
Robinhood Will Retool Checking Product Following Scrutiny - vthallam
https://www.bloomberg.com/news/articles/2018-12-15/robinhood-will-retool-checking-product-following-scrutiny
======
snuxoll
Somebody from Robinhood's legal team either said "yeah, the SPIC will totally
be okay with this" or management ignored any advice to the contrary, whichever
it was those people need to pull their heads out of their asses. Even Schwab,
an investor bank, has insurance from the FDIC for their deposit (and sweep)
accounts - if they could have gotten away with just SPIC coverage don't you
think they would have?

~~~
evanriley
As well as Fidelity's checking account, Cash Management Account, is FDIC
insured.

This definitely feels like a case of Robinhood ignoring some advice.

~~~
whitepoplar
Not quite. Fidelity CMA accounts are brokerage accounts and thus cannot offer
FDIC insurance because Fidelity is not a bank. Fidelity accounts offer SIPC
insurance.

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.

~~~
astura
It's sorta abstracted in a way, but they are very clear about what's happening
behind the scenes; they even show you which banks hold your deposits, which
banks are available to hold your deposits, and they even let you request to
exclude some banks from holding your deposits. (I don't remember if it was a
priority system or an include/exclude system)

There's no hand waving going on.

~~~
whitepoplar
Yup, it's completely transparent and customizable for those folks who want to
mess around with it, but it's abstracted away so that 99.9% of people will
never have to think about it as something other than a single money bucket.

------
mbesto
As noted by @asanwal[0] this can be seen as both deceptive and smart. Here's
the reality - when you get a $6B valuation, you are accepting VC-fueled growth
fate, which means you are on a tightrope to grow _at all costs_. It's a
gamble, but if executed successfully will lead to exponential growth and thus
outsized investment returns.

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](https://twitter.com/asanwal/status/1073945507100270592)

~~~
JumpCrisscross
> _there is much needed punitive damages for this type of behavior_

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.

~~~
AnthonyMouse
I don't know. The fact that it was done completely publicly (and therefore was
discoverable and discovered immediately) basically moots any need for harsh
penalties.

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.

~~~
JumpCrisscross
> _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.”

~~~
throwaway98434
Had they launched a product, sure. But this was mere talk about a future
product which they've decided "to retool" after scrutiny.

No one was harmed here. This is fine.

~~~
dragonwriter
> Had they launched a product, sure. But this was mere talk about a future
> product which they've decided "to retool" after scrutiny.

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.

~~~
AnthonyMouse
> 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.

~~~
halibuthaler
Ummm but if you want people to trust you with their money and build reputation
shouldn't you do your DD and make sure what you say is true? imo RH is either
reckless or deceptive, and neither is a good look for a company like them

~~~
throwaway98434
They hurt their reputation and they look like idiots, sure.

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.

------
kakaorka
So no one actually did their due diligence before announcing the product. I’m
quite shocked that a ~$6 billion company can behave this way.

~~~
lykr0n
"$6 billion"\- there seems to be a disconnect between what some VCs say and
what the market says.

------
jamestimmins
This seems to be a Rorschach Inkblot test for what people think of fin-
tech/startups in general. If you want to see it as an example of a company
moving too fast and being careless then you're inclined to jump on that
reasoning. The same goes if you think this was a purposeful attempt to mislead
the public.

Either way, what actually happened isn't public, so it's foolish to jump to
conclusions.

~~~
jancsika
At the same time, it certainly is _not_ possible to conclude that whoever was
in charge of this knew what the fuck they were doing.

------
talltimtom
Why is everyone acting like robinhood stole people’s money or destroyed
people’s lives? They wanted to make a product that would have been incredible
value for costumers, got yelled at by the existing market and are now
retooling to see if they can still put it out another way. No one has been
hurt and they are just pushing forwards to get this out.

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.

~~~
mikeash
They tried to obtain people’s money under false pretenses. The fact that their
scam failed doesn’t make it ok.

~~~
dragonwriter
They almost certainly got people to give personal info for signups and
referrals based on the waitlist and referrals move you forward in line
announcement; so it's not just _trying_ to get things of value under false
pretenses.

------
ulfw
Silicon Valley is broken. Ethics went out the window years ago, replaced by
greed. Whether that is Google suddenly wanting to go into China, Facebook
lying and spying on everyone and their dog or companies like Uber et al
‘bending the law’. The most recent such bend was now this stock trading
company trying to sell customers Checking accounts that were never insured as
such.

Time for the old valley of scrappy founders who wanted to change the world for
the better to return.

~~~
alexandercrohde
I'm confused. Are we saying that robinhood is the scrappy kind or not?

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.

~~~
elliekelly
> 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.

~~~
SEJeff
As explained to you in another HN post. HN makes their money via their margin
accounts aka Robinhood Gold, and by selling their order flow, like many other
brokerages do. It results in better execution for the clients (like myself)
and a tighter spread. If it means I get a better price and someone else gets
first dibs at the buy or sell side, I honestly don't care. You can use limits
if you worry about getting "ripped off by the man".

~~~
elliekelly
I understand where their revenue comes from. But if they're doing the same
thing as every other bank and _not_ charging for trades what's making up the
difference on their bottom line? It's not income. So it must be that they're
avoiding costs that the rest of the industry is incurring. Like the cost of
compliance.

~~~
bonestamp2
Maybe they're not making up the difference on the bottom line... maybe they're
equivalent to Walmart, running on a lean margin and hoping to make it
worthwhile through volume, and the wall street banks are Saks, charging more
and earning higher margins.

------
Lazare
I think it's becoming increasingly clear what happened.

As whitepoplar noted here
([https://news.ycombinator.com/item?id=18691477](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.

~~~
dmoy
The only treasuries over 3% are pretty long term. Like, decades long. How do
you sweep short term deposits into 20 year bonds?

Like I get generally how a treasuries backed money market fund works, but the
average maturity there is like 2 months, not 20 years.

~~~
Lazare
The idea is that they would be sweeping it into short term treasuries, and no,
they don't pay 3% either, but it's more than a chequing account pays.

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.

~~~
dmoy
So they're making up like 0.7% from fee cuts? As soon as they get big enough
all debit card transactions are capped at 0.05% and like a quarter or
something.

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.

------
mikeash
“However, we realize the announcement may have caused some confusion.“

Gotta love corp-speak. “We lied our asses off but didn’t realize you’d catch
on so fast.”

~~~
jancsika
It's difficult to imagine a situation where an individual could get away with
something like this.

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..."

~~~
Godel_unicode
You've never seen someone screw something up, apologize for screwing up, and
promise to do better next time? I find that hard to believe.

~~~
village-idiot
It’s more surprising when everyone lets them try a second, third, or fourth
time

~~~
dvtrn
Has Robinhood here slipped up multiple times like this? I'm asking as someone
who's only heard of the product, never tried it, doesn't look remarkably
interesting to me/doesn't fill a financial need I have, never gave it much
thought aside from this latest fuss.

~~~
rchaud
Not to my knowledge, this is a pretty big screwup, at least reputationally.
Robinhood's entire spiel is about how the big banks are bloated and sell you
products you don't need (all of which can definitely be true). But I have
never once doubted my bank's ability to comply with financial regulations and
keep my cash safe.

------
rchaud
If they really were "disruptors", they could have tapped their VCs for money
to provide their own insurance, while they tried to work things out with the
SIPC.

Instead, they made a shambles out this announcement, hurt customer trust and
made themselves look like a fly-by-night operation.

------
gcb0
this article says absolutely nothing besides what have been discussed here
last week. this is a dupe for all I care.

------
tamalsaha001
Move fast and break things, I suppose.

------
nixgeek
Dupe.
[https://news.ycombinator.com/item?id=18691119](https://news.ycombinator.com/item?id=18691119)

~~~
Wowfunhappy
It looks like this one was posted before that one. Two hours ago vs three
hours.

------
beefman
Submission with non-paywalled version

[https://news.ycombinator.com/item?id=18691119#18691536](https://news.ycombinator.com/item?id=18691119#18691536)

~~~
Wowfunhappy
You should be able to open the article in a private browsing window. Bloomberg
provides ten free articles a month normally, and of course, that number is
based on cookies.

------
muhneesh
The correct response here would be for Robinhood to cancel the product and
apologize, instead of revamping their marketing materials.

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.

[1]
[https://www.investopedia.com/terms/r/revolver.asp](https://www.investopedia.com/terms/r/revolver.asp)

~~~
fastball
TIL banks didn't exist before the FDIC existed.

~~~
muhneesh
This is a ridiculous strawman as it relies on an equation of social and
economic systems before the 1930s to today, but despite that, it's a bad
strawman given that the FDIC was created in direct response to restore faith
in American banks after the Great Depression.

I'm all for fintech, but I'm not for blind trust in startups looking for
hypergrowth as it relates to consumer protections.

