Robinhood Will Retool Checking Product Following Scrutiny
bloomberg.com
bloomberg.com
This definitely feels like a case of Robinhood ignoring some advice.
However, Fidelity's trick is to sweep all cash into third-party FDIC-insured bank accounts behind the scenes. This yields several benefits:
1) Practically speaking, it offers the exact same FDIC insurance as a real bank account, because your money is being held in a real bank account.
2) Since cash is deposited into FDIC-insured accounts behind the scenes, Fidelity can seamlessly split money up so that each sub-account holds no more than $250k (the limit of FDIC coverage). This is how they can offer $1.25M of FDIC insurance (split between 5 accounts).
The customer never deals with this complexity, as it's completely abstracted away, behind the scenes. The result is a cash management account that offers $1.25M FDIC insurance on cash balances.
There's no hand waving going on.
On any given night your dollars are spread out at banks all over the country. Likely at tiny little community banks that you've never even heard of. It's pretty impressive how banks manage to maximize FDIC insurance.
For example, if RBC "failed" in Canada, woulnd't the payout largely come from the Bank of Canada printing more money and all this could essentially happen without CIDC existing? You might get your money back, but now a loaf of bread costs $1000.
Again, maybe I don't understand how it works. Maybe it makes more sense in the US where there are many smaller banks.
Insight?
As for where the funding comes from...the FDIC requires payment into the insurance pool by member institutions, so it's not the government bailing out the depositors each time a bank fails. But if the FDIC pot of money is exhausted, the U.S. Government will still guarantee it by act of Congress. I'm not sure how this works in Canada, however.
Like any other form of government spending, that is not directly covered by "printing money"; that can't be done by the federal government. Instead, the money would come from a mixture of spending cuts, additional taxes, and additional borrowing. (Given current US politics, most of the money would probably come from borrowing.)
Now as part of an independent process, the central bank conducts open market operations where it sells and purchases US debt to try and keep inflation and interest rates within targets. When it purchases debt, money is effectively created, and if the US was forced to borrow a large amount of money to cover an FDIC shortfall some of that debt would no doubt end up purchased at least temporarily by the central bank, so:
> woulnd't the payout largely come from the Bank of Canada printing more money [...] You might get your money back, but now a loaf of bread costs $1000.
In the US, some portion of the funds would indirectly come from the central bank printing more money, but only to the extent that it would not cause that sort of spike in inflation.
(Also note that even when a pretty big bank goes under, they still have a lot of assets, and the actual cost to the insurance program once everything has been liquidated is generally very small if not zero. Even if extreme cases such as Iceland when Landsbanki went under, the desposit insurance guarantees were eventually covered by assets recovered in liquidation.)
So basically: 1) Deposit insurance is very important to prevent bank runs (ie, people panicing and causing bank failures even when the bank is actually solvent and 2) It's not that expensive, and doesn't represent the sort of risk or potential costs you can imagine. There aren't a lot of policies which are basically all upside, but deposit insurance comes close.
Moreover, it's “frontstopped” by the government facilitating takeovers of failing banks by healthy banks that will cover deposits.
> In the US, some portion of the funds would indirectly come from the central bank printing more money, but only to the extent that it would not cause that sort of spike in inflation
That's true to the extent that large bank failures are likely to be correlated with (and may contribute to) the broader economic conditions which would promote easier money policies at the Fed, but a major point of independent central banking is creating separation between government fiscal needs (like paying off deposit insurance claims) and monetary policy.
https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U...
The FDIC apparently has a $67 billion "Deposit Insurance Fund" that holds money that it pays out the insurance from; that fund is raised from insurance premiums paid by banks. During and after the 2008 crisis the DIF got squeezed pretty hard and so they used a power to require prepayment of premiums (from healthier banks).
Just like auto insurance, everyone pays premiums to the FDIC which pools the money and claims are paid for using that pool.
If the FDIC fund ran out of money the insurance would have to be backed by... the US Treasury, basically? The government would have to open up a money spigot somewhere: either borrow it or print it. It looks like the FDIC has a $100 billion line of credit with the Treasury, so it could use that, but that is just moving money around inside the government.
Eg Robinhood could have notified the sipc some more or less reasonable time ago, that they were planning this product, and the sipc took a(n un) reasonable time to get back to them.
Maybe they played golf with someone at the sipc who said they'd sort it, and it would be fine.
Just wanted to point out that there are scenarios where it isn't completely Robinhood's fault.
And they probably aren't evil business men out to rob from the poor, to give to the rich. Occam's razor and all that.
Here's my personal problem - there is much needed punitive damages for this type of behavior. Until we have people in power that understand why these situations (deceptive advertising) are problems, then, well, let's be honest, we're gonna see the Wild West flourish full of cowboys and Indians.
[0] - https://twitter.com/asanwal/status/1073945507100270592
I'm a fan of Robinhood. But this calls for more than a slap on the wrist. Not punishing someone misrepresenting their FDIC or SIPC insurance status is a horrible precedent. Not only does it show a green light to scammers. It also corrodes the protective, anti-run value these programs provide to depositors and investors.
They were essentially testing the fences. That isn't bad, especially when it's done completely in the open. It gives the regulators an opportunity to say "no" and shut it down immediately if they want to, or say nothing and let it proceed.
If they say no, it doesn't happen long enough for anybody to really come to any harm.
And the alternative is that nobody is willing to try anything new just because there is no existing precedent explicitly saying that it's OK.
The part that was grossly problematic was Robinhood falsely claiming it was SIPC-insured. SIPC insurance isn’t automatically granted. There isn’t any useful innovation limited by telling people “try new things, but don’t lie about having certifions you don’t have.”
This is slack laziness and cavalier disrespect for their userbase. I had started toying with Robinhood; I immediately pulled everything I've got back out. They aren't trustworthy custodians.
Why is that supposed to be necessary? The government is more than capable of telling you if it's a problem, and if it's not a problem -- which is the default -- it would only waste resources on the part of everyone.
What I suspect may have happened here is that the traditional banks soiled themselves when they saw the announcement and started calling around to see who they could get to put a stop to it.
The head of the SIPC essentially said as much in the article: "This has gigantic ramifications for the banking industry." As if his role is to save the mortgage banks from competition.
> I had started toying with Robinhood; I immediately pulled everything I've got back out. They aren't trustworthy custodians.
Presumably they're SIPC insured. :)
If I say “I’m insured by AIG,” I actually need to be insured by AIG. It’s not AIG’s job to tell me I’m lying. SIPC coverage isn’t automatically granted. Robinhood already has SIPC coverage through their brokerage products; this is abundantly clear to everyone there. Whether through fuck-up or will, they ignored a clear regulatory line.
But that's the weird thing. This new product is essentially a combination of two things.
1) A brokerage account instructed to hold safe treasury-related securities. This is exactly the sort of thing the SIPC normally insures. Expecting them to refuse that is really bizarre -- it's their main purpose. And as you note, they already do have that insurance for their brokerage accounts.
2) An ATM card and bank routing number that makes it easy to transfer to/from the brokerage account, so that it can be used as a checking/savings account. This is the real innovation, but it doesn't affect the risk to the insurer in any apparent way or really have much to do with them at all. Withdrawing the insurance over this only makes sense if it was done out of politics. Punishing them for failing to anticipate a political backlash seems particularly unjust.
Car accidents are the sort of thing most insurers usually insure. That doesn’t make it okay to lie about whether you have insurance. If this is still somehow confusing you, please stay away from banking and healthcare.
> An ATM card and bank routing number that makes it easy to transfer to/from the brokerage account, so that it can be used as a checking/savings account. This is the real innovation
I have a Fidelity Cash Management Account that does exactly this. The cash deposits are swept into FDIC-insurer accounts. The brokerage products are SIPC insured. I have a debit card I can spend against the cash deposits.
The difference is Fidelity applied for and obtained SIPC protection. This involves installing various auditing and safety mechanisms. Approval isn’t guaranteed. Automatically forcing the SIPC to insure everything that looks like a brokerage account would be a horrible idea.
Would you be ok with that?
> Would you be ok with that?
When I'm in the insurance business and the party making that claim is paying me insurance premiums under the same terms that I'm already insuring existing things with a commensurate level of risk? That is how insurance works.
If you have renter's insurance and you buy a new television on credit, telling the creditor that you have renter's insurance before you tell the insurance company that you have a new television is not some kind of fraud. If the insurer then suddenly threatens to cancel your insurance if you try to add the television, you have to go back to the creditor, but why would you have reasonably expected them to do that?
But the second one is the one that applies to a future product you haven't actually provided yet.
No one was harmed here. This is fine.
Which is why something between slap on the wrist and massive fines is in order.
The FDIC and SIPC work through public trust. When a broadly-marketed consumer product sets a precedent for degrading that trust, it causes real harm. Robinhood grabbed users through marketing this affiliation and gained tangible value from it. The last thing we need is the next growth hacking scheme involving falsely marketing trusted affiliations before pulling the product, customer lists in hand.
False advertisement shouldn’t be acceptable even in the case where it didn’t go far enough for people to actually obtain the product.
It was not mere talk, it was talk about a waitlisted feature used to induce signups to (and because of a “referrals move you up the line” policy, also to induce providing personal information if third parties as referrals to) Robinhoods existing service.
That is, it was false representation used to induce people providing Robinhood things of value, and thus, arguably, commercial fraud.
That's assuming they knew the representation was false. If they reasonably expected to be able to get the insurance, claiming that they would get it was a true statement of their intentions.
Above, people are suggesting that we need regulatory and/or criminal charges. There isn't any harm to customers and there isn't any evidence of fraud or criminal wrongdoing.
RH harmed themselves by looking stupid in front of the world. That's it. The rest is misguided hysteria.
They just got 600k people to signup. Even if they convert 10% of those for brokerage accounts (and not checking) it's probably worth it.
This reminds me of Lance Armstrong and Trek Bicycles. Trek doesn't have to return any of its record profits for all of the years they sponsored a cheater. (for the record, I own several Trek bikes and they're fantastic)
I don't see how such a new bold product can pass legal, even if it passes management. Their legal team probably sit around nodding their head as they collect their paychecks. They deserve to be fired before getting Robinhood into much bigger trouble.
Either way, what actually happened isn't public, so it's foolish to jump to conclusions.
It protects both parties.
You guys make it sound like they sold people’s private info to undercut the democratic process or killed innoscent people by putting untested self driving cars on the road.
It was nothing new or groundbreaking, it was just a checking account with an unusual high interest rate.
The government inurement don't like that because there are two usual cases of unusual high interest rate:
* plain scams
* overoptimistic bank managers that can't pay the interest rate when they are due.
Sometimes it's difficult to distinguish the cases.
Time for the old valley of scrappy founders who wanted to change the world for the better to return.
I see no reason to be hostile toward them. I think they're undercutting buy fees. It sounds like they announced something and had to retract, but that doesn't hurt anyone. And I bet whatever they do come up with will put pressure on banks to be more competitive.
More competitive how, exactly? Robinhood isn't "innovative." They haven't done anything fundamentally different from any other financial institution except skirt regulatory protections for retail investors. You'd think by now we would learn to ask "if this platform is free, how are they making their money?" Robinhood is cutting compliance corners. Period. That doesn't "pressure" other banks to be more competitive. That hurts consumers.
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.
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.
Gotta love corp-speak. “We lied our asses off but didn’t realize you’d catch on so fast.”
Suppose someone gets a gig playing church hymns, and instead they stubbornly play an impromptu hour-long jazz interpretation of "Free Bird" until the police are called. What would happen if their response to the churchgoers was, "I was excited and humbled by the response I received yesterday! I'll be revamping my accompaniment style in preparation for next week's service!"
Would any church's response really be, "Well, ok, as long as you're sure you won't do a completely incompetent job next time..."
Not the sort of stability I'm looking for in a brokerage.
But I'm also a very boring/lazy investor.
Instead, they made a shambles out this announcement, hurt customer trust and made themselves look like a fly-by-night operation.
They are not offering a "cash management" service. Unless they get insured or find another vehicle to prevent funds from being at risk, they are effectively just borrowing money from their customers.
This is sardonically innovative, as they've invented the retail investor equivalent of a revolver[1].
If they continue to market this without deep protections for consumers, this is effectively a scam and I would encourage anyone originally considering this to scuttle their considerations.
I'm all for fintech, but I'm not for blind trust in startups looking for hypergrowth as it relates to consumer protections.