Americans are getting ‘ripped off’ by big banks, Robinhood CEO says

By Matt Egan, CNN

New York (CNN) — Robinhood is trying hard to lure customers fed up with traditional banks that pay little to no interest on savings.

To attract deposits, the stock trading app made famous by the GameStop craze is offering fatter and fatter interest rates.

Robinhood will now pay subscription customers a 5% annual percentage yield (APY) on uninvested cash, the company told CNN on Wednesday. That’s far higher than traditional banks and among the highest in the industry.

The decision to go after banks on their own turf is part of a broader strategy by Robinhood to become more than just a retail trading shop – and to revive a share price that is miles away from its 2021 IPO price.

Even though the Federal Reserve has catapulted interest rates to 22-year highs to fight inflation, the average savings account pays less than 0.6%, according to a Bankrate survey of institutions.

“Customers are beginning to wake up and realize that they have been getting ripped off by these traditional financial institutions,” Robinhood CEO Vlad Tenev told CNN in an exclusive interview. “These banks are basically generating all of this revenue that they’re not sharing with customers. We see an opportunity to correct that,”

Tenev argued this has long been part of the “playbook” of traditional banks.

“It’s sort of like banks have assumed that customers are not savvy or intelligent enough to realize that rates are changing, and they could be generating a higher risk-free rate of return on their funds backed by the US government,” the Robinhood CEO said.

In response, the American Bankers Association noted that recent surveys suggest many consumers are satisfied with their banks.

“Banks of all sizes have a record of delivering dependability, safety and convenience, as well as competitive prices,” ABA spokesperson Jeff Sigmund told CNN in a statement. “It’s also worth noting that Robinhood can only offer FDIC protection on some of its products because it partners with FDIC-insured banks.”

There are options for savers hoping to earn a decent return beyond Robinhood. According to Bankrate, online banks including SoFi, LendingCLub, Capital One and Marcus by Goldman Sachs pay north of 4% or even 5%.

The Robinhood rate of 5% applies to new and existing customers of Robinhood Gold, a subscription service that costs $5 a month. Other Robinhood customers can still earn a more modest 1.5% on uninvested cash.

Robinhood says its premium customers will have their cash automatically moved into deposit accounts at a network of banks – and that cash is covered by FDIC insurance.

Robinhood, known mostly for its stock trading platform, is increasingly taking on traditional banks by offering high-yield deposit accounts, and traditional and Roth retirement accounts and even dipping its toes in the credit card business.

“Robinhood is transforming into a full-service financial institution,” Tenev said, noting that more than half of the company’s revenue is now generated by net interest income. “There’s trillions of assets out there in savings accounts that are up for grabs for us.”

The diversification strategy is aimed at making Robinhood less dependent on the ups and downs of retail trading of stocks and crypto.

Back in 2020 and 2021 when consumers were flush with cash and it was free to borrow, Robinhood was on fire. Retail investors flocked to the platform to take advantage of the meme stock craze.

In early 2021, Robinhood ignited a firestorm by suspending purchases of GameStop, AMC and other stocks boosted by an army of traders on Reddit. Tenev was hauled before Congress, where he apologized to lawmakers and the public.

Robinhood’s active user account has been roughly cut in half since early 2021.

The stock performance has been much worse.

After going public at $38 a share in July 2021, its share price rocketed to as high as $85 in its first week of trading.

Today, Robinhood shares trade at just $8. And even though the stock is up 4% this year, it has badly trailed the S&P 500’s 18% gain, let alone the Nasdaq’s 36% spike.

Bank of America warned clients last week that Robinhood’s revenues “remain highly exposed” to the overall market backdrop and reiterated an “underperform” rating on the stock.

“We believe the Covid-related tailwind reversals (bear market, back to work, stimulus reduction…) continue to impact HOOD’s growth/retail engagement but we are monitoring for signs of stabilization,” Bank of America analysts wrote in the report, adding that Robinhood faces regulatory risks related to market structure.

For his part, Tenev says he tries not to be “too stock price oriented” and stressed that he’s happy with the early results in the diversification strategy. He noted Robinhood has attracted $10 billion of inflows to its Gold platform.

In the future, Tenev said Robinhood plans to offer a credit card product, expand overseas and improve its web offerings to move beyond just mobile.

“We’re just at the beginning,” Tenev said. “When I look ahead at the future of Robinhood, there’s so much left to build. I think we’re still in the very early innings of our journey.”

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