We wrote on Friday that Robinhood was launching a Savings and Checkings account offering 3% savings rate, claiming the account would be insured by SIPC. Interestingly enough, SIPC came out and stated this is not the case and Robinhood basically made it up and had not contacted them. After massive backlash over the week-end they backtracked on the offer. The company wrote in a Blog on their website;
We’re excited and humbled by the response to yesterday’s announcement of Robinhood’s cash management program launching in 2019. However, we realize the announcement may have caused some confusion.
As a licensed broker-dealer, we’re highly regulated and take clear communication very seriously. We plan to work closely with regulators as we prepare to launch our cash management program, and we’re revamping our marketing materials, including the name.
Our promise is unwavering—we always put our customers first—whether it’s deciding which features to build, keeping your cash and securities protected, or offering products that allow everyone to participate in and benefit from the financial system.
Stay tuned for updates.
– Baiju Bhatt and Vlad Tenev, Co-Founders and Co-CEOs
Basically, the company admitted they showed blatant disregard for regulation and they rather just launch something with big push without even checking with regulators. Interestingly enough, all this could have potentially been just a marketing ploy to get new customers. Anand Sanwal of CB insight made this observation;
Robinhood got 600k signups (as of yday) for their checking/savings aka cash management account This was fantastic marketing They had to change the copy today but only after they’d derived most of the value from the launch Well played by their team
In another words, it could have just been that the company knew what they were doing, but thought the risk was worth it to get the media exposure and added customer base. Question lies for a company that is trying to build investor and customer confidence, misleading consumers might not be the best approach.
The company has already a semi tarnished reputation for its clients first whilst selling their flows to high-frequency trading funds (HFTs) at 10x the rate of what other firms do. This came out in regulatory filing earlier this fall.
As a customer, the old adge of “There is never such thing as a free lunch. If something is free, you are the product”. rings true here. It appears that Robinhood which targets younger customers, tends to put its own interest first over its customers. One wonder, how long this will sustain.