Robinhood and the Sheriff of Nottingham: The Fintech Financial-Inclusion Illusion

By Karen Petrou

On December 14, a fintech venture dubbing itself Robinhood launched a consumer-banking product touting a no-fee, high-return, and yet somehow still profitable checking, savings, brokerage, and payment product.  It didn’t take long to see that Robinhood would steal from the poor to feed the rich.  Speculative investors have somehow bid the company up to a $5.6 billion valuation despite, as even a cursory analysis of public documentation shows, a flawed business model premised on a series of increasingly improbable assumptions about the transformative powers of financial technology and the malleability of U.S. financial regulation. 

In its efforts to come up with a new idea to appease restive venture capitalists, Robinhood came so far out of the forest that the sheriff – in this case SIPC – quickly exposed at least one fallacy in this bubble-blown venture.  But the absence of a coherent U.S. fintech-policy framework ensures that Robinhood is not the only bandit loose upon the land.  Financial inclusion can surely advance economic equality, but only if its offerings are safe, sound, and secure under even acute stress. 

The Legend of Robinhood

Prior to its fabulous consumer-finance fiasco, Robinhood had little to show for itself but an e-brokerage website/mobile app and a free cryptocurrency exchange (oops).  The new venture promises accounts with:

  • zero fees or minimum balances on SIPC-insured accounts offered through debit and credit cards;
  • interest rates paying more than 3%;
  • commission-free brokerage accounts;
  • limitless ATM access; and for good measure
  • what is described as its own clearinghouse.

What the Sheriff Saw

Why did no one else stumble upon financial products with such undeniable appeal?  Robinhood touts the “scalability of software to pass impressive perks on to customers.”  But, it took just one read of the press stories on this fantastic product suite to spot a critical flaw – the promise of SIPC insurance.  Even a quick read of the rest of the documentation – such as it is – also makes it clear that profits will prove, shall we say, illusive.

First to SIPC.  Robinhood is not the only fintech venture to quash nay-sayers by asserting that its offerings pose no risk to yield-hungry, tech-savvy consumers because the federal government stands guard.  Last year, another innovative venture, “Jiko” promised that its similarly-high-yield accounts were backed by the FDIC.  In each case, a quick check of the SIPC or FDIC websites – let alone a look in a book or two – would have shown that such claims are not only baseless, but also deceptive. 

As Bloomberg pointed out the day after Robinhood’s foray, SIPC provides nothing even close to the promised federal coverage.  It’s for securities in a brokerage account and, even then, it is generally limited to broker theft or failure, not loss of value due to a flawed business strategy, operational risk, or other unfortunate occurrences.  The FDIC for that matter also doesn’t provide coverage for anything but insured-depository failure. 

And, even if Robinhood failed, the funds in the brokerage account aren’t securities and the company isn’t an insured depository.  Admittedly, aspects of its product run through an insured depository in ways sure to confuse customers about when risk starts and stops.  That in Robinhood’s own clearing house – whatever that is – appear to be at risk at virtually every stop in a transaction that isn’t into an FDIC-insured bank account.

Robinhood is sure to counter that it’s at little risk because customer funds are housed in U.S. Treasury obligations.  No word about whether Robinhood plans to trade in this account, although the profit strategy it lays out suggests strongly that it will indeed trade its Treasury positions.  As any bond trader will tell you, losses are likely in the event a security isn’t simply held to maturity with coupons clipped along the way.

Peasants Beware

Anyone willing to have fun with his or her phone by opening a Robinhood account is of course free to do so.  But, to suggest that any service along these lines advantages consumers is to avert one’s gaze from an array of risks clearly inappropriate for any consumer unable to parse through Robinhood’s assertions to underlying fact. 

Congress long ago established the Truth-in-Lending and the Truth-in-Savings Acts along with piles of statutory disclosures about when FDIC or SIPC insurance does or doesn’t apply.  The reason for these laws is not to frustrate fintechs convinced of their scalability skills or seemingly unique profit insights. 

The Bandits in the Bushes

Decade in and decade out, we learn the hard way that consumers need to know with whom they’re dealing at how much risk.  We also know from bitter experience and a financial crisis or two that, when a retail-finance product is too complex for ready analysis, then only prudent profits should be readily on offer to the average customer.  As the Sheriff of Nottingham surely would say, the law must apply to Robinhood no matter how dashing his disguise or sharp his arrows.

N.B.:  Robinhood said late Friday that it is “excited and humbled” by the response to its product, which it then rebranded as a cash management service.  We’ll await what’s next.

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