Could Robinhood's New Cash Back Credit Card Be a Game-Changer?

Robinhood just announced its first-ever credit card product, known as the Robinhood Gold Card. While the financial technology company is best known for its stock trading app, this marks the first serious attempt by Robinhood to move into other areas of consumer finance, with the ultimate goal of evolving into a one-stop shop for banking and investing needs. In the keynote speech introducing the card, CEO Vlad Tenev said that the ultimate goal is for Robinhood to be the "primary financial institution" for its user base.

Based on the benefits the card offers, it has the potential to have an immediate impact on the credit card industry. Here's a quick rundown of what Robinhood's new credit card will offer, how much it costs, and what it could mean for the rest of the credit card industry.

Robinhood's new credit card has some big perks

The new credit card is called the Robinhood Gold Card, and it has some interesting perks. Most notably, the Robinhood Gold Card has an industry-leading 3% cash back rewards rate on all purchases. While there are other cards that have higher rewards rates in certain categories, this is an extremely strong flat rate on all purchases.

In addition, the card has no foreign transaction fees, as well as the ability to create virtual and one-time cards through the Robinhood app.

One interesting aspect is that although the credit card is issued by a third-party bank (Coastal Community), Robinhood is going to be qualifying applicants itself based on their credit scores and other factors.

There's one big caveat that is important to mention. The Robinhood Gold Card doesn't have an annual fee, but it does require a Robinhood Gold membership, which costs $5 per month.

To be sure, there are some other big perks of Robinhood Gold membership. For example, the higher bonus on IRA contributions you get as a Robinhood Gold member can more than justify the cost of membership all by itself. But if you are not already a Robinhood Gold member, it's important to know that you'll need to become one in order to get the card.

Should you get the Robinhood Gold Card?

If you are already a Robinhood Gold member and prefer to receive your credit card rewards in the form of cash back, it's an easy call. But if you aren't already a Gold member, or if you prefer a different credit card rewards currency (such as airline miles), it might not be the best fit for you.

Will it be a game-changer for the credit card industry?

To be perfectly clear, there are no other credit cards on our radar that offer a flat rate of 3% cash back on all purchases. But I wouldn't be surprised if we see others follow suit.

For one thing, Robinhood has a clear history of starting financial trends. It was the company that pioneered zero-commission stock trading, just to name the most prominent example. But now virtually every broker offers the same.

Second, profit margins in the credit card industry can be massive. The average credit card interest rate is nearly 25%. So, even if a bank pays 5% interest on deposits and has a 5% net charge-off (default) rate, both of which would be on the high end for the banking industry, that still leaves plenty of room to make money.

In other words, many other credit card companies could afford to absorb an additional percentage point in cash back rewards (after all, some already have unlimited 2% cash back). So it wouldn't be a shock to see additional 3% back cards appear on the market -- especially if the Robinhood Gold Card is successful.