Lessons Learned from the Robinhood Debacle

I was excited about Robinhood’s announcement too. The prospect of earning 3% on a savings and checking account was extremely appealing. The interest rate is 95 basis points (or 0.95%) higher than that of Goldman Sachs’ Marcus which continues to rank among the top yielding bank accounts.

Unfortunately, it didn’t take long for the company to backpedal on their announcement, which attracted hundreds of thousands to the waitlist. I checked the site today and secured spot 744,248 for their “Cash Management” offering which was hastily changed from the original name, Robinhood Checking & Savings. Issues arose as many dug into the actual offering, mainly how deposits would be insured. Bank accounts today are protected by the Federal Deposit Insurance Corporation, up to $250,000. Because this was part of a brokerage account, rather than being insured the the FDIC, Robinhood’s offering would be protected by the SIPC or Securities Investor Protection Corporation.

However Robinhood failed to disclose the difference between the SIPC and FDIC. The main difference is that the SIPC protects cash which is slated to purchase securities. According to the SIPC website:

SIPC protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash. Most customers of failed brokerage firms when assets are missing from customer accounts are protected.

The SIPC goes on to address the limitations of SIPC protection:

It is important to recognize that SIPC protection is not the same as protection for your cash at a Federal Deposit Insurance Corporation (FDIC) insured banking institution because SIPC does not protect the value of any security.

Stephen Harbeck, president and chief executive officer of SIPC was quoted in this Bloomberg article which shared that the company hadn’t approached the SIPC about the offering:

I disagree with the statement that these funds are protected by SIPC…Had they called us, I would have told them what I just told you in that I have serious concerns about this. This has gigantic ramifications for the banking industry.

The fact that Robinhood did not consult with regulators over there planned offering, branded as a checking and savings account brings into question whether the oversight was intentional in order to drum up hundreds of thousands of leads for their service. On December 14, the founders posted this underwhelming response on the Robinhood blog.

As somewhat of a fintech connoisseur, I can appreciate Robinhood’s ambition. There are plenty of names in fintech today that have drastically changed consumer financial services for the better. The main difference is that these companies have done so while engaging with regulators to ensure regulatory compliance. Robinhood is not operating in a vacuum. Many love to criticize fintech as being unprofessional and untrustworthy. The problem I have with Robinhood’s approach is that it is damaging to the entire fintech industry. The decision to go forward with the announcement can confirm the belief of our critics that fintech is the fly-by-night sector of financial services.

While many areas have been touched by fintech we will see more competition particularly in checking and savings account offerings in the next year with some compelling new names. SoFi Money is still in a limited launch of their hybrid checking/savings account product and I expect widespread availability in 2019. From Europe we’ll see challenger banks N26 and Revolut attempt to enter the US, although it remains to be seen just how long it will take them to launch. As new names enter the market we need to be aware of the impact that any missteps will have on the entire fintech industry and I hope this is a lesson learned by the recent Robinhood debacle.