And in a lot of cases it is.
But not in something as tightly regulated as banking -- and not when as the Bloomberg piece astutely points out, the "innovation" in question was already done in the 20s before regulation.
It's like crypto Ponzi schemes. People who start them think they are doing something innovative, when really, it's the same "robbing Peter to pay Paul" trick that existed long before Charles Ponzi and his postal reply coupons scam made it a household name. And yet, investors still willingly invest in clear Ponzis, because they are convinced the math will work! The math never works. (To be clear, I think there is a difference between someone like Charles Ponzi and the BitConnect scamsters and the people who invested with Madoff. Madoff was successful for so long, in part because he didn't promise ridiculously outrageous returns. He was running a Ponzi, but what made him so much worse was that it looked legit to investors, whereas most Ponzis offer returns that are never sustainable and look weird to a more savvy investor.)
I'm not implying Robinhood is a Ponzi, btw, but I think what it did here by actively misleading the public is really gross and I've lost all respect for the startup and will never give them a cent -- "free" trades or not.
Oh man, the alt-boom the last half of 2017 was really fun -- provided you didn't put any money into anything!
If not and they lost it - probably not a huge deal if you're playing and know the game.
See GS, 1MDB, AIG, etc.
1. They are doing everything like this (i.e. with not enough legal analysis), and have only just now happened to do something illegal. This would make sense if the top-level people at Robinhood were techbros and not people with experience in finance, but that seems kind of unlikely given that they're able to set up an investment app in the first place - I would assume that's very hard to do if you're not already neck-deep in that industry.
2. They are (for some reason) trying to set this up as a "Robinhood vs The Man (tm)" thing. They're already branding themselves hard on the "Giving financial freedom to the average person" thing, and I could totally see this giving them some free advertisement if they choose to take advantage of the "Big bad government hurting poor people's opportunities!!!" idea.
They are banking (unintentional pun) way too hard on "millennial research" telling them that the '82-'04 crowd wants "a meaningful connection" with their jobs, and apparently, their financial services provider. Maybe this is how they're hoping to relate to them?
The connotations of "Robin Hood" are such that it's a pretty brazen name to pick. Especially so when you consider that it's a VC-funded startup that will almost certainly go to a Too Big To Fail institution when an IPO beckons.
The timing was also terrible, right after their big crash earlier in the week. Every single interview addressed that.
Where trust is involved, bad publicity can be worse than no publicity.
Furthermore, this fits into their narrative of disruption. Their target audience will likely see this as, "stupid big banking industry trying to make it hard for them again."
Because not only will I not use them for this, I closed my account entirely 'cause this is the sign of a disreputable company.
I wouldn't be surprised to find out that's a lie.
That's a pretty small target audience, and those people are heavy into crypto and gold. Robinhood needs customer growth, and a nice, safe interest-bearing chequing account would have been a good way of doing it.
One-off press events with negative sentiment typically only affect brands that are getting to be known for the first time.
While a disastrous launch, most people who heard about this Robinhood checking already knew about the app. I don't think it's going to affect their brand much but will have driven app downloads to check it out, or re-acquisition of churned users. Referral events like this end up driving more core activity, which for Robinhood is making more deposits and trades (not signing up for checking).
Robinhood got a lot of press from this, well beyond their existing target market.
The fact that they announced this before confirming it with regulators smacks of CEO arrogance in the "Funding Secured!" vein.
From my comment:
>One-off press events with negative sentiment typically only affect brands that are getting to be known for the first time.
https://trends.google.com/trends/explore?date=today%203-m&ge...
https://www.lmcu.org/personal/banking/checking-accounts/max-...
In contrast, for LMCU:
Maximum of $15,000 for the 3% interest rate, most people with houses and/or families are going to want to have an emergency fund greater than $15,000, I spent almost $10,000 on emergency house repairs a couple weeks ago. If you're saving for a major purchase (car, down payment on house, major purchase, etc.) you're probably going to have more than $15,000. There is ZERO interest paid over $15,000!!!
The following are required to earn the 3% interest:
Direct deposit (self employed need not apply)
Minimum 10 debit card purchases per month (this alone should be a dealbreaker, one should almost always be using a credit card over a debit card if you're going to use plastic)
Minimum 4 logins to home banking per month
Requires eStatements
You're only getting an extra $12.50 a month over if you're keeping $15,000 in an Ally or Discover Savings account, and if you spend a modest $500/month on your debit card you're leaving at least $10 on the table in credit card cash back, not to mention the other benefits that come with using a credit card (extended warranty, price protection, purchase protection, travel insurance, etc. - depending on your card)
I use a credit card and then pay it off with the money in my LMCU checking account, the day after the interest hits :) I only do the minimum number of transactions with the debit card and I use them on low cost purchases.
>You're only getting an extra $12.50 a month over if you're keeping $15,000 in an Ally or Discover Savings account
Savings accounts have restrictions on the amount of times you can move money in and out of them. Checking accounts do not have that restriction. I'm sure I could find a savings account with better interest, but in my current life position I need a checking account.
I am unemployed right now, but I am meeting the direct deposit requirement with my monthly dividend from a stock I own, O. They also accept things like transfers from PayPal towards the direct deposit requirement.
If I were instead a homeowner with a family, I could get my spouse to make a separate checking account to double up on the amount emergency reserve money kept in a checking account. But again, it makes way more sense for emergency reserve money to be kept in a savings account. That's what they're made for.
IM(potentially uninformed)O, if your family is keeping more than $30K in a checking account, then you should probably be investing in stocks or bonds or mutual funds at that point anyways. It's not like you can't sell off investments to pay for emergency costs.
What possible benefit could LMCU receive if you log in four times a month instead of just the one time to pay off your credit card? There is none, it's a dark pattern.
I don't login to pay off my credit card, that's set up to happen automatically on the credit card company's side.
I basically just login to see if I've done 10 transactions yet. If I've met that but haven't logged in enough, I'll just logout and login real quick until that part is done. It's really not that big of a deal.
The benefit LMCU could receive from requiring monthly logins is:
- Not having to pay interest to a dead person
- Potentially being the institution you go to when you need a loan. This is where they (and other financial institutions) really make their money. In this respect, it's in their best interest to be with the customer as they become more financially savvy.
>IM(potentially uninformed)O, if your family is keeping more than $30K in a checking account, then you should probably be investing in stocks or bonds or mutual funds at that point anyways. It's not like you can't sell off investments to pay for emergency costs.
Emergency fund should not be invested! It needs to be in a liquid account that has zero (or near zero) risk to the principal. How big your emergency fund should be is dependent on your life situation. You're most likely to need your emergency fund at the same time the market tanked. I'm not selling securities (maybe at a loss) when I have an emergency, I'm going to use the money I've already set aside for such an occasion.
https://www.investopedia.com/terms/e/emergency_fund.asp
>Financial advisers view an investment strategy as a pyramid. A strong base is fundamentally important to support the levels of risk an investor bears as securities with varying levels of volatility layer over the foundation. Before an individual ventures into intermediate- or long-term investment vehicles, the establishment of an emergency fund is recommended as the first step toward creating stability and minimizing risk. Stashing three or even six months’ income in a highly liquid account, such as a money market, should preclude the purchase of any instrument that holds risk to principal or requires lock-in periods during which penalties are assessed for early withdrawal. As more volatile securities sit atop above the base of savings accounts or Treasury bills, overall portfolio volatility is minimized and necessary access to risk-free capital is optimized.
> I need to coin a term for this concept, I see it on every Hacker News thread once it reaches a certain size. It is the attribution of the topic to some nefarious intention of a dude in marketing. Once you start noticing it you can't unsee.
> Intel fires their CEO? It's a PR stunt.
> Startup abandons Europe due to GDPR? PR STUNT!
> AlphaZero beats professionals at Dota 2? You guessed it, it's just PR for oligarchy parent Alphabet.
> I see this so often now it's becoming humorous. As if some how this being all about PR explains everything. It doesn't explain anything! Although I'm sure Bill over in marketing loves that he has subsumed the historical role of deity in explaining the unknown.
For me it's actually hilarious. The follow-up response letter from the founders group is hilarious. If , robinhood did have a legal team to audit this new tool, they suck ass. They probably made a couple hundo thousand a pop, didnt do any work, and they are now living their lives just a tad richer.
A lawyer can't really tell you what will happen in a novel situation. They can speak with great confidence about legal precedents and where the law is black and white, but once you start walking into the grey areas, where the law isn't clear and there is no precedent, the law isn't a computer program interpreted by machines. There's a whole layer of human judgement in deciding what happens in that case, you don't just overflow onto the stack and get to rewrite the legal code to suit your needs.
So when a lawyer says something like, "Ahh, but the law only talks about 'checking accounts' and 'savings accounts' not 'checking & savings accounts'", at best they are giving you a preview of the argument they will make to a judge or jury at your trial.
Then future lawyers will be able to refer back to the precedents set in your court case with more confidence.
In other words, "this hasn't been tested in court" doesn't excuse them from apparently not bothering to get an opinion from the regulators who have the potential to greatly embarrass them after a high-profile product launch.
"This language doesn't directly violate the rules, and hasn't seen a court case. But it looks like an unsubtle attempt to bypass those rules and a big announcement using this approach is at minimum likely to draw some unfriendly scrutiny."
The law isn't a computer, and regulators - especially in financial spaces - have substantially more freedom than courts to simply reject loopholes. Things like structuring rules are essentially "laws against circumventing the law" for exactly this reason. I'm pretty surprised that Robinhood either didn't get a warning about how poorly this could go, or chose to ignore it.
Regulators have strictly less power than courts here when applying existing law and regulation, though they can write new regulations (but not law).
I guess it's a matter of terminology, but I think there are at least some cases where this isn't true. Ex post facto legislation is permitted in civil law, but it's not something courts can generate in response to a case.
Regulators operating under administrative law can create ex post facto rules wholesale if granted express permission by Congress, which is of course new regulation. But even without that grant, they can create limited retroactive rulings when new interpretations are offered during adjudication. [1] We can debate whether that's 'new regulation' or 'new interpretations of old regulation', but the net result is that regulators are empowered to cover unforeseen circumstances in ways that direct lawsuits are unlikely to offer.
(I am not a lawyer, but...) a move like this looks like an invitation for a Chenery II action, if one is was even needed. The SIPC didn't want to issue brokerage-account protections for a "Checking & Savings Account", and whatever the SEC said to Robinhood produced a very swift change of tune. I suspect it was something like "if we go into adjudication and say magic ampersands don't change your issuing rights, every court in the country will back us up".
[1] http://www.minnesotalawreview.org/wp-content/uploads/2013/02...
I'm not a lawyer, but that line of reasoning sounds like something out of a comedy skit.
"Sure, the law regulates sales of alcohol and sales of firearms, but it doesn't say anything about an Alcohol And Firearms Combo Pack™!"
But there are many types of lawyers in this world. Besides the obvious professional divisions -- real estate vs patent law, trial law vs contract law, etc etc -- you have lawyers who advise their clients versus lawyers who assist their clients. The former are the kind you want, who will tell you what to do to keep everything above board; the latter view it as their job to help you do whatever it is you wanted to do, with the thinnest veneer of "obeying" the "law".
It "works" insomuch as you don't come under scrutiny and your lawyer's legal theories are never tested at trial; a lot of the people making use of this sort of lawyer will rarely if ever actually go to trial -- they'll drag things out until their opponents eventually settle.
[1]: https://www.forbes.com/sites/jeffkauflin/2018/12/13/in-a-bol...
edit: Doh.. I guess I just got caught commenting without reading the article. Sorry everybody!
“Checking” accounts are regulated. “Savings” accounts are regulated. “Checking & Savings” accounts are not a thing and thus could be considered a grey area.
The ampersand magically gets you out of regulation.
Well, it DIDN’T, but that was the theory it seems.
> Robinhood can’t issue a “checking account,” or a “savings account,” since those are things only banks can do, but “checking & savings” is technically neither of those things and so perhaps it falls into a gray area. “A magic ampersand,” I called it.
“””
There is a lot of confusion about what Robinhood’s thing is. Delightfully, it is called “Robinhood Checking & Savings,” apparently because calling it a “checking account” or a “savings account” would come too close to implying that it is a real bank account insured by the Federal Deposit Insurance Corp., while “checking & savings” is not a thing and so does not carry that implication. A magic ampersand!
“”” https://www.bloomberg.com/opinion/articles/2018-12-14/nyse-n...
The intent. The SIPC will insure the funds if their purpose is to be exchanged for securities as some point.
The reason why people move cash into a brokerage account is because they intend to invest it at some point in future.
If I intend to invest my coverage limit amount at some point in future but for now I'm using it as a place to dump my cash into and use it as a DDA, i absolutely fall under that umbrella.
The reason why SIPC is having a fit is because someone who is supposed to be fleecing the retail clients is also planning on fleecing those those business is fleecing retail clients.
This is the problem. Robinhood is marketing the product to people who have no intention of investing.
You're taking a very conspiracy-theory view of the situation. If there were an agenda to maliciously over-regulate Robinhood, it could have been executed well before this point. The fact is that Robinhood was trying to introduce a novel product that doesn't neatly fall into pre-existing categories that benefit from insurance protection. (It's great they're trying this-- I hope it succeeds!) But they appear to have done this without contacting SIPC. Had they done so up front (as they're now doing) they probably could have massaged the marketing and legal details appropriately (as I expect they will do).
> Funds are invested to be able to get that 3% return.
If they are, then they are not insured either. SIPC doesn't insure bad investment decision, thus if the 3% return fail, you would lose money.
The SIPC protect the cash that is stored there which you are going to invest at some point. Let say you put 1000$ there and you invest 200$, it's alright, theses 800$ are protected whatever happens, but if you put 1000$ there but wasn't planning to invest anything, then it's not alright and this is the issue. It's mostly a semantic point, but that semantic is what make it manageable for the SIPC.
[1] https://www.consumerfinance.gov/ask-cfpb/what-is-a-money-mar...
Like a regular savings account, a money market account at a bank is insured by the Federal Deposit Insurance Corporation (FDIC)...
Where they are not insured is in a Brokerage firm, like Robinhood.
As we hear repeatedly on HN from Google's Dragonfly apologists, it's perfectly normal to keep the legal department out of the loop in modern-day "disruptive" businesses.
Man I can't wait to be done with the banking cartel!
> One possible explanation for the regulatory efficiency here is that so many of fintech’s financial innovations have been tried before. Robinhood was certainly not the first non-bank to get the bright idea of pretending to be a bank and taking deposits!
[...]
> In many areas of “tech,” companies are racing to do things—in virtual reality, in artificial intelligence, in surveillance and data collection—that have genuinely never been done before and that pose novel social and regulatory challenges. In many areas of fintech, though, companies are racing to do things that were done in the 1920s, before modern financial regulation came into effect, only this time with an app. The regulators know how to handle that.