I am not smart enough to explain all the complexities or nuances of what transpired. Still, I have a message to Robinhood and every other fintech looking to make both a profit and a positive impact on the world.
As an entrepreneur and executive, I have built and sold fintech solutions for three decades. So, I know firsthand the power of financial technology to lift up the underserved or make it easier for anyone to dig a giant hole.
This cliche sums up my opinion; “With Power Comes Responsibility.”
Kaihan Krippendorff, a well-known keynote speaker on growth strategy, once said, “Power is a tool that carries no innate moral value.” You can use your power in many ways to get things done or get things you want. Through their technology and business model, Robinhood had the power to let anyone invest in the stock market with as little as $1 and not pay any commissions.
But just because you can invest in stocks or more complicated financial instruments such as options or currency does not mean you should. Look at what occurred during the 2008 financial meltdown. Just because you could get a high leverage loan for real estate without reasonable underwriting criteria does not make it a good idea.
So, who is responsible for all the collateral damage when a financial system goes awry? How do we prevent harm to either large groups of individuals or the greater economy?
First, I am not suggesting that individuals can abdicate personal responsibility for their actions. If you make a risky trade or buy or sell crypto and get caught with a short position you can’t cover, you should suffer the consequences. Unfortunately, there are many tragic stories of people making ill-advised day trades or taking high-interest loans.
Fintech is neither inherently good nor bad. Robinhood’s stated intention to “democratize finance” can positively or negatively impact society. But to use another cliché, “There is no such thing as a free lunch.” It is incredibly naïve of retail customers to think they can buy or sell stocks for zero transaction costs. There is no free lunch on the Internet. Facebook, Google, and Robinhood are selling your clicks, likes, searches, personal data, and transactions.
Robinhood gets paid handsomely for sending their order flow to high-frequency traders that pay a commission for each trade. That commission comes directly from the price difference between the customer’s bid and the price for the trade. The customer is typically not getting the benefit of this price improvement and is, therefore, “paying” for the trade.
In 2018 Robinhood announced a zero-fee checking and savings account with a 2.05% interest. Robinhood had to hit the reset button and pull the offer. They failed to consult the appropriate regulators. They did not confirm that the SIPC would insure these bank accounts. So consumers would not be projected in case of the broker’s failure.
None of these mistakes mean that Robinhood’s management team acted nefariously. Entrepreneurs and tech startups do what they do. They get to market quickly, iterate, fix and ask questions about compliance and risk later. Most fintechs are subject to a myriad of Federal and state regulatory schemes. The alphabet soup of regulators and regulations include SEC, OCC, KYC, AML, FINCEN, CFPB. Shall I continue?
I don’t think regulation is the problem or the answer. If a law or regulation was broken, I am sure Robinhood will be held accountable.
It comes down to the responsibility that comes with power. I think that responsibility includes specific qualities like integrity and transparency. Robinhood needs to be more transparent about how it makes money. It must have the integrity to offer the right financial product or service to the right customer. Eventually, not applying both moral and sound business practices will catch up with them. Either because their customers will leave them or regulators will put Robinhood under increased scrutiny and more stringent regulations.