Robinhood, a popular investing app, just announced a checking account with 3% interest, and it’s already in hot water. Robinhood is just the latest app to want your paycheck and all your cash without providing insurance if the company fails.
FDIC insurance is pretty simple. Bank balances up to $250,000 are insured by the Federal Deposit Insurance Corporation, which is backstopped by the US government. The FDIC was created in 1933 during the Great Depression to restore Americans’ faith in the banking system that had just failed. Since then, it has never failed to pay up. Whenever an FDIC-insured bank goes out of business, the FDIC steps in and makes sure you get every last cent of your money. No one has lost a penny of an FDIC insured bank account in 85 years.
But now some technology startups think they don’t need FDIC insurance on their banking products. After all, what are the odds a startup will go out of business?
Companies don’t normally fall flat on their face like Robinhood does. Robinhood announced that its new checking and savings product would be insured by the SIPC. That’s the Securities Investor Protection Corporation, a private organization that insures investments. The very next day, the head of the SIPC said he had serious concerns and didn’t think the money is protected by the SIPC. Robinhood would not comment publicly on his comments.
In other words, if Robinhood goes out of business, you could lose all the money in your Robinhood “bank account.” Do you really want to depend on a startup not going out of business?
Robinhood is just the latest example, but there are others. Square Cash wants you to deposit your paycheck into its app. But Square Cash doesn’t provide FDIC insurance for all the money you store there, as Walt Mossberg pointed out on Twitter. Until Square Cash gets that FDIC insurance it’s pursuing, you should avoid using it as a bank account. It’s a great app for sending money to people, but don’t keep all your money in it.
I’m a fan of the company and gave the app a rave review when it launched (https://t.co/9frjhdFZys). I still use it. My beef is that its latest feature tempts people to store their entire paychecks in an unregulated company outside the direct FDIC system. That’s risky to me.
— Walt Mossberg (@waltmossberg) March 8, 2018