Somebody 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?
Not 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.
I 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.
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.
Maybe 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.
The 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.
In a really really bad situation, there's always the risk that the insurer also runs out of money. The FDIC would run out of money if its pool of money collected from premiums ran out. It's never happened, though they had to finesse it a bit during the 2008 crisis (they required banks to prepay premiums, which recapitalized it in the short term).
If the FDIC fund ran out of money the insurance would have to be backed by... the US Treasury, basically? The government would have to open up a money spigot somewhere: either borrow it or print it. It looks like the FDIC has a $100 billion line of credit with the Treasury, so it could use that, but that is just moving money around inside the government.
There are lots more small banks in the US than Canada- and a number that are pretty tiny. After the 2008 crisis there were a lot of small banks that folded:
The FDIC apparently has a $67 billion "Deposit Insurance Fund" that holds money that it pays out the insurance from; that fund is raised from insurance premiums paid by banks. During and after the 2008 crisis the DIF got squeezed pretty hard and so they used a power to require prepayment of premiums (from healthier banks).
In the US, FDIC is primarily funded by fees banks are required to pay, and there is an actual fund held by the FDIC to cover this. However, if the fund is exhausted the FDIC is backstopped by the federal government, which would step in and cover any losses.
Like any other form of government spending, that is not directly covered by "printing money"; that can't be done by the federal government. Instead, the money would come from a mixture of spending cuts, additional taxes, and additional borrowing. (Given current US politics, most of the money would probably come from borrowing.)
Now as part of an independent process, the central bank conducts open market operations where it sells and purchases US debt to try and keep inflation and interest rates within targets. When it purchases debt, money is effectively created, and if the US was forced to borrow a large amount of money to cover an FDIC shortfall some of that debt would no doubt end up purchased at least temporarily by the central bank, so:
> woulnd't the payout largely come from the Bank of Canada printing more money [...] You might get your money back, but now a loaf of bread costs $1000.
In the US, some portion of the funds would indirectly come from the central bank printing more money, but only to the extent that it would not cause that sort of spike in inflation.
(Also note that even when a pretty big bank goes under, they still have a lot of assets, and the actual cost to the insurance program once everything has been liquidated is generally very small if not zero. Even if extreme cases such as Iceland when Landsbanki went under, the desposit insurance guarantees were eventually covered by assets recovered in liquidation.)
So basically: 1) Deposit insurance is very important to prevent bank runs (ie, people panicing and causing bank failures even when the bank is actually solvent and 2) It's not that expensive, and doesn't represent the sort of risk or potential costs you can imagine. There aren't a lot of policies which are basically all upside, but deposit insurance comes close.
> In the US, FDIC is primarily funded by fees banks are required to pay, and there is an actual fund held by the FDIC to cover this. However, if the fund is exhausted the FDIC is backstopped by the federal government, which would step in and cover any losses.
Moreover, it's “frontstopped” by the government facilitating takeovers of failing banks by healthy banks that will cover deposits.
> In the US, some portion of the funds would indirectly come from the central bank printing more money, but only to the extent that it would not cause that sort of spike in inflation
That's true to the extent that large bank failures are likely to be correlated with (and may contribute to) the broader economic conditions which would promote easier money policies at the Fed, but a major point of independent central banking is creating separation between government fiscal needs (like paying off deposit insurance claims) and monetary policy.
It'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)
Yup, 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.
While 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.
It'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..."
Has 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.
Few 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.
Not to my knowledge, this is a pretty big screwup, at least reputationally. Robinhood's entire spiel is about how the big banks are bloated and sell you products you don't need (all of which can definitely be true). But I have never once doubted my bank's ability to comply with financial regulations and keep my cash safe.
Robinhood specifically? No. But it’s not exactly hard to find cases where corporations make the same mistake repeatedly to no change and no consequence. Facebook’s habit of “accidentally” changing everyone’s privacy settings comes to mind
I'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.
It 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.
Sure, 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.
This 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.
You 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.
Silicon 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.
I'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.
> 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.
As 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".
I understand where their revenue comes from. But if they're doing the same thing as every other bank and not charging for trades what's making up the difference on their bottom line? It's not income. So it must be that they're avoiding costs that the rest of the industry is incurring. Like the cost of compliance.
Maybe they're not making up the difference on the bottom line... maybe they're equivalent to Walmart, running on a lean margin and hoping to make it worthwhile through volume, and the wall street banks are Saks, charging more and earning higher margins.
As if checking account insurance is effective altruism? And are you saying offering a neo-bank service involving skirting what's possible and passing the value on to customers isn't scrappy? And finally, did someone force you to move your money? Ethically speaking optionality and customer empowerment is good, and forced insurance is fraud.
The 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.
This 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.
I think it's becoming increasingly clear what happened.
As whitepoplar noted here (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.
Another important distinction is that, under the law, accounts can be either a demand deposit account (typical bank accounts like checking or savings) or a brokerage account. They can't be both. As the name suggests, Financial institutions _must_ allow customers to withdrawal some or all of the funds in a demand deposit account at any time, without penalty and without requiring prior notice. Because of the time it takes for the settlement of securities transactions brokerage accounts don't have the same obligations. If you put $100 in a traditional checking account and you need it today you have the right to access it immediately (assuming the bank is open). If you put $100 in a Robinhood account and you need it today you might have to wait three.
When Robinhood calls a product a "checking" account that fundamental concept of immediate access to your money is implied to consumers but looking at their site there are all kinds of restrictions around dollar amount and frequency of withdrawals.
> 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.
This could be mitigated substantially by holding short-term treasuries. In theory they could still be worth less than the original principal amount from time to time, but not by very much, and even then they would always be back to at least the original principal amount by the maturity date in e.g. six months.
My local bank even has a promo for 2% checking (some requirements, like debit transactions), so getting decent interest on checking isn't out of the question.
The idea is that they would be sweeping it into short term treasuries, and no, they don't pay 3% either, but it's more than a chequing account pays.
The remainder would presumably come from interchange fees. Ie, you put $500 into Robinhood, you then pay for something using your debit card, a cut goes to Visa, a cut of that goes to Robinhood, and a cut of that goes to subsidise your 3% interest.
So they're making up like 0.7% from fee cuts? As soon as they get big enough all debit card transactions are capped at 0.05% and like a quarter or something.
If the average transaction size is like $20 then they would not be able to make ends meet unless they took basically all of the fee for themselves.
In a universe where debit interchange fees are regulated to 0.05% and less than a quarter, I don't understand how this works.
Edit: I looked up the average debit card transaction amount, and it's over $40. The math doesn't work out at all.
Edit2: I guess if there's 3 more fed rate hikes the math might work out? That's not a good look though, if they don't increase rates along with the fed, because the gap between them and various savings account will shrink to almost nothing.
As 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.
> 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.
I 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.
> 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.”
A plausible explanation is that they expected it to apply. "Try new things, but never make a mistake" is essentially equivalent to "never try new things."
C'mon. Never try new things? How about ask before you start promoting them? You think a couple phone calls with SIPC wouldn't have disabused them of the notion?
This is slack laziness and cavalier disrespect for their userbase. I had started toying with Robinhood; I immediately pulled everything I've got back out. They aren't trustworthy custodians.
> How about ask before you start promoting them? You think a couple phone calls with SIPC wouldn't have disabused them of the notion?
Why is that supposed to be necessary? The government is more than capable of telling you if it's a problem, and if it's not a problem -- which is the default -- it would only waste resources on the part of everyone.
What I suspect may have happened here is that the traditional banks soiled themselves when they saw the announcement and started calling around to see who they could get to put a stop to it.
The head of the SIPC essentially said as much in the article: "This has gigantic ramifications for the banking industry." As if his role is to save the mortgage banks from competition.
> I had started toying with Robinhood; I immediately pulled everything I've got back out. They aren't trustworthy custodians.
If I say “I’m insured by AIG,” I actually need to be insured by AIG. It’s not AIG’s job to tell me I’m lying. SIPC coverage isn’t automatically granted. Robinhood already has SIPC coverage through their brokerage products; this is abundantly clear to everyone there. Whether through fuck-up or will, they ignored a clear regulatory line.
> If I say “I’m insured by AIG,” I actually need to be insured by AIG. It’s not AIG’s job to tell me I’m lying. SIPC coverage isn’t automatically granted. Robinhood already has SIPC coverage through their brokerage products; this is abundantly clear to everyone there.
But that's the weird thing. This new product is essentially a combination of two things.
1) A brokerage account instructed to hold safe treasury-related securities. This is exactly the sort of thing the SIPC normally insures. Expecting them to refuse that is really bizarre -- it's their main purpose. And as you note, they already do have that insurance for their brokerage accounts.
2) An ATM card and bank routing number that makes it easy to transfer to/from the brokerage account, so that it can be used as a checking/savings account. This is the real innovation, but it doesn't affect the risk to the insurer in any apparent way or really have much to do with them at all. Withdrawing the insurance over this only makes sense if it was done out of politics. Punishing them for failing to anticipate a political backlash seems particularly unjust.
> This is exactly the sort of thing the SIPC normally insures
Car accidents are the sort of thing most insurers usually insure. That doesn’t make it okay to lie about whether you have insurance. If this is still somehow confusing you, please stay away from banking and healthcare.
> An ATM card and bank routing number that makes it easy to transfer to/from the brokerage account, so that it can be used as a checking/savings account. This is the real innovation
I have a Fidelity Cash Management Account that does exactly this. The cash deposits are swept into FDIC-insurer accounts. The brokerage products are SIPC insured. I have a debit card I can spend against the cash deposits.
The difference is Fidelity applied for and obtained SIPC protection. This involves installing various auditing and safety mechanisms. Approval isn’t guaranteed. Automatically forcing the SIPC to insure everything that looks like a brokerage account would be a horrible idea.
> “You can trust this product. If it ever breaks, AnthonyMouse on Hacker News will reimburse you the full purchase price.”
> Would you be ok with that?
When I'm in the insurance business and the party making that claim is paying me insurance premiums under the same terms that I'm already insuring existing things with a commensurate level of risk? That is how insurance works.
If you have renter's insurance and you buy a new television on credit, telling the creditor that you have renter's insurance before you tell the insurance company that you have a new television is not some kind of fraud. If the insurer then suddenly threatens to cancel your insurance if you try to add the television, you have to go back to the creditor, but why would you have reasonably expected them to do that?
If you buy on credit and call the insurer to notify them while you're still in the store and they unexpectedly refuse, it's hard to call that fraud when the store can just take back the product before you even leave with it.
If you state it as “I have insurance coverage” rather than “I should be able to obtain coverage immediately” then I don’t see how that’s not fraud. There’s no legal principle that you’re off the hook if your crime doesn’t succeed.
I don’t think so (for example, my car insurance automatically covers a new car I buy without the need for immediate notification) but even if so, that’s all the more reason why the first statement is fraud.
Which is why something between slap on the wrist and massive fines is in order.
The FDIC and SIPC work through public trust. When a broadly-marketed consumer product sets a precedent for degrading that trust, it causes real harm. Robinhood grabbed users through marketing this affiliation and gained tangible value from it. The last thing we need is the next growth hacking scheme involving falsely marketing trusted affiliations before pulling the product, customer lists in hand.
If I try to sell you a car and tell you that it has a 20-year warranty, which it turns out is a total lie, is that fine just because I got caught before any cars changed hands?
False advertisement shouldn’t be acceptable even in the case where it didn’t go far enough for people to actually obtain the product.
> Had they launched a product, sure. But this was mere talk about a future product which they've decided "to retool" after scrutiny.
It was not mere talk, it was talk about a waitlisted feature used to induce signups to (and because of a “referrals move you up the line” policy, also to induce providing personal information if third parties as referrals to) Robinhoods existing service.
That is, it was false representation used to induce people providing Robinhood things of value, and thus, arguably, commercial fraud.
> That is, it was false representation used to induce people providing Robinhood things of value, and thus, arguably, commercial fraud.
That's assuming they knew the representation was false. If they reasonably expected to be able to get the insurance, claiming that they would get it was a true statement of their intentions.
Ummm but if you want people to trust you with their money and build reputation shouldn't you do your DD and make sure what you say is true? imo RH is either reckless or deceptive, and neither is a good look for a company like them
They hurt their reputation and they look like idiots, sure.
Above, people are suggesting that we need regulatory and/or criminal charges. There isn't any harm to customers and there isn't any evidence of fraud or criminal wrongdoing.
RH harmed themselves by looking stupid in front of the world. That's it. The rest is misguided hysteria.
> If they say no, it doesn't happen long enough for anybody to really come to any harm.
They just got 600k people to signup. Even if they convert 10% of those for brokerage accounts (and not checking) it's probably worth it.
This reminds me of Lance Armstrong and Trek Bicycles. Trek doesn't have to return any of its record profits for all of the years they sponsored a cheater. (for the record, I own several Trek bikes and they're fantastic)
But at this point, have they actually offered this service to anyone? If you already have an account, can you use this today? If not, it kind of seems like no harm, no foul. But even if so, it's hard to see how anyone has been injured at this point.
Why 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.
They 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.
If 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.
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[ 3.3 ms ] story [ 149 ms ] threadThis definitely feels like a case of Robinhood ignoring some advice.
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.
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.
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?
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.
Just like auto insurance, everyone pays premiums to the FDIC which pools the money and claims are paid for using that pool.
If the FDIC fund ran out of money the insurance would have to be backed by... the US Treasury, basically? The government would have to open up a money spigot somewhere: either borrow it or print it. It looks like the FDIC has a $100 billion line of credit with the Treasury, so it could use that, but that is just moving money around inside the government.
https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U...
The FDIC apparently has a $67 billion "Deposit Insurance Fund" that holds money that it pays out the insurance from; that fund is raised from insurance premiums paid by banks. During and after the 2008 crisis the DIF got squeezed pretty hard and so they used a power to require prepayment of premiums (from healthier banks).
Like any other form of government spending, that is not directly covered by "printing money"; that can't be done by the federal government. Instead, the money would come from a mixture of spending cuts, additional taxes, and additional borrowing. (Given current US politics, most of the money would probably come from borrowing.)
Now as part of an independent process, the central bank conducts open market operations where it sells and purchases US debt to try and keep inflation and interest rates within targets. When it purchases debt, money is effectively created, and if the US was forced to borrow a large amount of money to cover an FDIC shortfall some of that debt would no doubt end up purchased at least temporarily by the central bank, so:
> woulnd't the payout largely come from the Bank of Canada printing more money [...] You might get your money back, but now a loaf of bread costs $1000.
In the US, some portion of the funds would indirectly come from the central bank printing more money, but only to the extent that it would not cause that sort of spike in inflation.
(Also note that even when a pretty big bank goes under, they still have a lot of assets, and the actual cost to the insurance program once everything has been liquidated is generally very small if not zero. Even if extreme cases such as Iceland when Landsbanki went under, the desposit insurance guarantees were eventually covered by assets recovered in liquidation.)
So basically: 1) Deposit insurance is very important to prevent bank runs (ie, people panicing and causing bank failures even when the bank is actually solvent and 2) It's not that expensive, and doesn't represent the sort of risk or potential costs you can imagine. There aren't a lot of policies which are basically all upside, but deposit insurance comes close.
Moreover, it's “frontstopped” by the government facilitating takeovers of failing banks by healthy banks that will cover deposits.
> In the US, some portion of the funds would indirectly come from the central bank printing more money, but only to the extent that it would not cause that sort of spike in inflation
That's true to the extent that large bank failures are likely to be correlated with (and may contribute to) the broader economic conditions which would promote easier money policies at the Fed, but a major point of independent central banking is creating separation between government fiscal needs (like paying off deposit insurance claims) and monetary policy.
There's no hand waving going on.
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.
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.
Gotta love corp-speak. “We lied our asses off but didn’t realize you’d catch on so fast.”
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..."
Not the sort of stability I'm looking for in a brokerage.
But I'm also a very boring/lazy investor.
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.
This line from the SIPC CEO
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."Either way, what actually happened isn't public, so it's foolish to jump to conclusions.
It protects both parties.
https://news.ycombinator.com/item?id=18691119#18691536
Time for the old valley of scrappy founders who wanted to change the world for the better to return.
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.
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.
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
I'm all for fintech, but I'm not for blind trust in startups looking for hypergrowth as it relates to consumer protections.
As whitepoplar noted here (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.
When Robinhood calls a product a "checking" account that fundamental concept of immediate access to your money is implied to consumers but looking at their site there are all kinds of restrictions around dollar amount and frequency of withdrawals.
This could be mitigated substantially by holding short-term treasuries. In theory they could still be worth less than the original principal amount from time to time, but not by very much, and even then they would always be back to at least the original principal amount by the maturity date in e.g. six months.
Like I get generally how a treasuries backed money market fund works, but the average maturity there is like 2 months, not 20 years.
The remainder would presumably come from interchange fees. Ie, you put $500 into Robinhood, you then pay for something using your debit card, a cut goes to Visa, a cut of that goes to Robinhood, and a cut of that goes to subsidise your 3% interest.
If the average transaction size is like $20 then they would not be able to make ends meet unless they took basically all of the fee for themselves.
In a universe where debit interchange fees are regulated to 0.05% and less than a quarter, I don't understand how this works.
Edit: I looked up the average debit card transaction amount, and it's over $40. The math doesn't work out at all.
Edit2: I guess if there's 3 more fed rate hikes the math might work out? That's not a good look though, if they don't increase rates along with the fed, because the gap between them and various savings account will shrink to almost nothing.
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
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.
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.
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.”
This is slack laziness and cavalier disrespect for their userbase. I had started toying with Robinhood; I immediately pulled everything I've got back out. They aren't trustworthy custodians.
Why is that supposed to be necessary? The government is more than capable of telling you if it's a problem, and if it's not a problem -- which is the default -- it would only waste resources on the part of everyone.
What I suspect may have happened here is that the traditional banks soiled themselves when they saw the announcement and started calling around to see who they could get to put a stop to it.
The head of the SIPC essentially said as much in the article: "This has gigantic ramifications for the banking industry." As if his role is to save the mortgage banks from competition.
> I had started toying with Robinhood; I immediately pulled everything I've got back out. They aren't trustworthy custodians.
Presumably they're SIPC insured. :)
If I say “I’m insured by AIG,” I actually need to be insured by AIG. It’s not AIG’s job to tell me I’m lying. SIPC coverage isn’t automatically granted. Robinhood already has SIPC coverage through their brokerage products; this is abundantly clear to everyone there. Whether through fuck-up or will, they ignored a clear regulatory line.
But that's the weird thing. This new product is essentially a combination of two things.
1) A brokerage account instructed to hold safe treasury-related securities. This is exactly the sort of thing the SIPC normally insures. Expecting them to refuse that is really bizarre -- it's their main purpose. And as you note, they already do have that insurance for their brokerage accounts.
2) An ATM card and bank routing number that makes it easy to transfer to/from the brokerage account, so that it can be used as a checking/savings account. This is the real innovation, but it doesn't affect the risk to the insurer in any apparent way or really have much to do with them at all. Withdrawing the insurance over this only makes sense if it was done out of politics. Punishing them for failing to anticipate a political backlash seems particularly unjust.
Car accidents are the sort of thing most insurers usually insure. That doesn’t make it okay to lie about whether you have insurance. If this is still somehow confusing you, please stay away from banking and healthcare.
> An ATM card and bank routing number that makes it easy to transfer to/from the brokerage account, so that it can be used as a checking/savings account. This is the real innovation
I have a Fidelity Cash Management Account that does exactly this. The cash deposits are swept into FDIC-insurer accounts. The brokerage products are SIPC insured. I have a debit card I can spend against the cash deposits.
The difference is Fidelity applied for and obtained SIPC protection. This involves installing various auditing and safety mechanisms. Approval isn’t guaranteed. Automatically forcing the SIPC to insure everything that looks like a brokerage account would be a horrible idea.
Would you be ok with that?
> Would you be ok with that?
When I'm in the insurance business and the party making that claim is paying me insurance premiums under the same terms that I'm already insuring existing things with a commensurate level of risk? That is how insurance works.
If you have renter's insurance and you buy a new television on credit, telling the creditor that you have renter's insurance before you tell the insurance company that you have a new television is not some kind of fraud. If the insurer then suddenly threatens to cancel your insurance if you try to add the television, you have to go back to the creditor, but why would you have reasonably expected them to do that?
But the second one is the one that applies to a future product you haven't actually provided yet.
No one was harmed here. This is fine.
Which is why something between slap on the wrist and massive fines is in order.
The FDIC and SIPC work through public trust. When a broadly-marketed consumer product sets a precedent for degrading that trust, it causes real harm. Robinhood grabbed users through marketing this affiliation and gained tangible value from it. The last thing we need is the next growth hacking scheme involving falsely marketing trusted affiliations before pulling the product, customer lists in hand.
False advertisement shouldn’t be acceptable even in the case where it didn’t go far enough for people to actually obtain the product.
It was not mere talk, it was talk about a waitlisted feature used to induce signups to (and because of a “referrals move you up the line” policy, also to induce providing personal information if third parties as referrals to) Robinhoods existing service.
That is, it was false representation used to induce people providing Robinhood things of value, and thus, arguably, commercial fraud.
That's assuming they knew the representation was false. If they reasonably expected to be able to get the insurance, claiming that they would get it was a true statement of their intentions.
Above, people are suggesting that we need regulatory and/or criminal charges. There isn't any harm to customers and there isn't any evidence of fraud or criminal wrongdoing.
RH harmed themselves by looking stupid in front of the world. That's it. The rest is misguided hysteria.
They just got 600k people to signup. Even if they convert 10% of those for brokerage accounts (and not checking) it's probably worth it.
This reminds me of Lance Armstrong and Trek Bicycles. Trek doesn't have to return any of its record profits for all of the years they sponsored a cheater. (for the record, I own several Trek bikes and they're fantastic)
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.
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.
Instead, they made a shambles out this announcement, hurt customer trust and made themselves look like a fly-by-night operation.