Robinhood, the free stock-trading app with 21 million active users and counting, is about to hit the road for a college coffeehouse tour to drum up new customers.
Now where have we heard this one before? Ah, yes, the credit card industry.
The campus antics that the card companies got up to two decades ago were so egregious that 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 $15 to give each student a taste of investing.
But here’s what they have in common: Both products are habit-forming, and if you get in over your head, the ramifications can be costly.
So let us begin with 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. And 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 merch to people who completed an application.
“Truly, you had kids signing up for exactly the wrong reason,” said 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 that the schools were leading their lambs to the slaughter. Inevitably, politicians and consumer advocacy groups took notice. U.S. PIRG, a consumer group that began on campuses, started showing up for a countercampaign. 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? It could happen, 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. (Robinhood’s original gamelike interface was especially appealing to younger investors; students who pry themselves away from the screen long enough to attend class will no doubt be discussing its design prowess in business schools for decades to come.) And as with credit cards — another saturated industry where it’s expensive to swipe customers from competitors — 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 brokerage firms, it makes money from something called “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 maneuvers. You can’t make money from order flow without orders, though.
And there is already evidence that many younger Robinhood investors are getting burned, as my 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 that necessary point that holding onto investments for a long time can earn you piles of compound interest.
Nevertheless, the company doesn’t offer Individual Retirement Accounts, which can help turn small investments into big nest eggs. Roth I.R.A.’s come with tax benefits that are of particular use to college-age, lower-income savers.
In July, Robinhood’s chief executive, Vlad Tenev, said it might add such offerings. A company representative had no additional information to add about any decision or timeline.
Still, there is reason to be skeptical of Robinhood. It recently paid about $70 million in restitution plus a fine — the biggest in the history of the Financial Industry Regulatory Authority — to settle charges of misleading millions of customers and letting others trade investments that were not appropriate for them. And late last year, it paid $65 million to settle Securities and Exchange Commission charges that it had misled 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 to building wealth long-term, 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 college students, about investing.”
According to Robinhood’s own survey data, its customers are already more racially diverse than those of more established brokerage firms like Fidelity and Charles Schwab. Kudos for that.
But Robinhood has gotten a lot of mileage out of portraying itself as the champion of newer investors and its boast of “democratizing” finance. It has even panned critics who question 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 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 stock offering in July won’t turn out to be the elitist types.
Robinhood said its campus tour would be heading to community colleges and historically Black colleges and universities, although it did not name them. Perhaps the teenagers who do trade aggressively at those institutions will somehow achieve above-average results over the long haul.
No doubt some Robinhood investors have come out ahead so far. In a rising stock market, plenty of people do — which made this as good a time as any for Fidelity to introduce a plan of its own to get its adult customers to open accounts for their teenage children.
I was curious whether Robinhood’s coffee shop tour would include the same kinds of financial arrangements with schools as the credit card companies had made, paying for student data. A company statement said that it was not compensating schools for “this specific” partnership. The company declined my suggestion to make a pledge that it would not do so in future partnerships, either.
So let’s assume these kinds of campus pitches aren’t going away, and that Robinhood remains a central player for a while.
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. In addition, they often take a weekslong course and learn to be defensive. “I learned to drive in a slow car,” said Ed Mierzwinski, who helped lead the U.S. PIRG credit card countercampaign.
Beginners also usually learn lessons from mistakes. Smaller investment losses can be a very good thing, as I noted in a column last year.
Mr. Papadimitriou, who started the credit and personal finance website WalletHub after his Capital One stint, found himself $20,000 in the hole after losing big on complex bets on Priceline’s stock 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.
Until then, however, 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.