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Robinhood takes 2nd stab at cash-management account

Robinhood Markets Inc. has announced its second attempt to launch a cash-management feature for customers.

The Silicon Valley-based startup announced in December 2018 that it would launch a checking and savings account backed by the Securities Investor Protection Corp., but the SIPC does not protect cash held for anything other than purchasing securities. Robinhood was forced to walk back that announcement, instead rebranding the product as a cash-management program. Now, the company has acknowledged its snafu and is relaunching the cash-management feature.

"We made mistakes with that announcement, which led us to hit the reset button and start over from scratch," the company said in an Oct. 8 blog post. Robinhood declined to provide a timeline for launch, but a spokesperson said the company would "soon" begin to roll out the feature to its first customers. Customers can currently join a waitlist to get early access once launched. The associated Mastercard Inc. debit card will be issued by Sutton Bank.

The new cash-management account does not tout insurance from the SIPC, which insures money held by member broker/dealers, including Robinhood, in case those companies fail. Its members typically offer brokerage accounts where customer money is stored as cash when not being invested. With Robinhood's new feature, uninvested customer cash is moved to program banks and is insured by the Federal Deposit Insurance Corp. up to $1.3 million, or $250,000 per bank.

Robinhood plans to offer a 2.05% annual percentage yield, a competitive rate in a declining interest rate environment. On Oct. 4, Goldman Sachs Group Inc. again lowered the amount of interest it pays on its digital high-yield savings account, bringing it to 1.90%, down from a high of 2.25% in June. Ally Bank has also lowered the yield for its high-yield savings account to 1.90%, according to the bank's website.

Robinhood's cash-management relaunch comes amid a shakeup in the online broker industry.

The startup was an early champion of free trading, but now that has become "the norm," according to JMP Securities analyst Devin Ryan. Charles Schwab Corp. shocked the industry on Oct. 1 when it announced that it would eliminate its $4.95 commission fee for online trades involving U.S. stocks, options and exchange-traded funds. Doing so essentially forced TD Ameritrade Holding Corp. and E*TRADE Financial Corp. to follow suit.

The traditional online brokers have previously resisted the growing momentum behind $0 commission fees. Now that these firms have announced free trading, it puts them and Robinhood in more direct competition for customers.