How does Robinhood’s cash sweep achieve 4% interest?

Question

As of February 2023, Robinhood’s Brokerage Sweep Program guarantees its users 4.15% APY (for those who pay $5 a month for Robinhood Gold). Robinhood is sweeping the cash to banks. Do those banks offer accounts with interest rates this high? The best savings accounts I can find are below 4% APY. Is this a money market account?

Answer 1

I opened an 11-month CD yesterday at 5% with Capital One, and rates were over 4% on all longer terms. If individuals have fixed rate options >4% then it makes sense that there are some variable rate options >4% too. A business with large amounts of cash can get more favorable rates than most individuals. Robinhood can reduce/eliminate margin on the interest they pay out vs receive and still come out ahead due to the $5/month fee.

Answer 2

Even if they're not really taking any risk, the one-month US treasury yield is currently around 4.6%. I think banks can treat these as effectively-cash and it's trivial to buy and sell them, so it should be relatively easy for them to make a profit if they're only paying out 4.15% of that.

Answer 3

It's really not that impressive as it's comparable to money market funds offered by other brokers. For example, Fidelity's SPAXX shows a 7-day yield of 4.2%.

There's also nothing guaranteed about the 4.15%.

Per the link you included:

Interest is earned on uninvested cash swept from your brokerage account to program banks. Program banks pay interest on your swept cash, minus any fees paid to Robinhood. As of February 3, 2023, the Annual Percentage Yield (APY) that you will receive is 1.5%, or 4.15% for Gold customers. The APY might change at any time at the program banks' discretion. Additionally, any fees Robinhood receives may vary and is subject to change. Neither Robinhood Financial LLC nor any of its affiliates are banks.

The real question is why customers accept below-market interest rates, when HY savings accounts, CDs, and other no/low-risk options are available.