charged fees to access it,” wrote co-founders Baiju Bhatt and Vlad Tenev.
One notable is that these checking and savings account products are separate balances held within a Robinhood brokerage account. Rather than being FDIC-insured, the accounts are protected by insurance from the Securities Investor Protection Corporation–up to $250,000 in cash.
Related: ‘A Lot Has to Change’ to Reach 5% Treasury Yield
Online Banks Offering Higher Rates
The move by Fintech comes as online banks are offering higher rates on products, such as certificates of deposit, to compete with their brick-and-mortar counterparts. Unlike the traditional brick-and-mortar banks, online banks do not have the operational costs associated with branches like Bank of America or Wells Fargo.
Traditional banks build their business models around customer retention and convenience rather than trying to attract new prospects based on higher interest rates. Online banks, however, can bypass the operating costs necessary for traditional banks and offer higher rates on their products like CDs.
In a rising rate environment, the tough sell for CDs will be that the a lack of a floating rate component and slow adjustments won’t allow investors to capitalize on short-term rate increases. Despite this, risk-averse investors can take advantage of CDs if the inherent volatility spikes of stocks or other asset classes are too much to endure.
“Banks tend to move rates up fairly slowly,” said Anthony Ogorek, CEO of Ogorek Wealth Management. “Just because the Fed is increasing rates, you’re not going to see much of an increase in what a bank is offering right now.”
For more trends in fixed income, visit the Rising Rates Channel.