Is it an investment, a deposit, a delivery service, a game, or a gamble? Or perhaps, all of the above?
Questions like these are being asked more frequently by savvy consumers - and in some cases business leaders and competitors - about the plethora of new hybrid financial services providers and their increasingly ‘mixed’ portfolios of spending, saving, investing,
and peripherally related products and services.
Robinhood Markets exemplifies elements of all of the above, and embraces and promises even more (travel, estate planning, etc.) through its customer offerings.
In case you missed it, the Silicon Valley-backed and now publicly traded
startup made a big announcement in late March concerning new wealth management services it will add to its client menu “by fall” of this year. It’s just the latest chapter in a remarkable and mostly steady growth trend for the firm – now boasting more than
25 million client accounts and $195 billion in assets under custody - which states at the top of its home page, “We’re on a mission to democratise
finance for all.”
New products up the ante for Robinhood in the banking and wealth management space
Now, the California-based Robinhood, publicly traded since July 2021 (Nasdaq:
HOOD), has stepped to the fore of the financial services fray – again – with several new banking and ancillary service offerings. Its chairman and CEO Vlad Tenev
said these enhancements will go even further toward achieving a principal company goal, “to give (clients) a world-class financial team in your pocket, with cutting-edge tools you can’t find elsewhere.”
In the brave (or crazy) new world of wealth management and personal finance, no new wrinkle or unusual service tie-in is perceived as ‘beyond the pale’ by either product managers, marketers, common sense, and/or regulatory standards anymore. Robinhood dove
in from its start with no fee equity trades and has been flirting along the edges of several subsector ‘moats’ within the traditional financial services industry for more than a decade. Now, given recent developments, they seem determined to disrupt the field
further in the coming months.
Jason Henrichs is co-founder and CEO at Alloy Labs Alliance, which its website describes as “a consortium of community banks working together to serve evolving customer needs in a rapidly changing world with
the insights, resources, and scale of a top 10 bank.” He sees Robinhood’s announcement of its plans for enhanced banking and wealth management services as a clear threat to traditional banking players. "New entrants and substitutes are the most dangerous competitors
because they rewrite the rules of competition.”
High savings rates, personal services, global payments, and home-delivered cash for no fee
Speaking of that competition, what are these new ‘tools’ Tenev and his strategy/product team described in their recent launch extravaganza “Robinhood Presents: The Lost City of Gold?
The company calls the package of newly-released products and services “Private Banking Unlocked” which on the financial side includes (with some specific client deposit/investment qualifications) a 4% savings account, fee free estate planning, professional
tax advice, international payments, cash delivery to client homes “in a large, plain envelope” (in lieu of visiting an ATM), and a cash sweep feature to multiply standard $250k/client FDIC account insurance to as many as ten banks and $2.5 million in deposit
coverage.
Remember: Deposit account coverage, “10xed” or not, only applies if a BANK fails
Key point: While the financial protection of the new Robinhood banking program can spread a deposit account holder’s risk among several federally insured ‘partner’ institutions - and nobody has ever lost a dime in FDIC insured accounts - none
of that coverage against the failure of a depository institution really matters in the case of any problems occurring solely within the operations of the nonbank financial provider itself.
Further, any regular observer of financial markets news over the past year (or more) is surely familiar with the serious repercussions, losses, and/or long-delayed access to funds that can potentially be inflicted on clients of fintech companies caught in
the middle of similar multi-party fintech/bank relationships.
That’s because the ongoing feud and protracted litigation between
Synapse, its bankruptcy administrator, and several of its partner banks serves as a prime example of the operational and regulatory confusion that can surround such arrangements if not properly constructed, executed, and reviewed regularly over time. Unfortunately,
this terribly costly squabble continues today, almost a year after Synapse failed. The company - also Silicon Valley venture-backed - functioned as “middleman” and aggregator/manager of deposits, withdrawals, and balances between scores of online application
providers and their customers’ treasured (and theoretically ‘fully covered’ bank deposits). Then it suddenly went out of business and the arguments over ‘who’s got what (funds) where?’ began.
Will the FDIC move to fix – once and for all - the systemic issues around account reconcilement and banks participating in such third-party partnerships in an effort to prevent a similar debacle from occurring in the future? No one is certain now, as there
were
proposals from the FDIC to do so late in the Biden administration’s tenure, but continued chaos surrounding proposed reorganisation of the FDIC and Consumer Financial Protection Bureau’s affairs under the new Trump regime make any imminent action on this
issue unlikely.
Latest innovations aim to preserve Robinhood’s forward momentum after recent missteps
Robinhood isn’t just about lower costs or higher returns. It has contributed some notable innovations to the investment marketplace. Its late 2019 introduction of fractional share trading – for example - was a greatly beneficial and financially inclusive new
offering. That said, the company has made several missteps along the way to reaching its present position as an increasingly prominent player in the consumer investing and banking field.
Robinhood’s first attempt to roll out a no fee ‘cash management’ savings account and debit card failed when it mistakenly promised client deposits would be covered by the government’s investment insurance program. The US Securities Investors Protection Corporation
(SIPC) instead said “No Way,” and the company was forced to quickly withdraw the product. It
returned a year later - redesigned and retooled correctly to include FDIC insurance from its bank partner and offering the potential for 6x the standard amount in brokered coverage for eligible client deposits.
Robinhood hit the regulatory radar screen again in early 2021 when it abruptly
halted trading on the “meme stock” GameStop, upsetting thousands of clients and drawing the unwanted attention of Congress for its actions. Ironic, as Robinhood itself had been frequently criticised for its focus on ‘gamifying’ investing as a way to attract
its primarily younger customers to ‘join in the fun.’
Robinhood has faced harsh financial penalties as well. The company has been fined repeatedly by the SEC and FINRA - the investment industry’s own nonprofit watchdog,
more than $70 million in total, for various violations of industry practices and procedures.
Will any of its past or current misfires on the product design or regulatory front slow Robinhood’s momentum? How many of its clients – statistically in their early 30s and eager to join its consistently long “waiting lists” to take advantage of its new
service offerings - will view the company’s faults or faux pas as enough to derail their interest in being a part of its fresh new approach to investments, banking, and elevated service aggregation?
Smart banks and WM firms will recognise, respond to growing attractions for clients
Alloy Labs’s Henrichs has strong concerns for his own client base when it comes to tackling these questions. As a venture capitalist, startup mentor, and engineer by trade, his is a prominent voice in the fintech industry and he co-hosts a podcast,
Breaking Banks, that addresses issues at “the intersection of regulation and innovation” in the financial services. industry.
“Banks,” Henrichs says, “tend to get fixated on the direct competition - the ones they can physically see.” He points to late- ‘70s Harvard Business School strategist
Michael Porter's Five Forces framework to explain how some bank leaders often overlook other looming threats, using a currently rising force in the lending marketplace as another prime example.
“When Rocket Mortgage entered the market, I heard many banks say, ‘they don't compete with us because they aren't a bank.’ The reality is they were a new entrant with a different model that provided the same product (as the banks). In the case of Robinhood,
in the eyes of customers, they are a perfect substitute.”
This is true even if all the details of Robinhood’s new banking offering and the linkages and partnerships required to provide it are not completely clear – at least yet. As Henrich points out, “It does the job they (Robinhood clients) need to be done -
and they don't care that the checking account is actually provided by a partner bank,” and if the company can execute on its plans as stated, they will likely become an even more formidable competitor to banks.
Strategic timing has been a major part of Robinhood’s approach to the marketplace since its inception. Eleven years ago, the firm made a bold entry onto the brokerage scene by offering commission-free online stock and then option trades with no minimum account
size, ‘friends and family’ new customer referral incentives, and stock trading online - available “24x5” (late Sunday to late Friday) if desired. Over time, they added cryptocurrency and margin trading and other products to their growing list of services.
Though it took a while - around eight years, actually - the major traditional investment firms, including Charles Schwab, TD Ameritrade, E-Trade and others, eventually capitulated by providing
trades for free to their customers (after previously charging from $5-8 or more per transaction) and this pricing continues today.
Robinhood’s growth – even beyond its product and service misfires and fines - hasn't come without
controversy, as some critics have pointed to its exceptionally wide spreads and its reliance on “payment for order flow,” (the practice of being compensated for directing business to “market-maker” intermediaries) for as much of two-thirds of its total
revenues have been widely questioned.
Yet, during Robinhood’s ‘second act’ - after the onset of the pandemic, when millions of people stuck at home suddenly realised investing was an exciting new opportunity, the company experienced massive growth. Its addition of initial public offering (IPO)
stock trading – previously the province of only the largest firms and well-connected investors – helped swell its client ranks to more than 6 million by the end of its fifth year in business. And then it introduced the Robinhood ‘Gold Card’ and then the company’s
next phase of growth began.
Some financial services industry watchers have pointed to the upstart’s
poor customer service or perceived or real product shortfalls as reasons to deny Robinhood as a true competitor. There is no doubt though, that with its newly enhanced multi-featured and high earning “private banking” package, now promising 24x7 service
to clients, it intends to be a major competitor to traditional financial services providers immediately and over the long haul.
Banks: Look beyond the now, enlarge business view, or prepare to get ‘Rob-inhooded’
Add to all of this Robinhood’s promised high-end travel, concert/event experience, and friends and family perks, and you have a powerful combination that stands to be extremely appealing to its target millennial and Gen Z customers. That’s even though, contrary
to its name, the company’s ‘Gold member’ banking features seem more aimed at enriching the emerging affluent than helping the poor within society, unlike the company’s mythical namesake – who was a medieval market disruptor and wealth redistributor of sorts.
Bank executives will likely find lots to ignore about the modern Robinhood’s fanciful announcements or occasional management missteps. But in doing so, they may also find they are risking their organisations’ current and future market opportunities, putting
their own collective ‘purses’ in potential peril.
Henrichs recommends financial institution leaders look beyond their present strategy and planning processes - embracing an enhanced view of the marketplace - to respond competitively to emerging upstarts like Robinhood already targeting their customers:
“Banks need to think more broadly about their business. We often hear 'we are more focused on business'; that’s great - but where do your deposits come from and what about non-interest income? The winners (and survivors) in the (banking world) of the future
are looking through a broad strategic lens – right now.”