Welcome to the Ugly Side of FinTech: Ripping Off Customers

‘Robinhood’​ should rebrand as ‘Sheriff of Nottingham’​

Okay, there is obviously no official rebranding, but it’s a proposed name change that some of it’s customers and competitors may regard as more appropriate for the over-hyped FinTech unicorn. ‘Robbing Hoodlums’ is another suggestion doing the rounds.

As you know, Robin Hood is a heroic character from English folklore who, with his band of merry men, stole from the rich to give to the poor. He supposedly overcame seemingly insurmountable odds to evade capture and continuously torment his arch nemesis the Sheriff of Nottingham, an evil Robber Baron who imposed a reign of cruelty and extortionate taxation upon the peasants in his shire.

Something is not quite right with this pantomime. How does a FinTech that was supposedly set up to “democratize finance” (what does that even mean?) turn into a shameless villain that has just been fined $65m by US securities regulators for ripping off its customers. Yes, the real (fictional) Robin Hood was deemed an outlaw, but that was for upsetting the authorities, not for thieving from the locals.

According to the SEC, Robinhood failed to give its customers the best prices for trades on its platform. That sounds like it was cheating its customers, doesn’t it? Apparently the company also failed to disclose payments received by trading houses to which it sent customer orders for processing. The overall impact is estimated to have cost customers $34.1m — and that’s after taking into account that trades are commission-free for users of the platform. The SEC stated Robinhood made “false and misleading statements” and “wilfully” violated Securities law. Sounds like Robinhood are a bunch of merry crooks, in my humble opinion.

The SEC penalty comes hot on the heels of the announcement of legal action to be taken by the Massachusetts Securities Division against Robinhood for ‘gamifying’ investing and abandoning safeguards. “Robinhood has a duty to protect its customers and their money. Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical, but also falls far short of the standards we require,” according to the state regulator. Sounds like Robinhood are a bunch of merry abusers, in my humble opinion.

What is the business model — disruption, innovation, or hype?

The story of this company shines a light on the dark side of FinTech. Obviously not all companies that use technology to disrupt the finance industry are doing so for the greater good, but it’s so annoying to see how much traction a few unethical culprits gain under this pretence. Indeed, many aren’t even innovating that much. The key element of the strategy here is pure hype, fuelled by market-smothering levels of investments and leveraged on the wide-spread mistrust and dissatisfaction associated with mega financial institutions, especially amongst younger customers.

Robinhood has used the hype model to suck up huge amounts of investment. There is little evidence that an original, let alone disruptive, idea ever existed to start with. Commission-free trades are a way of buying tons of customers — and of losing tons of money. That’s why it doesn’t work, and hasn’t worked in the past, and why other online brokers and WealthTech platforms are trying instead to build viable businesses. Of course, Robinhood and its backers have known this from the start, but it has always been part of the plan.

To date, Robinhood has raised over $1.7bn, mainly from brand-name west coast VC firms. In the last quarter alone it raised $780m, which accounted for more than a third of all capital invested in the WealthTech sector in Q3 2020. It’s valuation reached $11.2bn.

This amount of capital has allowed Robinhood to feed the marketing hype while throwing money around to create a better UX or to add incremental features, thereby claiming “innovation” and “disruption” as part of their story.

Now that their green tights have fallen down and they’ve been found out, it’s apparent to all that they are simply looking to displace the other Robber Barons by becoming one themselves. Will that damage the company? Unlikely: there are too many large players with vested interests to make it work and the force of capital behind it can keep the juggernaut hurtling along. The destination won’t be affected much either. Ultimately, this business model aims to sell its large customer base of relatively younger customers, to one of a large number of giant financial institutions that live in constant panic about their ageing customer profile. It won’t matter if the company is losing tons of money when it is time to sell. The concepts of profit or commercial sustainability are irrelevant to this story, as are “disruption”, “innovation” and “democratizing finance” (whatever that means).

Abandon the ugly giants and find the real innovators

You don’t have to look too hard to find other over-funded, value-deficient FinTech companies that use the same hype model. The wheels are coming off for some of these juggernauts, but others keep going. Once the incremental, and often superficial, “innovations” are replicated by incumbents, the somewhat thin value proposition evaporates and a panic ensues to raise the hype, raise more money, or resurrect tired marketing gimmicks (how about a shiny new premium card that doesn’t actually do anything, anyone?).

Fortunately, although they siphon off a lot of the capital and a lot of the media attention in the FinTech space, these oversized monsters comprise a small minority. There are literally thousands of FinTech companies around the world, hundreds in the WealthTech sector, that are genuinely innovating to produce better, faster, cheaper, more efficient and more inclusive outcomes. They don’t rely on hype, the VC mafia, or underhand practices to progress. Have a closer look at the WealthTech sector and you’ll find them. You can start with the WealthTech100, but there are many others. Hopefully, the denuding of the ugly giants in the industry will work to redirect capital and attention to the WealthTech companies that deserve it.

Originally published at https://www.linkedin.com.