(NYTIMES) – Robinhood, the free stock-trading app with 21 million active users and counting, is about to hit the road for a college coffee house tour to drum up new customers.
Now where have we heard this one before? Ah, yes, the credit card industry.
The campus antics the card companies got up to two decades ago were so egregious they helped lead to a 2009 federal law 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 keep you from qualifying for an apartment or other services years later. Robinhood is handing out a mere US$15 (S$20) to give each student a taste of investing.
But both products are habit-forming, and if you get in over your head, the ramifications can be costly. First, a history lesson.
First-year college students are a highly desirable pool of prospective customers.
They replenish themselves by the millions each year, and most start school with no strong affinity for any particular peddler. So they’re fish in a barrel for the right pitch: A generation ago, card issuers and their marketing firms started turning up on campus with offers of free food or college logo items to people who completed an application.
“Truly, you had kids signing up for exactly the wrong reason,” said Mr Odysseas Papadimitriou, a former Capital One employee who became intimately familiar with how to work with customers with little credit. “They had no clue how the products worked.”
MBNA, which Bank of America eventually acquired, took things a step further. It cut deals with the schools or their alumni chapters – worth up to seven figures a year – in return for names, addresses and phone numbers so the company could pitch students directly.
Enterprising student journalists and others raised alarm bells, noting the schools were leading their lambs to the slaughter. Politicians and consumer advocacy groups took notice. US PIRG, a consumer group that began on campuses, started showing up for a counter campaign. One of its visuals aped Visa’s 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 was one that kept most people under 21 from getting a credit card without a co-signer.
Is Robinhood destined for a similar fate? Maybe, especially if the markets take a dive and large numbers of customers experience unexpected losses.
Like credit cards back in the day, Robinhood’s service is easy to get and easy to use. And as with credit cards – another saturated industry – much depends on finding inexperienced people who want to sample your offering.
This is not necessarily a bad thing. If you use credit responsibly early on – and plenty of people do – you start a permanent record that can lead to high credit scores. Similarly, stock market exposure is necessary for most people to retire comfortably, and the earlier 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 lock in losses because we’re fearful and grasp too much for winners because of our greed.
Less trading poses a problem for Robinhood. Like some other brokerages, it makes money from “payment for order flow”. Third parties pay Robinhood for the privilege of executing its customers’ trades, since those parties can themselves make money through clever market manoeuvres. You can’t make money from order flow without orders, though.
And there is evidence that many younger Robinhood investors are getting burned, as my New York Times colleague Nathaniel Popper reported last year. Robinhood settled a lawsuit brought by the family of one college student who killed himself believing he had incurred over $700,000 of losses. The frenzied trading in GameStop drew in yet more novices.
Caution flags and other guidance could help, and some of Robinhood’s educational materials are pretty good. They reiterate the necessary point that holding onto investments for a long time can earn you piles of compound interest.
“Investing early is important to building wealth long term, but research shows that the vast majority of young adults have never invested in the stock market,” the firm said in a statement. “We want to help educate and empower all investors, including college students, about investing.”
Robinhood’s own data shows its customers are already more racially diverse than those of established brokerages like Fidelity and Charles Schwab. Kudos for that.
But Robinhood has got a lot of mileage out of portraying itself as the champion of newer investors and its boast of “democratising” finance. It has even panned critics who query whether it has the best interests of beginners at heart.
“It’s pretty elitist to suggest that participation in the markets by small investors is gambling, while participation by the wealthy is investing,” the company said in a statement when I raised this issue.
That’s rich, given that no serious person is suggesting that people with low balances are all gamblers. Hopefully, the Robinhood staff and investors who cashed in on the company’s US$31 billion initial public stock offering in July won’t turn out to be the elitist types.
If your future holds an experiment with any trading app, think about it as you might if you were or are a new driver. Most people don’t learn to drive in a high-performance vehicle. Also, they often take a weeks-long course and learn to be defensive. “I learnt to drive in a slow car,” said Mr Ed Mierzwinski, who helped lead the US PIRG credit card counter campaign.
Beginners also usually learn from mistakes. Smaller investment losses can be a very good thing.
Mr Papadimitriou, who started the credit and personal finance site WalletHub after his Capital One stint, found himself US$20,000 in the hole after losing big on complex bets on Priceline during a tech stock meltdown two decades ago. Today, he said, he is much more conservative.
If history is any guide, today’s gunslingers will shoot themselves in the foot, lick their wounds and creep back into the market via buying and holding a few basic index or exchange-traded funds.
But until then, there will be a fresh crop of teenagers each year, graduating from high schools that taught them little or nothing about personal finance – unleashed from any sort of parental monitoring.
Robinhood would like to buy those students a latte. Good luck to them.
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