On Thursday, online brokerage firm Robinhood announced a new checking account paying 3% interest. It seemed too good to be true. It was.
The big picture: Checking accounts are extraordinarily powerful things. They're one of the key mechanisms by which banks create money and help to keep the economy growing. They're also the key mechanism behind bank runs that can cause an economy to crash. That's why depositary institutions are the most regulated companies in the world.
How it works: If you want to offer a real checking account, you need to submit to regulation not only by a bank regulator, but also by the FDIC, which provides the all-important deposit insurance. Those regulators insist that you have a minimum level of capital, and they ensure that your business model is sustainable. Getting a bank charter for a mobile-native app is extremely difficult: Only Varo Money is even close, and it has spent years getting to this point.
Robinhood was trying to game the system. It was a brokerage trying to be a bank. It wanted to get the advantages of being a bank, like deposit insurance and maturity transformation, without the concomitant regulatory oversight. It even contracted with a genuine bank, Sutton Bank of Ohio, to provide things like routing numbers and Mastercard-branded debit cards. But Sutton Bank wouldn't get the money. That would stay at Robinhood.
The bottom line: Robinhood took down the checking.robinhood.com site on Friday evening and put up a blog post talking instead about a "cash management program" to be announced at an unspecified point in the future. The "do first, ask forgiveness later" approach, it turns out, doesn't work very well in financial services.
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