Robinhood, the free stock trading app with 21 million+ active users, is about to hit the road on a college cafe crawl to attract new clients.
Now where have we heard this one before? Ah, yes, the credit card industry.
The campus antics that card companies had until two decades ago were so blatant they helped craft a 2009 federal law that made it harder for those under the age of 21. to get their products in the first place.
There are some important differences. Credit card issuers can put marks on your file that can prevent you from qualifying for an apartment or other services years down the road. Robinhood is handing out just $ 15 to give every student a taste of investing.
But here’s what they have in common: Both products are habit-forming, and if you bother, the ramifications can be costly.
So let’s start with a history lesson.
Freshmen are a highly desirable pool of potential clients. They are replenished by the millions each year and most of them start school without any particular affinity with a particular peddler. And they’re fishing a barrel for the right pitch: A generation ago, card issuers and their marketing companies started coming to campus with offers of free food or college logo to people who filled in. a demand.
“Really, you’ve had kids who signed up for the wrong reason,” said Odysseas Papadimitriou, a former Capital One employee who has learned how to work with low-credit clients. “They had no idea how the products worked.”
MBNA, which Bank of America eventually acquired, went further. He made deals with schools or their alumni sections – worth up to seven digits a year – in exchange for names, addresses and phone numbers so the company could introduce students directly.
Enterprising student journalists and others sounded the alarm, noting that schools were leading their lambs to slaughter. Inevitably, politicians and consumer groups took note. US PIRG, a consumer group that started on campuses, has started to come forward for a counter-campaign. One of its visuals mimicked the Visa logo: Feesa, with a tagline that read “Free Gifts Now.” Huge fees later.
Then, in 2009, Congress passed the Federal Credit Card Act. Among its many provisions, there was one that prevented most people under the age of 21 from getting a credit card without a co-signer.
Is Robinhood destined for a similar fate? This could happen, especially if the markets plunge and a large number of customers experience unexpected losses.
Like credit cards at the time, Robinhood’s service was easy to obtain and use. (Robinhood’s original game interface was especially appealing to young investors; students who stray from the screen long enough to attend classes will no doubt discuss its design prowess in business schools for decades to come.) And as with credit cards – another saturated industry where it’s costly to cut customers off from competitors – it depends a lot on finding inexperienced people who want to sample your offer.
This is not necessarily a bad thing. If you use credit responsibly from the start – and a lot of people do – you start a permanent record that can lead to high credit scores. Likewise, exposure to the stock market is necessary for most people to comfortably retire, and the sooner you start investing prudently, the better off you are.
But an avalanche of studies over the decades has shown that individuals who trade too often end up with less money than if they had simply left their investments alone. We block losses because we are afraid and grab too much for the winners because of our greed.
Less trading is a problem for Robinhood. Like some other brokerage firms, it makes money through what is known as “payment for order flow”. Third parties pay Robinhood for the privilege of executing its clients’ trades, as these parties themselves can make money through smart market maneuvers. However, you can’t make any money with the no-order order flow.
And there is already evidence that many young Robinhood investors are being burned, as my colleague Nathaniel Popper reported last year. Robinhood settled a lawsuit brought by the family of a student who committed suicide believing he had suffered more than $ 700,000 in losses. GameStop’s frenetic trading has attracted even more newbies.
Warning flags and other tips might help, and some of Robinhood’s teaching materials are pretty good. They reiterate this necessary point that holding investments for a long time can earn you amounts of compound interest.
Still, the company doesn’t offer individual retirement accounts, which can help turn small investments into big pips. Roth IRAs come with tax benefits that are particularly useful for college-age and low-income savers.
In July, Robinhood chief executive Vlad Tenev said he could add such offers. A company representative had no additional information to add about a decision or a timeline.
Still, there are reasons to be skeptical of Robinhood. He recently paid about $ 70 million in restitution plus a fine – the largest in the history of the Financial Industry Regulatory Authority – to settle charges of misleading millions of customers and letting others trade. investments that did not suit them. And at the end of last year, he paid $ 65 million to settle Securities and Exchange Commission charges that he misled users about his use of payment for order flow.
In either case, the company neither admitted nor denied the charges and findings.
“Investing early is important for building long-term wealth, but research shows that the vast majority of young adults have never invested in the stock market,” the company said in a statement. “We want to help educate and empower all investors, including students, about investing.”
According to Robinhood’s own survey data, its clients are already more racially diverse than those of more established brokerage firms like Fidelity and Charles Schwab. Well done for that.
But Robinhood has made a lot of progress by branding itself as the champion of new investors and bragging about “democratizing” finance. He’s even pissed off critics who wonder if he has newbies’ best interests at heart.
“It is quite elitist to suggest that participating in small investor markets is a game, while participating in the rich invests,” the company said in a statement when I raised this issue.
That’s pretty rich, considering that no serious person is suggesting that people with low balances are all gamblers. Hopefully the Robinhood employees and investors who cashed the company’s initial $ 31 billion public offering in July won’t turn out to be the elitist type.
Robinhood said his campus tour would be heading to historically black community colleges and colleges and universities, although he did not name them. Perhaps the teens who trade aggressively in these institutions will somehow perform above average in the long run.
There is no doubt that some Robinhood investors have taken the lead so far. In a rising stock market, a lot of people are doing it – which has made Fidelity the perfect time to introduce its own plan to get its adult clients to open accounts for their teenage children.
I was curious if Robinhood’s coffee tour would include the same kinds of financial arrangements with schools that the credit card companies had made, paying for student data. A company statement said it would not pay schools for “this specific partnership.” The company declined my suggestion to commit not to do so in future partnerships either.
So let’s assume these types of campus grounds don’t go away and Robinhood remains a central player for a while.
If your future contains experience with a trading app, think of it as you would if you were or are a new driver.
Most people don’t learn to drive in a high performance vehicle. Plus, they often take a weeklong course and learn to be defensive. “I learned to drive in a slow car,” said Ed Mierzwinski, who helped lead the US PIRG credit card counter-campaign.
Beginners also generally learn from their mistakes. Lower investment losses can be a very good thing, as I noted in a column last year.
Mr Papadimitriou, who started credit and personal finance website WalletHub after his stint at Capital One, found himself $ 20,000 in the hole after losing big on complex bets on Priceline shares during a crash in tech stocks two decades ago. Today, he says, he is much more conservative.
If history is any guide, today’s gunslingers are going to shoot themselves in the foot, heal their wounds, and come back into the market by buying and holding a few core indices or exchange-traded funds.
Until then, however, there will be a new crop of teenagers each year, high school graduates who taught them little or nothing about personal finance – freed from any sort of parental supervision.
Robinhood would like to buy a latte for these students. Good luck to them.