Be Careful of “Innovative” Financial Services

Category: Finance

Is there a cyberspace equivalent of Robin Hood, stealing from the rich and giving to the poor? “Fintech” is short for “financial technology,” a nebulous term for Internet-enabled new-fangled financial services. Fintech innovations are often couched in terms that imply they will benefit you; but that’s not the way it turns out, generally. Read on for the scoop…

Who Benefits from Fintech Services?

Yes, the ubiquity of ATMs and the ever-expanding portfolios of money management tasks they can handle are convenient. But they come with fees that most find exorbitant, because they are. Banks are so enamored of highly profitable ATM fees that some now charge a fee if you insist on walking into a branch and dealing with a teller. You may even have to settle for a videoconference with a teller.

Mobile banking apps are very popular among bankers because they reduce costs even further, allowing banks to acquire more customers while avoiding commensurate investments in buildings and staff. But bank customers give them mixed reviews. Elderly or disabled customers, in particular, have difficulty navigating banking apps on phones. Nonetheless, there is an unmistakable push to make mobile apps the “preferred” way to interact with a bank.

Banks’ websites, which many find easier to navigate via a desktop browser, may be slower and less fully featured than their mobile app brethren; account data may not be as up-to-date as it is on mobile. Speaking to a live person by phone often requires pressing a score of keys; one key for your preferred language, 8 or 13 to enter your account number, 4 more for a PIN, perhaps 10 more to verify your phone number, and then some more to get to the queue to speak to a live person – who is going to request your account number again and some identity-verification questions before you get to state why you are calling. Obviously, this is not how the bank wants you to communicate with it!

RobinHood online banking - Fintech

Behind this growing wave of automation that saves banks money at the expense of your time (which has monetary value) has come another breed of fintech services which purports to make money management easier and more profitable to you. But the startup firms behind these new services are just as self-serving and disingenuous as the banks.

Back in 2015, I laughed at the vaporware that was “The Final Card.” It was supposed to be a credit/debit card to which you could link other cards, or even link directly to a bank account. The Final Card generated a unique virtual card number for every merchant with whom you used the card. If a given merchant suffered a data breach, you only needed to create a new card number for that merchant. You did not need to supply any other merchants with a new card number. The idea was pretty good, but at the time I thought the people behind it were playing a joke or, worse, collecting email addresses to spam and sell.

Apparently, The Final Card did get off the ground and issue some cards. But in January, 2018, the geniuses behind Final, Inc., got a better offer from Goldman-Sachs and abruptly shut down operations – except the part that collects monthly payments from cardholders, of course. Terms of the acquisition were undisclosed, as was the number of cardholders left in the lurch.

TANSTAAFL

This month, we have the whimsically-named Robinhood.com. "Free, free, free!" is the prominent message on Robinhood's website. "Invest for Free! Invest in stocks, ETFs, options, and cryptocurrencies, all commission-free, right from your phone or desktop." And there's even more free stuff. It offered zero-fee checking and savings accounts that required no minimum balance and, allegedly, would pay 3% interest, an astonishing return compared to the 0.01% to 0.04% paid by big banks.

Robinhood also offered zero-fee access to 75,000 ATMs in stores such as Walgreens, 7-11 and Walmart. This is more ATMs, the company claimed, than the five biggest banks combined. Plus, you could deposit checks via the app, and order a check written and mailed – for no fee. No overdraft fees, either.

But this amazing deal was not available for long – about seven days, in fact. Almost as soon as Robinhood announced its no-fees checking and savings accounts, it withdrew its offer. You see, Robinhood initially assured prospective depositors that their money would be protected by the Securities Investor Protection Corporation (SIPC), a government-mandated nonprofit similar to the Federal Deposit Insurance Corporation (FDIC). But the CEO of the SIPC quickly announced that Robinhood's checking and savings accounts are NOT covered by SIPC insurance.

“Robinhood would be buying securities for its account and sharing a portion of the proceeds with their customers, and that’s not what we cover,” SIPC CEO Stephen Harbeck told TechCrunch. “I’ve never seen a single document on this. I haven’t been consulted on this.”

Robinhood’s master plan was to invest deposits in US Treasury securities, pay depositors 3%, and run its business on what was left. That won’t work with short-term T-bills, which currently pay less than 3%. Ten-year Treasury Notes are paying around 4.25% so that might work if a 300-employee company like Robinhood gets a lot of depositors.

Robinhood already has a growing business as a stock brokerage, aggressively undercutting the fees charged by Charles Schwab and other discount brokers. Apparently that business was supposed to subsidize the banking business for a while… probably quite a while.

The Rich Get Richer

RobinHood online banking - Fintech

It’s hard to understand how a fintech company could not understand what its insurance covers, until you get a look at Robinhood co-CEO Baiju Bhatt, who looks like more like a guy that runs a headshop in Colorado. And yet, Bhatt and co-CEO Vlad Tenev have created a company valued at $6 billion. Robinhood.com was founded in 2013 as a no-fee securities brokerage. It now has over 4 million customers, and claims to have saved them more than $1 billion in commissions. Robinhood.com makes money from interest earned on customers’ cash balances and “leveraged lending.” How much money does Robinhood make? Don’t ask.

Robinhood promises to be back “real soon” with a solution to the insurance problem. You can still leave your email address to get an invitation to open an account when that’s possible. Right now, as with Robinhood.com’s no-fee cryptocurrency exchange (are you seeing a marketing pattern here?) I suspect it’s mainly Millennials and younger people who are doing so; the “free” generations, you might say.

I'm not saying that Robinhood's online banking is a scam. I am saying that you should be careful when considering a significant investment of your hard-earned money in any financial service that exists only in cyberspace, where you are offered something for nothing, or when the promised returns are far outside the norms.

There is a long section of "small print" disclosures at the bottom of Robinhood.com's home page. I suggest you read every one of the 1,350 words there. Your thoughts on this topic are welcome. Post your comment or question below…

 
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Most recent comments on "Be Careful of “Innovative” Financial Services"

Posted by:

Mark H.
20 Dec 2018

CapitalOne just came out with "virtual cards" that can be used instead of the real card. It's called Eno. The virtual cards can be used just about anywhere, though Apple and Lastpass won't accept a virtual card. Still, it limits exposure. Also, the cards can be turned off/on to control recurring charges. I would hesitate to sign onto some startup.


Posted by:

Daniel Wiener
20 Dec 2018

Just about the only times I used to actually go into my credit union to transact business is when I received a check which needed to be deposited. But this past year I've been taking advantage of their remote deposit service, in which I use their app on my Android phone to take photos of the front and back of the check and deposit it electronically. They no longer need to receive the physical check, which makes sense, since they'd presumably just be scanning it in to process it anyway. It's kind of neat, and it saves me time, which I appreciate.


Posted by:

bill
20 Dec 2018

Are cash machines all that heavily used?

About 30 years ago, I did almost all my transactions cash with bills being paid by check. I looked for the local bank with the largest number of cash machines (they also offered fee free checking). It was extremely rare that I had to use a cash machine that charged a fee.

Fast forward 30 years and almost all my transactions are via credit card and automatic payments have replaced almost all my checks.
I have a credit union at work so I closed the accounts at the former bank. I had to destroy left over checks that were bought in the 1990s.
The initial couple hundred checks that came with the credit union account will last a number of decades. I have checked where the nearest non-fee cash machine to my house is and it turns out to be only a handful of blocks away. If I want, the CU will accept checks for deposit by a photo from my cell phone.


Posted by:

gene
20 Dec 2018

I'm a senior and have no problem navigating mobile banking apps at all. I'm also a veteran so I use USAA which doesn't even have a physical office in my state, but I've been able to manage insurance, checking, savings, claims, everything either on my desktop or on my phone. I can also talk a live body anytime I want to or chat. I write zero checks these days, do all of my bill paying online directly. I don't need a teller, why travel to a bank branch when I can do everything I need from my home or my phone wherever I am?

That said - the kind of thing you write about here, well, I already said I wasn't born yesterday and I DO know what TANSTAAFL means and have since Heinlein wrote the Moon is a Harsh Mistress. When I was a kid. :^)


Posted by:

AE
20 Dec 2018

What about these other new online investment firms like Wealthfront and Betterment, are they safe?


Posted by:

Rick Leinster
20 Dec 2018

I haven't dealt with a bank for about 30 years, since I moved all my business to Navy Federal Credit Union and South Carolina Federal Credit Union. Few fees and those are very reasonable, convenient locations in addition to online access.


Posted by:

chuck
20 Dec 2018

A fool and his money is soon parted. The real question is how did they ever get together?


Posted by:

john
20 Dec 2018

It is amazing that the fine print is only 1350 words. My doctor's office recently suggested I sign on to their portal to see my test results "for free". The agreement to use the portal was almost 8000 words, or double the length of the US Constitution. I declined. So 1350 doesn't sound bad, unless they were written by a lawyer.


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