July 12, 2019
What We’re Reading this Week
Once upon a time I wrote a short piece that made fun of the investment app Robinhood. Mostly, I just kind of teased them for the rash decision to let their clients trade on margin. Robinhood, as a firm, is sort of interesting to me. In the technology industry, there seems to be a lot of…well, interest in doing things differently. This approach is fine, if technology happens to overlap with, say, ride hailing (Uber, lyft, etc.) … you can sort of just go out there and do it. If what you want to do isn’t totally legal, you have a good chance that things will work in your favor as long as people sort of want what you are trying to do.
However, when technology overlaps with finance, things are a lot more interesting. For one, finance is highly regulated. Second, these regulations are born from centuries of trial and error. Tech CEOs seem hell-bent on “disrupting” things and generally operate with a “shoot first, ask questions later” mentality, and the finance industry is very much unwilling to be disrupted. When an unstoppable force meets said unmovable object, the outcomes range from silly (Elon Musk has to hire an attorney to approve his tweets) to fairly benign.
Last year, Robinhood launched a program to offer checking and savings accounts to their clients but scuttled the project inside 48 hours. As it turns out, things that are not banks (investment companies) can’t offer bank accounts. This seems obvious to you and me, but when you are a technology CEO you can just do things like that and call it disruption.
Business Insider ran a story outlining the decision-making process and the reality is as wonderful as I could have imagined. The first obstacle the plucky investment firm encountered was SIPC insurance coverage. Specifically, the lack of it. Robinhood staff never contacted the SIPC to get coverage for their accounts and when staff brought this to the CEO’s attention he said, “we’re going to be fine” and expressly decided not to pursue the SIPC’s approval. Now, if you’re thinking “my bank has FDIC insurance, not SIPC,” then you are correct:
“During one meeting, the former executive said, product managers raised concerns with [founder and co-CEO Baiju] Bhatt about naming the product checking and savings. The trouble, they argued, was that the money was not in a checking account or in a savings account: It was in a brokerage account. And unlike traditional bank accounts, brokerage accounts aren’t insured by the Federal Deposit Insurance Corp. Pitching the product as bank account could mislead customers.”
To which the CEO replied, “we’re doing it anyways.” I LOVE IT. This approach to rules and regulations is just not possible in finance. Look, if you want to change the way people drive cars by making cars that don’t need people to drive them, you will probably be able to do that. No one has done it before and they can make new laws to accommodate you. But if you want to change the financial system, you definitely need to play by the rules because much larger, smarter companies have already come before and tried to break them.