Through all of this I can't help but be reminded of the 2008 financial crisis and think "this is not going to end well." One part of that crisis was Icelandic Banks making a huge push for savings all over the UK and other parts of Europe ("IceSave") with the promise of better interest rates. When it all went belly up those savers realized these Icelandic banks were not quite the same thing as UK banks and Iceland refused to make depositors whole.
If Robinhood had offered this as a normal bank with FDIC insurance I would have been impressed. For now it just seems they're just moving a little bit higher up the risk/reward curve and trying to pretend the risk is the same.
SIPC insurance is entirely different from FDIC insurance.
FDIC insures the value of your deposits. SIPC covers the case where your broker or mutual fund cannot keep operating (eg. pay the help)
In a case like that all of your stocks and bonds are still there and have most of their value, but you can't get at them because there is nobody to process the transaction. Somehow the holdings need to be transferred to another brokerage or liquidated, and SIPC is there to make sure the resources exist for that happen.
Circa 1970 there was a crisis on "Wall Street" in the sense that many brokerages failed, see
The danger that the FDIC protects us from is even more pernicious because fractional reserve banking is one of the most dangerous things people do. By design the assets and liabilities of a bank are very close to each other, in fact far larger than the equity of the bank. If the depositors want their money out, a bank might not be able to support the cash flow -- which means depositors REALLY want their money out.
The stock market on the other hand is "risky" because stocks can go up and down, but it is not dangerous systemically because if your stocks went down you have to accept that they went down. The bank is legally required to pay you back what you put in and promising to do that 100% of the time is a big promise. If people don't trust banks and banks don't trust each other then you can't cash your paycheck, get money out of the ATM, buy groceries, and then you really have a problem...
> When it all went belly up those savers realized these Icelandic banks were not quite the same thing as UK banks and Iceland refused to make depositors whole.
That's a very inaccurate recalling of history which you can see from reading the intro to the relevant Wikipedia article[1] and a summary of the EFTA Court's decision on the matter[2].
The case centered around a dispute between mainly Britain, The Netherlands and Iceland about how to interpret certain EFTA regulations. Iceland's position ultimately prevailed in court.
It is entirely possible for them to safely promise a 3% account under these conditions. This is not at all like the financial crisis. It's just wrapping an investment grade bond fund in a bank account interface.
"There is a lot of confusion about what Robinhood’s thing is. Delightfully, it is called “Robinhood Checking & Savings,” apparently because calling it a “checking account” or a “savings account” would come too close to implying that it is a real bank account insured by the Federal Deposit Insurance Corp., while “checking & savings” is not a thing and so does not carry that implication. A magic ampersand!"
Second, the SIPC boss probably is not in the best position to understand how RH is setting it up. Harbeck seemed unaware that the "cash" in RH accounts was actually going to reside in investments like Treasuries and thus be covered.
You can open an Ameritrade or any other brokerage account and deposit money into the account with no intention of purchasing securities. There is no dispute that the SIPC would cover your account in that instance.
The only thing that has changed here is Robinhood is explicitly marketing their brokerage account as being able to be used as a savings account without any need to invest in securities.
It’s not black and white on either side. If there ever was a default event, it would surely go to court and it’s not 100% clear who would win. For that reason, I wouldn’t make use of the account.
there is little he can do, as cash in brokerage account is obviously protected by SIPC.
Downvoters: you are confused. When you move cash to a brokerage account, it's protected by SIPC. It's a loophole, because this protection was not intended to be for permanent cash parking in an account - but there is nothing that can stop that protection from taking effect. SIPC statute is clear, cash in account is protected. You don't have to invest it, you just have to move it there with the intent of at some point maybe investing it, which is impossible to verify.
I don't understand the infatuation silicon valley has of Robinhood. Take almost every possible bad idea about personal finance and put them in an app, you get Robinhood. The business model is also suspect, I think there's a little more that hasn't been disclosed and I suspect the chase for cash started when the crypto currency fad started deflating in a hurry. I wonder if Robinhood is hiding something bigger under the covers.
Robinhood's offering is indistinguishable from a cash management account at a brokerage. Short-term deposits, check writing, debit card, interest bearing, etc.
Fidelity Investments pioneered this product, and now it's available from others like Schwab.
But at Fidelity, the cash management account is distinct from the brokerage account. While the brokerage account is insured by the SIPC, cash management funds are swept into FDIC-insured balances at actual banks.
The whole "this can't end well" seems to come at every Robin Hood product announcement.
The somewhat recent addition of crypto is just depressing. They've integrated it with chat and live announcements of transactions, so you see people's names as they buy $1500 or $2500 worth of crypto as the whole market makes an inverted hockey stick nosedive to zero.
But the most absurd thing was seeing the HN comments yesterday as people were saying they were living up to their name of taking from the rich and giving to the poor. They're doing something worse--tricking non-rich people into thinking they'll get rich, while making a ton of money in the process.
It's a bit jaw dropping that they've launched this without talking to the SIPC to check that they agree with the statement that they provide FDIC-like protection on these accounts. I wonder what happened here…
AFAIK they haven't yet launched, it's not going to be until "early 2019". Not a defense of Robinhood, but their lack of (apparent) SIPC protections today do not necessarily imply they will be missing when they formally launch with actual customer deposits.
Robinhood strikes me as a complete financial amateur-ish company, trying to attract millennials that don't know better by branding themselves as a cool tech company.
I have been using Ameritrade for a while and was curious about their no fee platform so gave it a quick go. The graphs have no legends associated in the app. The spreads seems not up-to-date with official quotes, etc. I went back to Ameritrade as fast as possible.
They are the "go fast and break things" of finance. There is a good chance that this will not end well.
I have been using Robinhood for years, but I don't disagree at all with this statement.
I have always been a little bit suspicious of their approaches.
For me the strangest thing about their business is their zero-fee approach. Yes you can make money by getting interest from uninvested funds + premium subscriptions + trade arbitrage, but if it's such a good business why aren't the incumbents taking similar approaches?
Contrarians would say that incumbents are just to engrained in their past approaches to actually adopt modern strategies, but I had that extremely hard to believe, especially when one of the incumbents, E-Trade, was the pioneer of online trading.
Also, unlike other industries, financial firms are savage. They're not scared to make risky bets and spin-off new businesses and strategies. Their industry is naturally risky, so they have the experience and tenure to make risky bets, without souring stakeholders.
I always give Robinhood the benefit of the doubt, because in my day to day I personally can say that it works great. They definitely nailed the Customer Experience. However that doesn't mean that they have an actual viable long-term business, so I prefer to stay reasonably cautious... Time will tell.
In their defense, their version of "go fast and break things" won't kill any jaywalkers, and instead could be devastating on a far wider scale, if 2007-2008 collapse showed us anything. (upwards of 10,000 extra suicides there [0] so....)
1) They knew SIPC wouldn't cover it, but decided to lie about it anyway
2) They weren't competent enough to assess the risk that SIPC wouldn't cover it, but decided to launch anyway without contacting the SIPC
Regardless of which is the truth, I wouldn't trust my money with someone who does either. Might as well jump into a tried-and-true pyramid scheme like bitcoin!
In an interview yesterday, the CEO said they were an "Engineering first company". While located in silicon valley, they have no right to subscribe to the "move fast and break things" mentality when they are playing with people's money. Any financial institution that holds external accounts should be a finance first company. Good technology is essential, but not as essential as following rules and regulations to protect your customers.
Apparently they purposely called it a "checking & savings" account because they were well aware that technically it is neither a "checking" nor a "savings" account and that a "checking & savings" account does not really exist to protect themselves from accusations of false claims...
also option 3) Very unlikely scenario that they outsmarted everyone and had some great legal work done to identify a loophole in the SIPC insurance requirements that nobody else has yet identified.
Another example of startup hubris. Much like Uber and AirBnB got started (and in many cases, continue to operate) by flouting regulations, Robinhood thinks they're being innovative, when they'll really just hoping they can get big enough that they can buy or bully their way past the rules. At least long enough to get acquired.
It might work, but in this case, the people most likely to get screwed are the customers.
AirBnB and Uber are both examples of companies that were huge wins for customers/consumers. Just because they flout regulations which are often times outdated and unnecessary (re: protecting inefficient incumbents) doesn't mean they aren't doing what's good for the consumer.
I agree though that Robinhood is a different story with potentially harmful consequences for unsophisticated investors looking for a safe/easy investment.
I agree with the comparison, but it feels as though Robinhood has another layer of hubris or ignorance beyond that - it doesn't seem to have studied those models terribly closely.
Uber and AirBnB both flouted primarily city-level regulations that are tough to enforce against external players, and where they broke larger rules it was by pushing vulnerability onto their service providers (e.g. drivers who assume Uber handles taxes like they're direct employees). And at least some of the regulations they ignored were so obviously protectionist that "look, we're breaking the law!" could actually form a selling point. (Which let them redirect focus from more popular rules like property hygiene.)
Robinhood is tangling with national financial regulations, which for all their loopholes and weaknesses are made to take on far larger players with a history of bad behavior. Meanwhile, the rules they're breaking are pretty much all directly tied to consumer protection, so it's going to be mighty hard to run an ad campaign to raise sympathy.
It reminds me a bit of Theranos, actually - "fake it till you make it" wasn't novel, but they neglected massive differences like offering an unsustainable service versus signing unfulfillable contracts, or failing random website visitors versus crossing major corporations and the DoD. It's like a clumsy new lobbyist offering a bribe instead of making a campaign contribution and expecting consideration; the dynamics might be similar, but the gap in execution could easily destroy them.
“I disagree with the statement that these funds are protected by SIPC,” Stephen Harbeck, president and chief executive officer of SIPC.
Not sure that leaves a lot of room for speculation - don’t sign up to use Robinhood as a savings account unless you are comfortable doing so without an FDIC level of guaranteed protection.
Without deposit insurance Robinhood would be extremely vulnerable to a bank run. In the event of even a slight market downturn I can't see why depositors wouldn't immediately withdraw their funds to an insured account (at the cost of only a slight reduction in interest) just to hedge their risk.
"“The statute that we administer says that we protect money with a brokerage firm that is used for the purchase of securities,” he added. “On Robinhood’s help page, it says that you don’t need to invest to use Robinhood checking and savings, that statement is wrong. If you deposit money for any other purpose, it is not protected.”" -- If they are using the deposit to then behind the scenes purchase a security directly, why wouldn't that be protected??
The SIPC insures and protects consumers, not the brokerage/investment bank itself. So if the funds are deposited by the customer in order to buy securities on behalf of the customer, then it's protected. If the funds are deposited by the customer in order to pay out interest, and the only one with the intention of investing that money into securities is the brokerage itself, then it's not protected.
When I saw the original announcement I thought to myself, that's a high interest rate, but it sounds to good to be true; I probably ought to stay away as I'd rather play things safe with my money.
ffs - they didn’t even do the most basic due diligence on this?
This is not just an indicator that this particular product might be in trouble, this is another order of magnitude kind of incompetence that makes me wonder why anyone would trust this company at all.
Wouldn’t you have to feel like the probability they end up with a major security issue, funding issue, executive behavior issue, etc., are all magnified by this knowledge?
I mean really, this is a staggering thing to read. I don’t think there could be hyperbole in this, it’s just incredible hubris-based incompetence.
I had a bit of interest on this when I first read about it, but was a bit skeptical then... I wouldn't touch this at all now with no guarantee that the deposits are insured.
Here's their very brief unaudited financial statement.[1] This makes no sense for a financial institution. How can their liabilities be so low? Anything on deposit with them is a liability for them. This seems to say "all your assets are belong to us."
Assuming patio11’s comment[1] from yesterday is correct that this is a loss leader intended to target millennials with low value accounts rather than whales, maybe this is Robinhood’s intended outcome to make it less attractive to the customers they don’t want?
[+] [-] hn_throwaway_99|7 years ago|reply
If Robinhood had offered this as a normal bank with FDIC insurance I would have been impressed. For now it just seems they're just moving a little bit higher up the risk/reward curve and trying to pretend the risk is the same.
[+] [-] PaulHoule|7 years ago|reply
FDIC insures the value of your deposits. SIPC covers the case where your broker or mutual fund cannot keep operating (eg. pay the help)
In a case like that all of your stocks and bonds are still there and have most of their value, but you can't get at them because there is nobody to process the transaction. Somehow the holdings need to be transferred to another brokerage or liquidated, and SIPC is there to make sure the resources exist for that happen.
Circa 1970 there was a crisis on "Wall Street" in the sense that many brokerages failed, see
https://en.wikipedia.org/wiki/Securities_Investor_Protection...
for a backgrounder on why we have the SIPC.
The danger that the FDIC protects us from is even more pernicious because fractional reserve banking is one of the most dangerous things people do. By design the assets and liabilities of a bank are very close to each other, in fact far larger than the equity of the bank. If the depositors want their money out, a bank might not be able to support the cash flow -- which means depositors REALLY want their money out.
The stock market on the other hand is "risky" because stocks can go up and down, but it is not dangerous systemically because if your stocks went down you have to accept that they went down. The bank is legally required to pay you back what you put in and promising to do that 100% of the time is a big promise. If people don't trust banks and banks don't trust each other then you can't cash your paycheck, get money out of the ATM, buy groceries, and then you really have a problem...
[+] [-] BurningFrog|7 years ago|reply
As I recall it, the 340,000 people of Iceland had no chance in hell of covering the enormous amounts even if they wanted to.
[+] [-] avar|7 years ago|reply
That's a very inaccurate recalling of history which you can see from reading the intro to the relevant Wikipedia article[1] and a summary of the EFTA Court's decision on the matter[2].
The case centered around a dispute between mainly Britain, The Netherlands and Iceland about how to interpret certain EFTA regulations. Iceland's position ultimately prevailed in court.
1. https://en.wikipedia.org/wiki/Icesave_dispute
2. https://en.wikipedia.org/wiki/EFTA_Surveillance_Authority_v_...
[+] [-] binarymax|7 years ago|reply
[+] [-] unknown|7 years ago|reply
[deleted]
[+] [-] gammateam|7 years ago|reply
The consumer banking side of the story has almost nothing to do with it
[+] [-] all_blue_chucks|7 years ago|reply
https://investor.vanguard.com/etf/profile/VCSH
It is entirely possible for them to safely promise a 3% account under these conditions. This is not at all like the financial crisis. It's just wrapping an investment grade bond fund in a bank account interface.
[+] [-] kgwgk|7 years ago|reply
"There is a lot of confusion about what Robinhood’s thing is. Delightfully, it is called “Robinhood Checking & Savings,” apparently because calling it a “checking account” or a “savings account” would come too close to implying that it is a real bank account insured by the Federal Deposit Insurance Corp., while “checking & savings” is not a thing and so does not carry that implication. A magic ampersand!"
[+] [-] DevX101|7 years ago|reply
How the hell did this product get launched?
[+] [-] bashook|7 years ago|reply
A: Are our customers accounts insured?
B: Yes, through SIPC, which is like FDIC for brokerages.
A: Great! Let's create this product.
No more questions were asked.
[0] http://catb.org/jargon/html/H/Hanlons-Razor.html
[+] [-] jfim|7 years ago|reply
[+] [-] harryh|7 years ago|reply
Their website says "Robinhood Checking & Savings is launching early 2019."
[+] [-] ozten|7 years ago|reply
[+] [-] pbreit|7 years ago|reply
Second, the SIPC boss probably is not in the best position to understand how RH is setting it up. Harbeck seemed unaware that the "cash" in RH accounts was actually going to reside in investments like Treasuries and thus be covered.
[+] [-] 300bps|7 years ago|reply
The only thing that has changed here is Robinhood is explicitly marketing their brokerage account as being able to be used as a savings account without any need to invest in securities.
It’s not black and white on either side. If there ever was a default event, it would surely go to court and it’s not 100% clear who would win. For that reason, I wouldn’t make use of the account.
[+] [-] paulclinger|7 years ago|reply
[+] [-] vasilipupkin|7 years ago|reply
Downvoters: you are confused. When you move cash to a brokerage account, it's protected by SIPC. It's a loophole, because this protection was not intended to be for permanent cash parking in an account - but there is nothing that can stop that protection from taking effect. SIPC statute is clear, cash in account is protected. You don't have to invest it, you just have to move it there with the intent of at some point maybe investing it, which is impossible to verify.
[+] [-] luckydata|7 years ago|reply
[+] [-] panarky|7 years ago|reply
Fidelity Investments pioneered this product, and now it's available from others like Schwab.
But at Fidelity, the cash management account is distinct from the brokerage account. While the brokerage account is insured by the SIPC, cash management funds are swept into FDIC-insured balances at actual banks.
Looks like Robinhood is gonna lose on this one.
Source: https://www.fidelity.com/cash-management/faqs-cash-managemen...
[+] [-] strict9|7 years ago|reply
The somewhat recent addition of crypto is just depressing. They've integrated it with chat and live announcements of transactions, so you see people's names as they buy $1500 or $2500 worth of crypto as the whole market makes an inverted hockey stick nosedive to zero.
But the most absurd thing was seeing the HN comments yesterday as people were saying they were living up to their name of taking from the rich and giving to the poor. They're doing something worse--tricking non-rich people into thinking they'll get rich, while making a ton of money in the process.
[+] [-] obeattie|7 years ago|reply
[+] [-] Mtinie|7 years ago|reply
[+] [-] toomuchtodo|7 years ago|reply
[+] [-] saalweachter|7 years ago|reply
[+] [-] warp_factor|7 years ago|reply
I have been using Ameritrade for a while and was curious about their no fee platform so gave it a quick go. The graphs have no legends associated in the app. The spreads seems not up-to-date with official quotes, etc. I went back to Ameritrade as fast as possible.
They are the "go fast and break things" of finance. There is a good chance that this will not end well.
[+] [-] whoisjuan|7 years ago|reply
For me the strangest thing about their business is their zero-fee approach. Yes you can make money by getting interest from uninvested funds + premium subscriptions + trade arbitrage, but if it's such a good business why aren't the incumbents taking similar approaches?
Contrarians would say that incumbents are just to engrained in their past approaches to actually adopt modern strategies, but I had that extremely hard to believe, especially when one of the incumbents, E-Trade, was the pioneer of online trading.
Also, unlike other industries, financial firms are savage. They're not scared to make risky bets and spin-off new businesses and strategies. Their industry is naturally risky, so they have the experience and tenure to make risky bets, without souring stakeholders.
I always give Robinhood the benefit of the doubt, because in my day to day I personally can say that it works great. They definitely nailed the Customer Experience. However that doesn't mean that they have an actual viable long-term business, so I prefer to stay reasonably cautious... Time will tell.
[+] [-] ineedasername|7 years ago|reply
[0] https://www.forbes.com/sites/melaniehaiken/2014/06/12/more-t...
[+] [-] ucaetano|7 years ago|reply
1) They knew SIPC wouldn't cover it, but decided to lie about it anyway
2) They weren't competent enough to assess the risk that SIPC wouldn't cover it, but decided to launch anyway without contacting the SIPC
Regardless of which is the truth, I wouldn't trust my money with someone who does either. Might as well jump into a tried-and-true pyramid scheme like bitcoin!
[+] [-] jkravitz61|7 years ago|reply
[+] [-] dawhizkid|7 years ago|reply
[+] [-] jkravitz61|7 years ago|reply
[+] [-] caymanjim|7 years ago|reply
It might work, but in this case, the people most likely to get screwed are the customers.
[+] [-] wallawe|7 years ago|reply
I agree though that Robinhood is a different story with potentially harmful consequences for unsophisticated investors looking for a safe/easy investment.
[+] [-] Bartweiss|7 years ago|reply
Uber and AirBnB both flouted primarily city-level regulations that are tough to enforce against external players, and where they broke larger rules it was by pushing vulnerability onto their service providers (e.g. drivers who assume Uber handles taxes like they're direct employees). And at least some of the regulations they ignored were so obviously protectionist that "look, we're breaking the law!" could actually form a selling point. (Which let them redirect focus from more popular rules like property hygiene.)
Robinhood is tangling with national financial regulations, which for all their loopholes and weaknesses are made to take on far larger players with a history of bad behavior. Meanwhile, the rules they're breaking are pretty much all directly tied to consumer protection, so it's going to be mighty hard to run an ad campaign to raise sympathy.
It reminds me a bit of Theranos, actually - "fake it till you make it" wasn't novel, but they neglected massive differences like offering an unsustainable service versus signing unfulfillable contracts, or failing random website visitors versus crossing major corporations and the DoD. It's like a clumsy new lobbyist offering a bribe instead of making a campaign contribution and expecting consideration; the dynamics might be similar, but the gap in execution could easily destroy them.
[+] [-] unknown|7 years ago|reply
[deleted]
[+] [-] aresant|7 years ago|reply
Not sure that leaves a lot of room for speculation - don’t sign up to use Robinhood as a savings account unless you are comfortable doing so without an FDIC level of guaranteed protection.
[+] [-] MrRadar|7 years ago|reply
[+] [-] neom|7 years ago|reply
[+] [-] CydeWeys|7 years ago|reply
[+] [-] Xixi|7 years ago|reply
[+] [-] mrfredward|7 years ago|reply
Robinhood thinks their checking account should fall under the SIPC...so is their bank account not a bank account? What am I missing?
[+] [-] dmarlow|7 years ago|reply
[+] [-] mlthoughts2018|7 years ago|reply
ffs - they didn’t even do the most basic due diligence on this?
This is not just an indicator that this particular product might be in trouble, this is another order of magnitude kind of incompetence that makes me wonder why anyone would trust this company at all.
Wouldn’t you have to feel like the probability they end up with a major security issue, funding issue, executive behavior issue, etc., are all magnified by this knowledge?
I mean really, this is a staggering thing to read. I don’t think there could be hyperbole in this, it’s just incredible hubris-based incompetence.
[+] [-] kyleblarson|7 years ago|reply
[+] [-] smaps|7 years ago|reply
[+] [-] Animats|7 years ago|reply
[1] https://d2ue93q3u507c2.cloudfront.net/assets/robinhood/legal...
[+] [-] forgottenpass|7 years ago|reply
[+] [-] stakecounter|7 years ago|reply
[1] https://news.ycombinator.com/item?id=18673426
[+] [-] gus_massa|7 years ago|reply