Robinhood, the free stock trading app with 21 million active users and counting, is about to take a tour of a college cafeteria to attract new customers.
Now where have we heard this before? Ah yes, the credit card industry.
The campus antics that the card companies did two decades ago were so egregious that they helped lead to a federal law in 2009 that made it harder for anyone under 21 to get their products in the first place.
There are some important differences. Credit card issuers can put marks on your record that can prevent you from qualifying for an apartment or other services years later. Robinhood is handing out just $ 15 for each student to test the investment.
But here’s what they have in common: Both products are habit-forming, and if overstepped, the ramifications can be costly.
So let’s start with a history lesson.
College freshmen are a highly desirable group of prospective clients. They are replenished by the millions each year, and most start school with no great affinity for any particular street vendor. And they’re fishing in a barrel for the right tone – a generation ago, card issuers and their marketing firms started popping up on campus with offers of free food or college logo merchandise for people who completed an application. .
“In truth, the kids signed up for exactly the wrong reason,” said Odysseas Papadimitriou, a former Capital One employee who became intimately familiar with working with low-credit clients. “They had no idea how the products worked.”
MBNA, which eventually acquired Bank of America, went one step further. It cut deals with schools or their alumni sections, worth up to seven figures a year, in exchange for names, addresses and phone numbers so the company could attract students directly.
Enterprising journalism students and others sounded the alarms and pointed out that schools were taking their lambs to slaughter. Inevitably, politicians and consumer advocacy groups took notice. US PIRG, a consumer group that started on campus, began running for a counter-campaign. One of their images mimicked the Visa: Feesa logo, with a tagline that read “Free gifts now. Huge fees later. “
Then, in 2009, Congress passed the federal credit card law. Among its many provisions was one that prevented most people under the age of 21 from obtaining a credit card without a co-signer.
Is Robinhood destined for a similar fate? It could happen, especially if markets sink and large numbers of customers experience unexpected losses.
Like credit cards in the past, Robinhood’s service is easy to obtain and easy to use. (Robinhood’s original game-like interface was especially appealing to younger investors; students who stay away from the screen long enough to attend class will no doubt be discussing their design prowess in business schools during the sessions. next decades). industry in which it is expensive to divert customers from competition; a lot depends on finding inexperienced people who want to test your offer.
This is not necessarily a bad thing. If you use credit responsibly from the start, and many people do, you start a permanent record that can lead to high credit scores. Similarly, exposure to the stock market is necessary for most people to retire comfortably, and the sooner you start investing wisely, the better off.
But a flood of studies over the decades has shown that people 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 we hold on to winners too much because of our greed.
Less trade poses a problem for Robinhood. Like other brokerage firms, it makes money from something called “pay per order flow.” Third parties pay Robinhood for the privilege of running their clients’ trades, as those parties can make money for themselves through ingenious market maneuvers. However, you cannot make money from order flow without orders.
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 college student who committed suicide believing he had incurred losses of more than $ 700,000. The hectic trading on GameStop attracted more newbies.
The caution flags and other guidance might help, and some of Robinhood’s educational materials are pretty good. They reiterate the necessary point that holding investments for a long time can generate lots of compound interest.
However, the company does not offer individual retirement accounts, which can help turn small investments into big savings. Roth IRAs come with tax benefits that are particularly helpful for lower-income college-age savers.
In July, Robinhood CEO Vlad Tenev said he could add such offers. A company representative had no additional information to add on any decision or schedule.
Still, there are reasons to be skeptical of Robinhood. It 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 allowing others to exchange investments that were not appropriate for them. And late last year, it paid $ 65 million to settle Securities and Exchange Commission charges for misleading users about its use of payment for order flow.
In both cases, 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 train all investors, including college students, about investing.”
According to data from Robinhood’s own survey, its clients are already more racially diverse than those of more established brokerage firms like Fidelity and Charles Schwab. Congratulations on that.
But Robinhood has benefited greatly by presenting himself as the champion of new investors and his boast of “democratizing” finance. He has even criticized critics who question whether he has the best interests of beginners at heart.
“It is quite elitist to suggest that the participation of small investors in the markets is a game, while the participation of the rich is investing,” the company said in a statement when I raised this issue.
That’s pretty rich, given that no serious person is suggesting that people with low balances are all gamblers. Hopefully, the Robinhood employees and investors who cashed in on the company’s $ 31 billion initial public offering of shares in July don’t turn out to be the elitist type.
Robinhood said his campus tour would target community colleges and historically black colleges and universities, though he did not name them. Perhaps adolescents who trade aggressively in these institutions somehow achieve above-average long-term results.
Certainly some Robinhood investors have been ahead of the game so far. In a rising stock market, a lot of people do, which made this as good a time as any for Fidelity to come up with a plan of its own to get its adult clients to open accounts for their teenage children.
I was curious if the tour of the Robinhood cafeteria would include the same kinds of financial arrangements with the schools that the credit card companies had made, paying for student data. A statement from the company said it was not compensating schools for “this specific partnership.” The company declined my suggestion to commit that it would not do so in future partnerships either.
So let’s assume these kinds of campus pitches won’t go away, and Robinhood remains a core player for a while.
If your future holds an experiment with any commercial application, think of it as you would if you were or were a new driver.
Most people do not learn to drive in a high-performance vehicle. Also, they often take a week-long 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 often learn lessons from mistakes. Smaller investment losses can be a very good thing, as I pointed out in a column last year.
Papadimitriou, who started the personal finance and credit website WalletHub after his stint at Capital One, found himself $ 20,000 in the hole after losing heavily on complex bets on Priceline shares during a tech stock crash two ago. decades. Today, he said, he is much more conservative.
If history is any guide, today’s gunmen will shoot themselves in the foot, lick their wounds, and get back on the market buying and holding some basic indices or exchange-traded funds.
Until then, however, there will be a new crop of teens each year, graduating from high schools that taught them little or nothing about personal finance, triggered by any kind of parental monitoring.
Robinhood would like to buy a latte for those students. Good luck to them.