Robinhood’s promise to make you money was too good to be true

Millennial favorite app reeled in users offering 3% in checking and savings, then someone called the SEC

The Securities Investor Protection Corp. said a new checking account from millennial trading app Robinhood may not be insurable. Robinhood wowed users on Friday with a blog post announcing accounts with a guaranteed 3 percent return in their checking and savings accounts. It sounded too good to be true, mostly because it actually was. By Sunday they had entirely removed the post from their website.

Now Robinhood may be in trouble with the SEC of Nottingham. CEO of the nonprofit SIPC Tony Harbeck referred the matter to the Trading and Markets Division of the Securities and Exchange Commission. Asked if the SEC had already been in contact with Robinhood, Harbeck told Barrons, “If they have not been, they will be. I’m sure.”

With no-minimum balance and unlimited upside the financial press was pretty stoked about Robinhood. It was not only a big deal but it’s a really, really good deal at a time when big banks like Chase offer something more like 0.01 to 0.9 percent.

I reached out to Robinhood’s communications person, Lavinia Chiroco, on Friday with my concerns and we will be happy to update this post if we hear back.

We were pretty hard on Robinhood when they added crypto “investing” earlier this year. While the crypto markets were tanking, they offered the chance to buy a cryptocurrency at a price they made up and sell it at another price they made up for their own profit. You couldn’t actually do anything with the currency, even if you knew a beef jerky company that would take Litecoin. There was no transparency between the buy and sell rates, meaning you could buy a currency priced to buy at $1.10 and then sell it seconds later only to find out the sell price was $0.90. Not exactly nice, but we did end up concluding that it is pretty good training wheels for kids who want to gamble with their allowance.

Robinhood planned on adding “checking accounts” just like they offered “crypto wallets.” You would have money you could move in and out of an account and link a debit card.

The problem is that Robinhood announced these 3 percent accounts before they figured out how to. They said they would start offering savings accounts in January. What makes us more curious about their timing it not when they will start offering it, but how long these accounts would have earned 3 percent.

This sounded like a good enough deal that the olds could like it, too. Three percent annual interest is better than any short-term Treasury yield. That’s the closest you get to a guaranteed return. As of the first week in December, you’d have to lock your money up with the U.S. government for 20 years just to get 3 percent per year.

So where was Robinhood gonna get the extra cash for you? That’s some complicated techonomics. And it seems like it was uninsurable.

Usually someone offering you a guaranteed return is a sure sign of a scam or a ponzi scheme. (See: Bitconnect)  Is that the case here?

Yes and no.

No, because it was intended as a promotional rate meant to lure in young, small-dollar investors who will then earn Robinhood fee income from merchants and then have more money in the system to buy and sell the securities that they offer at their own marked-up values. Cool.

Yes, because it walked and talked like a Ponzi scheme. It hit every red flag. Users couldn’t just sign up. They had to put their emails on a list and then they could “Move up the list by inviting your friends.” It was also hard to get any actual info about these accounts. How many would there be? Did users have to get X number of friends to sign up in order to get to the top of the list? If users did actually get an account, would it earn 3 percent for a period long enough for it to matter?

I asked Lavinia Chirico this and she only replied, “I’m totally swamped but please take a look at the blog post, it has all the info.” The blog post did not address these questions. As of Sunday it was taken down.

If you couldn’t keep this 3 percent forever, then it was no different from a credit card company that offered you 3 percent cash back for your first six months.

Three percent compounded annually would have been pretty good. Let’s say you live basically paycheck-to-paycheck but you somehow manage to keep $1,000 in your account. At the end of one year, you’ll have $1,030.45, or about $2.53/month. Not bad! If this promotion still existed in a decade, you could have $1,349.84. In 30 years, you would have $2,459.51. It’s not enough to retire on, but it’s more than zero.

There were no details whatsoever about the plumbing behind this in their blog post. No diagram of where your money would actually go and where you can go to get it. But a tiny-print disclaimer at the end of their now removed YouTube video said they partnered with Sutton Bank to handle the checking account systems. Sutton Bank is from the economic powerhouse of…Ohio.

But Robinhood is not a real bank. It’s closer to a prepaid Mastercard. If these accounts ever do become available you will have to use their network of ATMs. They said these would be at Target, Walgreens, 7-Eleven and Costco. That would be handy because Costco doesn’t accept Mastercard. So you couldn’t use their ATM to get cash so you can spend $300 on cheese puffs in bulk.

But what about if you went to the new, cool, cash-only bar for your friend’s birthday? You would have to use their ATM. If you did that once a month for a $2.50 fee, you would erase just about all gains.

And since Robinhood is not a bank, your checking and savings would just be based on being a brokerage account. The Robinhood “debit card in partnership with Sutton Bank” would only work at the ATM and stores that accept Mastercard. Good luck with that while traveling!

But even after all that, should you have gone for it? Well, it’s kind of like the neo-Ponzi scheme Initiative Q we went over last week. Would there have been any harm in signing up? Not especially. But would there have been any proof whatsoever that they could deliver on what they’re promising? Also no. The reality is that these tech companies grow in value based on the number of users. They get more money for themselves every time you invite one of your friends.

Robinhood is also unbelievably overvalued. They boast a $5.6 billion valuation and only 4 million (small dollar) users. Think about it: will every user bring in $1,400 in fees?

Robinhood’s entire mentality is that you’re so smart that you can do this stuff yourself. Damn the man for leaving you behind. With their ads featuring stockboys buying stocks in the back of a grocery store they’re saying that just because you’re young, you shouldn’t be left out of finance. We have to agree with that.

Charles Schwab, by comparison, has $4.95 trading fees which make it impossible for a small-dollar investor to make any money. But Robinhood also benefits from a userbase that is purposely kept from knowing that they are the real product being sold.

So would it have been worth it?

Is Robinhood really just Casper for finance, super hip, don’t-hassle-me-man banking for people who have never been tied down to a landline? No. Even Casper Mattress has to put one of those do-not-remove-under-penalty-of-law tags on their mattresses by law to protect the consumer from the greedy mattress company who would stuff anything they wanted in there. Robinhood “banking” would have been basically a big mattress stuffed with your money. But they weren’t going to tell you what else was in there. Or how long it can stay. Clearly, it was only a matter of hours at most.

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Brendan Sullivan is a writer, producer, and author of the memoir Rivington Was Ours: Lady Gaga, the Lower East Side, and the Prime of Our Lives. Disclosure: he owns cryptocurrencies. Follow him on Twitter.