The Robinhood Revolution
The Robinhood Revolution
Robinhood, the stock trading start-up that offered a no-fee service, is now going after banks, offering 3% interest-bearing savings accounts and no-fee checking accounts. These accounts come with a Debit Card backed by Mastercard and available to use free of charge at ATMs found at CVS, Walgreens, and other stores they have come to terms with.
Robinhood will have a new app that integrates the new banking features. These “Robinhood Checking & Savings” accounts have no fees or account minimums, building off of its free stock trading model that earned it 6 million users and a $5.6 billion valuation in its five-year existence.
Robinhood shook up Wall Street with its zero-fee transactions, forcing giants like Charles Schwab and TD Ameritrade to come down substantially in their fees, and offer up other perks to remain competitive. And now Robinhood is taking aim at an even bigger market: banks.
In the past, Robinhood’s biggest drawback was that it was a stock-trading only operation. In comparison Charles Schwab offered stock-trading, a Margin (the ability to take a ‘loan’ on the stock shares you already own, to purchase additional stock) they linked your investment account with a checking account which offered interest, checks, an ATM card, and other services and abilities.
Robinhood was a great tool and opportunity for people with little funds, but for those that had significant money and wanted more available to them than just buying and trading stock, it was rather limited.
Banks and Brokerages didn’t like the zero-fee transactions model of Robindhood, it went against their customary means of doing business and raking in profit. But it was limited in what it could offer its customers and was not a serious threat to compete for those customers that required the services and access to funds they could offer that Robinhood couldn’t. But now, with Robinhood going into checking and saving accounts, it is about to become a serious threat to the future of the financial behemoths to say the least.
If Robinhood’s app can do all of these things and have a crypto wallet as well, a lot more people would look into it. Being customer-centric is really important, Robinhood is building on the philosophy of zero-fee trading with its zero-fee banking.
This approach is reminiscent to how Facebook and Amazon grew their customer base, by being either free, or the most affordable and convenient option available, shunning profits for growth. Only after establishing dominance in the marketplace, and becoming household names, did either Facebook or Amazon turn truly profitable.
A savings and checking option that comes with a Mastercard debit card and no ATM, membership, overdraft, transaction, or other fees, and a 3% interest rate. Will it be too good to be true?
Robinhood initially said the feature would be insured by the Securities Investor Protection Corporation (SIPC), rather than the Federal Deposit Insurance Corporation (FDIC). The problem is that apparently nobody bothered to tell the SIPC that this was happening.
Without going into a major dissertation here, the SIPC protects those who invest in stocks and bonds from various apocalyptic events, while the FDIC protects people who put their money into bank accounts from disastrous events. Essentially they cover different types of accounts, and follow different regulations.
SIPC CEO Stephen Harbeck stated to Bloomberg soon after Robinhood announced their checking and savings option, that if they had come to him with the feature ahead of time, that he would have told them he had “serious concerns about this.”
Following substantial backlash from various analysts and financiers, Robinhood issued a statement from cofounders Baiju Bhatt and Vlad Tenev, saying that while they were “excited and humbled” about the response to the product, they “realize the announcement may have caused some confusion,” and said that they plan to “work closely with regulators as we prepare to launch our cash management program,” and review how the program is marketed.
Robinhood is still taking signups for a waiting list, that it will be an added feature to its brokerage account but now states that it “will not be a separate account or a bank account,” and says that it will “provide additional information on the cash management program once it is operational.”
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© 2018 Ken Burgess