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Robinhood Will Retool Checking Product Following Scrutiny
- snuxoll 8y agoSomebody 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 8y agoAs well as Fidelity's checking account, Cash Management Account, is FDIC insured. This definitely feels like a case of Robinhood ignoring some advice.
- whitepoplar 8y agoNot 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.
- dawnerd 8y agoI would be interested to see how they and others go about setting up mass numbers of accounts. I imagine it’s probably something boring like a partnership.
- elliekelly 8y agohttps://en.wikipedia.org/wiki/Promontory_Interfinancial_Network https://en.wikipedia.org/wiki/Promontory_Interfinancial_Netw... On any given night your dollars are spread out at banks all over the country. Likely at tiny little community banks that you've never even heard of. It's pretty impressive how banks manage to maximize FDIC insurance.
- latch 8y agoMaybe it's because I don't understand how deposit insurance works. Maybe it's because I live in a country where there are relatively few banks. But is this insurance actually meaningful? For example, if RBC "failed" in Canada, woulnd't the payout largely come from the Bank of Canada printing more money and all this could essentially happen without CIDC existing? You might get your money back, but now a loaf of bread costs $1000. Again, maybe I don't understand how it works. Maybe it makes more sense in the US where there are many smaller banks. Insight?
- whitepoplar 8y agoThe insurance is meaningful in that its mere existence can prevent financial institutions from collapsing in the first place. If everyone knows that FDIC/CDIC will keep their balances safe and sound, they're less likely to make a run on the bank in times of uncertainty. Bank runs can turn a bank insolvent very quickly, especially when depositors don't need to wait in lines, but can instead tap on their banking apps. Also keep in mind that the financial system is in many ways quite fragile: the failure of one bank makes other bank failures more likely. FDIC/CDIC helps prevent the dominos from falling as easily as would otherwise happen if deposits weren't guaranteed. As for where the funding comes from...the FDIC requires payment into the insurance pool by member institutions, so it's not the government bailing out the depositors each time a bank fails. But if the FDIC pot of money is exhausted, the U.S. Government will still guarantee it by act of Congress. I'm not sure how this works in Canada, however.
- astura 8y agoIt'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 8y agoYup, 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.
- pytyper2 8y agoProbably correct, they also might be far less leveraged than your average deposit taking institution.
- isoskeles 8y agoSIPC, not SPIC which is an ethnic slur.
- benj111 8y agoWhile I agree this doesn't look great, I'm sure theres a few more possible explanations. Eg Robinhood could have notified the sipc some more or less reasonable time ago, that they were planning this product, and the sipc took a(n un) reasonable time to get back to them. Maybe they played golf with someone at the sipc who said they'd sort it, and it would be fine.
- rchaud 8y agoIfs, buts, maybes. The margin for error is a lot smaller when you're asking people to trust you with their money.
- benj111 8y agoAgreed. Just wanted to point out that there are scenarios where it isn't completely Robinhood's fault. And they probably aren't evil business men out to rob from the poor, to give to the rich. Occam's razor and all that.
- isoskeles 8y agoHahaha, flagged for pointing out that it’s SIPC and “SPIC” is an ethnic slur. I will add my comment again, thank you very much.
- mikeash 8y ago“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 8y agoIt'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 8y agoYou'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 8y agoIt’s more surprising when everyone lets them try a second, third, or fourth time
- dvtrn 8y agoHas 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.
- dmoy 8y agoFew times a year they have problems where people can't log in and execute trades for hours or so. Earlier this week (last week?), they shut down all options trading. Not the sort of stability I'm looking for in a brokerage. But I'm also a very boring/lazy investor.
- kakaorka 8y agoSo 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 8y ago"$6 billion"- there seems to be a disconnect between what some VCs say and what the market says.
- fma 8y agoI'm sure someone in management came up with the idea and said it will make a lot of money or get lots of customers. Anyone who said otherwise is a debbie downer and shunned. It also reveals their culture of speaking up. I don't see how such a new bold product can pass legal, even if it passes management. Their legal team probably sit around nodding their head as they collect their paychecks. They deserve to be fired before getting Robinhood into much bigger trouble.
- hartator 8y agoDon't want to be too salty, but it seems an attempt to shut the 3% checking threat down by big institutions.
- jakebasile 8y agoIt doesn't seem like that to me. It seems like they tried to sidestep the required regulatory hurdles to offer a real checking/savings account and got a wake up call.
- jnwatson 8y agoSure, but they just weren't sophisticated enough. It isn't wrong, they just need to go through some more steps, like Fidelity. It will be a non-issue in 60 days.
- vinay427 8y agoSure, though it wasn't an ominous attempt to shut them down, which is what the commenter was replying to.
- fastball 8y agoI don't know. This line from the SIPC CEO ...I have serious concerns about this. This has gigantic ramifications for the banking industry. makes me thing that this is precisely what it is. "We don't want to let you do this easily because the other banks can't compete."
- jakebasile 8y agoUninsured deposit accounts in a fractional reserve system are extremely risky to the banking system as a whole. Perhaps he meant that?
- jamestimmins 8y agoThis 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 8y agoAt the same time, it certainly is not possible to conclude that whoever was in charge of this knew what the fuck they were doing.
- deleted 8y ago[deleted]
- foobarbazetc 8y agoHolding people's money is highly regulated for a reason. It protects both parties.
- nixgeek 8y agoDupe. https://news.ycombinator.com/item?id=18691119 https://news.ycombinator.com/item?id=18691119
- Wowfunhappy 8y agoIt looks like this one was posted before that one. Two hours ago vs three hours.
- beefman 8y agoSubmission with non-paywalled version https://news.ycombinator.com/item?id=18691119#18691536 https://news.ycombinator.com/item?id=18691119#18691536
- Wowfunhappy 8y agoYou 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.
- ulfw 8y agoSilicon 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 8y agoI'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 8y ago> 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 8y agoAs 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".
- muhneesh 8y agoThe 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 8y agoTIL banks didn't exist before the FDIC existed.
- muhneesh 8y agoThis 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.
- Lazare 8y agoI 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.
- mbesto 8y agoAs 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 8y ago> 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 8y agoI 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 8y ago> 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.”
- gcb0 8y agothis article says absolutely nothing besides what have been discussed here last week. this is a dupe for all I care.
- tamalsaha001 8y agoMove fast and break things, I suppose.
- talltimtom 8y agoWhy 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.
- gus_massa 8y ago> They wanted to make a product that would have been incredible value for costumers It was nothing new or groundbreaking, it was just a checking account with an unusual high interest rate. The government inurement don't like that because there are two usual cases of unusual high interest rate: * plain scams * overoptimistic bank managers that can't pay the interest rate when they are due. Sometimes it's difficult to distinguish the cases.
- mikeash 8y agoThey tried to obtain people’s money under false pretenses. The fact that their scam failed doesn’t make it ok.
- dragonwriter 8y agoThey 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.
- rchaud 8y agoIf 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.