Like I get generally how a treasuries backed money market fund works, but the average maturity there is like 2 months, not 20 years.
The remainder would presumably come from interchange fees. Ie, you put $500 into Robinhood, you then pay for something using your debit card, a cut goes to Visa, a cut of that goes to Robinhood, and a cut of that goes to subsidise your 3% interest.
If the average transaction size is like $20 then they would not be able to make ends meet unless they took basically all of the fee for themselves.
In a universe where debit interchange fees are regulated to 0.05% and less than a quarter, I don't understand how this works.
Edit: I looked up the average debit card transaction amount, and it's over $40. The math doesn't work out at all.
Edit2: I guess if there's 3 more fed rate hikes the math might work out? That's not a good look though, if they don't increase rates along with the fed, because the gap between them and various savings account will shrink to almost nothing.
This could be mitigated substantially by holding short-term treasuries. In theory they could still be worth less than the original principal amount from time to time, but not by very much, and even then they would always be back to at least the original principal amount by the maturity date in e.g. six months.
When Robinhood calls a product a "checking" account that fundamental concept of immediate access to your money is implied to consumers but looking at their site there are all kinds of restrictions around dollar amount and frequency of withdrawals.
As whitepoplar noted here (https://news.ycombinator.com/item?id=18691477) other similar services are FDIC insured because the funds are swept into FDIC bank accounts behind the scenes. But FDIC insured bank accounts pay very, very little interest, and Robinhood wanted to offer a high interest rate.
Their innovation was, instead of sweeping the funds into FDIC bank accounts, to sweep the funds into treasuries, which pay more. And as a bonus, bonds held on your behalf by a brokerage are insured via SIPC, which is a little bit like having your funds be insured by FDIC, which makes for good marketing.
The problem here is:
1) SIPC insurance makes sure you get your bonds back if a brokerage goes under. It doesn't make sure that they're worth what you were promised, just that if the broker goes under, whatever they were holding on your behalf gets returned to you. That's valuable, but it does mean there's no guarantee that you'll get all your money back. Money market funds are covered by SIPC insurance, and that didn't stop investors from losing money during the crisis when some funds "broke the buck" and became less worth than what investors had paid.
2) It's not actually clear that SIPC insurance actually covers this sort of thing. If I buy $5k of treasuries with a broker, it clearly would. If I deposit $5k cash with my broker (not for use in buying securities, but just to hold onto for me so I can pay my rent, as you would with a bank account), it clearly does not. If I deposit $5k cash and my broker uses it to buy $5k of treasuries then...I dunno, maybe? It does cover money market funds, and money market funds are a lot like what Robinhood was planning, but there are some obvious differences.
In short, Robinhood has done two things: They have marketed a vaguely money market like product as a bank account, but elided the difference in protection a money market and a bank account enjoys (very naughty). And they seem to have possibly contemplated launching a money market like product without getting the SIPC to sign off on it being covered, although it's very possible that the SIPC is reacting to the confusion caused by Robinhood's marketing. (Eg, the SIPC may have confirmed with Robinhood that a money market like product would be covered, but had no idea that this bank account product Robinhood was marketing was the same underlying product.)
In any case: In the US, bank accounts are covered by FDIC, Robinhood marketed this as a bank account, it isn't covered by FDIC, and even if Robinhood is right and the SIPC is wrong and it is covered by SIPC, that type of coverage is fundamentally different (and weaker) than FDIC coverage, making Robinhood's marketing fundamentally misleading. The core issue here isn't the dispute with the SIPC, it's that this was never going to work how Robinhood implied it was.