On Thursday, Robinhood Financial LLC announced a new product called “Robinhood Checking & Savings,” which would allow anyone to open a deposit account with no-fee ATM access, a debit card, insurance from the Securities Investor Protection Corp. and a 3% interest rate.
Robinhood is not a bank, so it can’t issue checking or savings accounts, and anyway the SIPC doesn’t insure checking and savings accounts, so it was all a bit weird. I assumed, perhaps foolishly, that Robinhood, uh, has some lawyers, and that they had thought about this and figured out a way to do it legally.
For instance, Robinhood can’t issue a “checking account,” or a “savings account,” since those are things only banks can do, but “checking & savings” is technically neither of those things and so perhaps it falls into a gray area. “A magic ampersand,” I called it.
The web page announcing the product is gone, and Robinhood’s website now contains a very-slightly-chastened-for-a-fintech “Letter From Our Founders” walking back the whole thing. “We plan to work closely with regulators as we prepare to launch our cash management program,” says Robinhood, now, “and we’re revamping our marketing materials, including the name.” The magic ampersand did not save them.
It is such a pure fintech story: Things broke faster than they could move! “What if we just offered a checking account and paid 3%,” someone presumably said, and rather than responding to that idea in the traditional financial industry way (by calling their regulator, or at least their lawyers), they instead responded in the bold new fintech way (by doing it, or at least by publishing a blog post saying that they were doing it). And now look where they are.
By the time they finish revamping the name with the SEC it’s going to be called the “Robinhood Penance & Risk Bad Idea Account.” “Keep the ampersand, we know how much you like ampersands,” the SEC will say smugly.
Doesn’t this kind of make you feel great about financial regulation? I mean, sure, the SIPC and SEC stamped out some innovative experimentation here, but the experimentation was “pretending to be a bank,” so I am not sure society has lost all that much. And the SIPC and the SEC stamped it out fast, and emphatically; one lesson here is that a hot tech startup that pretends to be a bank will get shot down a lot quicker than a hot tech startup that pretends to be, oh just for instance, a blood-testing company.
One possible explanation for the regulatory efficiency here is that so many of fintech’s financial innovations have been tried before. Robinhood was certainly not the first nonbank to get the bright idea of pretending to be a bank and taking deposits.
There are some basic ideas in finance—borrowing short to lend long, slicing a thing into shares and selling those shares, building a market for derivative bets on a thing, etc.—that are powerful and intuitive enough that people keep independently discovering them. Long experience has taught that those basic ideas are mostly good, but have some problems, and a regulatory system has been built to remember and address the problems.
If you borrow short to lend long you’ll want deposit insurance; if you sell shares of a thing you’ll need to give buyers some disclosure; if you trade derivatives you should make sure your counter-parties understand them, etc.
In many areas of “tech,” companies are racing to do things—in virtual reality, in artificial intelligence, in surveillance and data collection—that have genuinely never been done before and that pose novel social and regulatory challenges. In many areas of fintech, though, companies are racing to do things that were done in the 1920s, before modern financial regulation came into effect, only this time with an app.
The regulators know how to handle that.