Robinhood Lures Customers with Higher Interest Rates

Robinhood, the stock trading app that gained fame during the GameStop frenzy, is offering an annual percentage yield (APY) of 5% on uninvested cash to subscription customers. This move is seen as part of a wider strategy to compete directly with traditional banks and revive its share price that has significantly dropped since its 2021 Initial Public Offering (IPO).

Aiming for Traditional Banks

Despite the Federal Reserve raising interest rates to a 22-year high to combat inflation, the average savings account yield is still under 0.6%. Robinhood CEO, Vlad Tenev, commented on this situation in an interview with CNN, stating that customers are beginning to realize that they are not getting their fair share from traditional financial institutions. He believes this presents an opportunity for Robinhood to make amends.

Customer Satisfaction and Safety

In response to Robinhood’s move, the American Bankers Association (ABA) pointed out that many consumers are satisfied with their banks. ABA spokesperson Jeff Sigmund mentioned the record of banks in delivering dependability, safety, and convenience, alongside competitive prices. He also noted that Robinhood can only offer Federal Deposit Insurance Corporation (FDIC) protection on some of its products because it partners with FDIC-insured banks.

More Than Just a Trading App

Robinhood’s 5% rate applies to both new and existing customers of Robinhood Gold, a subscription service costing $5 per month. Other customers can still earn a modest 1.5% on uninvested cash. With its move into high-yield deposit accounts, retirement accounts, and even credit cards, Robinhood aims to transform into a full-service financial institution.

Diversification Strategy

Robinhood’s diversification strategy aims to reduce its dependence on the volatile retail trading of stocks and cryptocurrencies. The company’s active user account has been halved since early 2021, and its share price plunged from a peak of $85 to $8. Despite this, Robinhood’s CEO remains optimistic about the early results of the diversification strategy, noting that the Gold platform has attracted $10 billion of inflows.

Future Plans

Robinhood has plans to expand its offerings in the future, including the introduction of a credit card product, overseas expansion, and improvement of its web-based services. Despite the challenges, Tenev believes that Robinhood is still in the early stages of its transformation journey.