Earlier this week, stock trading app Robinhood announced that it would offer a new feature to users in early 2019: a checking and savings account that had no associated fees. But after the feature received intense criticism, the company appears to have backtracked, saying it plans to “work closely with regulators as we prepare to launch our cash management program.”
Launched in 2014, the company allowed users to trade shares in companies listed on the US stock exchanges for free. A year later, its user base had grown to “hundreds of thousands” of customers who had “transferred $ 1 billion” to the platform. Earlier this year, it launched a new feature that allowed users to trade cryptocurrencies, and reportedly began talking to regulators to offer other banking products, such as savings accounts.
The banking industry comes with considerable regulations.
That territory comes with considerable regulations, and Bloomberg He noted at the time that most financial startups worked around that by partnering with existing banks and licensees. Earlier this week, Robinhood launched its new feature: an engaging savings and checking feature that came with a Mastercard debit card and no ATMs, membership, overdrafts, transactions, or other fees. All of that at a whopping 3 percent interest rate, well above the national average of .08 percent, although it would apparently fluctuate depending on the health of the economy. Robinhood also said the function would be underwritten by the Securities Investor Protection Corporation (SIPC), rather than the Federal Deposit Insurance Corporation (FDIC).
The problem is that apparently no one told SIPC that this was happening, and while the accounts look like bank accounts, they are not. Companies like the SIPC and the FDIC provide considerable protection to people who deposit their money in securities or banks in the event they fail. (The agencies were founded after the Great Depression.) SIPC CEO Stephen Harbeck told TechCrunch that “Robinhood would be buying securities for their account and sharing a portion of the profits with their clients”, and that is not something they cover. Harbeck also said Bloomberg that the company had come to them with the feature beforehand, that they had “serious concerns about this.”
Analysts said the product could potentially attract regulatory attention.
Analysts were less charitable: CNBC reported that UBS analyst Brennan Hawken called it “a potentially dangerous strategy that is very close to real banking and therefore could lead to regulatory scrutiny,” and that the accounts appear to “look more like a money market fund “rather than a bank and that users could experience” friction inside and outside the product. ” But Hawken also noted that Robinhood is investing in treasuries (which currently carry an interest rate of 2.7 percent) and that they may have struck some deals with ATM retailers to bring in income to maintain the 3 percent interest rate. for the consumers.
Following the backlash, Robinhood removed their introductory blog post and posted a new one from co-founders Baiju Bhatt and Vlad Tenev, saying that while they were “excited and humbled” about the response to the product, “they realized that the announcement might have caused confusion, “and they said they plan to” work closely with regulators as we prepare to launch our cash management program “and” revamp “the way the program is marketed.
It is not clear what this new “cash management program” looks like. Robinhood spokeswoman Lavinia Chirico has not responded to repeated requests for comment and clarification on what the future of the feature might look like, or which regulators the company is talking to. The company is now signing up for a “cash management” waiting list, but details on what that looks like remain scant. The fine print in the registration email simply says that it will be an additional feature to your brokerage account and “and it will not be a separate account or bank account”, and says that it will “provide additional information about the cash management program a once it’s operational. “
