Robinhood, looking beyond brokerage, seeks bank charter to expand into deposits, credit cards

Robinhood, the free online stock trading outfit, has filed an application to open an FDIC-insured online bank and to offer customers a higher interest rate on deposits and a lower rate on secured credit cards.

Robinhood Markets, Inc. filed an Interagency Charter and Federal Deposit Insurance Application.  The application, for Robinhood Bank, N.A., dated April 19, shows that Robinhood wants to focus on offering a deposit account that doesn’t have minimum balances and fees – and also helps customers earn “a fairer share of the benefits derived from use of the customers’ deposits in the form of a higher interest rate.”

Robinhood states in the application that it wants to reward customers by “democratizing financial services” and that it may offer other banking products as well, if its application is approved.

Robinhood wants to offer secured credit cards – won’t have branches

Robinhood confirmed via email on Wednesday that it submitted an application to the Office of the Comptroller of the Currency (OCC) for a national bank charter.

“Robinhood’s goal is to be able to offer its customers a full suite of financial products to service their needs,” according to a statement made by Robinhood via email to Bankrate. “To that end, Robinhood Financial, LLC, one of our broker-dealers, plans to offer customers a cash management feature within their brokerage accounts. More information will be shared later.”

Robinhood Bank, N.A. wants to offer secured credit cards with “an anticipated interest rate of that is fairer than the rates charged by most other secured credit cards (21% to 26%).”

It’s not surprising that Robinhood, N.A. doesn’t plan on opening brick-and-mortar branches. It also doesn’t intend to have its own ATMs to take cash deposits.  The smartphone and website will be how customers can interact with their account, similar to how online banks currently operate.

On Robinhood’s website, its Cash Management account is still labeled as coming soon. Back in December, Robinhood had to walk back its checking and savings product that was offering 3.00 percent interest due to concerns that the Securities Investor Protection Corporation (SIPC) account doesn’t cover cash that isn’t deposited for the purposes of purchasing securities.

Robinhood will have to show it’s learned from that experience, says Brian Knight, the Director of Innovation and Governance and a senior research fellow at the Mercatus Center at George Mason University.  “They’re starting with something of a black mark on their record,” Knight says.

What’s this mean for consumers?

It isn’t known what kind of annual percentage yield (APY) Robinhood, N.A. would offer – if its application is approved.

“New entrants often up the competitive ante, which benefits savvy consumers that are on the prowl for a better deal,” says Greg McBride, CFA, Bankrate chief financial analyst.

There’s much competition in savings and money market accounts for banks offering more than 2.00 percent APY with low or no minimum balances. So it’s unclear what – besides a high APY – Robinhood Bank, N.A. could do to differentiate itself from the pack. The rate environment at the time will factor into this.

Robinhood Bank, N.A. plans to provide bank accounts without a monthly fee. But this is a regular occurrence at online banks.

Robinhood is best known for its investing platform that allows customers to trade stocks, exchange-traded funds (ETF) and options for free. Not charging a fee per trade has been a way that Robinhood has disrupted the competition.

“One thing about being a bank of course is that the bank regulators are going to be concerned about safety and soundness,” Knight says. “So there’s the possibility that Robinhood is not going to be able to be as aggressive as they may want to be in terms of pricing because the regulators are gonna be saying, ‘Well look is that sustainable? Can you offer the products at these rates and still be safe, sound, profitable?’”