BankThink

Robinhood’s stumble is a wake-up call

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For nearly 90 years, U.S. deposit accounts have been the gold standard for security, safety and soundness. Strong regulations to ensure banks have a solid foundation serve as the first line of defense, but the Federal Deposit Insurance Corp. plays an important role as a backstop protecting consumers’ deposits.

American families and businesses are used to the protections offered by the FDIC and have come to expect them. They know their paychecks and other deposits are protected.

That is why the Consumer Bankers Association and its member institutions have been growing increasingly concerned as new nonbank financial institutions enter the deposit space. It is not out of a fear of competition — after all there are more than 5,000 banks across the country, so competition is something banks are well prepared for and accustomed to. What is a concern, however, is the differences in protections these accounts offer consumers.

We are concerned promoting “insured” accounts by nonbanks and fintechs could leave consumers with the false impression these accounts are just as safe as those in the well-regulated, FDIC-insured banking industry.

Just last week, Robinhood Financial, a large non-bank financial service company, introduced its take on the traditional bank account. The new offering, Robinhood Checking & Savings, promised a 3% interest rate. Robinhood pitched the service to its roughly six million customers as being akin to a traditional checking or savings account with debit cards and ATM access. The marketing material used by Robinhood described the product as a traditional banking product.

It sounded too good to be true, largely because it was.

Robinhood erroneously claimed its accounts would be insured by the Securities Investor Protection Corp., which covers brokerage accounts. The SIPC was quick to rebut this claim and reported the issue to the Trading and Markets Division of the Securities and Exchange Commission for potential securities violations.

But that does not deal with CBA’s concern of consumer protection. Even if Robinhood’s new product — which it has now withdrawn — did carry SIPC insurance, this does not make it equivalent to the safety of a checking or savings account at a bank, which carries FDIC insurance. Unlike a bank account, the nonbank products offered by companies like Robinhood are intended for the purchase of securities and any SIPC insurance coverage would only protect against the insolvency of the company, not fraud or bad decisions.

CBA earlier this week wrote the heads of the FDIC, Federal Reserve Board, Federal Trade Commission, Office of the Comptroller of the Currency and the Securities and Exchange Commission to “express concern over non-bank companies blurring the lines between the highly regulated Federal depository industry and technology providers in the financial service market” and encourage the “agencies to help ensure consumers are not harmed by products that are misleading and not clearly understood.”

Presenting, perhaps deceptively, a purely fintech or broker account as being akin to a bank-backed checking account should present significant concerns for consumers and regulators alike. We see Robinhood’s actions as a prime example of misleading consumers — intentionally or not.

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