A New Threat to Banks and Credit Unions from Robinhood

Jim Marous (0:00)

Robinhood wants the paycheck, and for banks or credit unions, the uncomfortable part is that an investment app may already have a relationship with a customer whose paycheck lands at your bank or credit union today. Think about a customer whose salary arrives every paycheck and whose bills get paid through the same account at your organization. That relationship can look healthy on a dashboard, but when the customer has $50 to invest, the money goes somewhere else, and another company starts playing a bigger role in your customer's financial future. Now, that investment firm offers everyday banking, and the customer who brings a paycheck gets the best terms. So what would make that customer keep the paycheck coming to your bank or credit union? At the end of June, Robinhood reported more than $3 billion in banking deposits from more than 240,000 funded banking customers out of 28.4 million funded customers across the company. About 40% of the banking customers had signed up for direct deposit. That doesn't tell us how much of their income is arriving or whether Robinhood has become their primary account, but it gives us a reason to pay attention. Robinhood is extending a banking offer from an established investment business. Customers who already invest there may have money and routines in place, which gives Robinhood a different starting point from a provider introducing itself for the first time. Here's what Robinhood is building. It started with people who wanted to begin investing, and it's now expanding into everyday banking. For customers with an annual gold membership, qualifying direct deposits are what earn checking interest and certain fee waivers. That gives an existing customer of theirs a financial reason to bring recurring income into the relationship. It's a smart place to start because of who those customers tend to be. Javelin Strategy, in its research on Robinhood, points out that the larger risk for your organization may be losing the investment assets of younger, upper-lead mobile customers. Those are the ones many of us often overlook until they have built some wealth. Their balances are small when they start, which is exactly when it's the easiest for institution to look past them. Imagine a made-up customer, we'll call him Daniel. His salary arrives at your organization and he's perfectly happy with what you provide. Your app works and when he needs help with his banking, he knows where to turn. One evening, though, he decides he wants to start putting some money away.

Say $50 a month, nothing dramatic. He wonders whether your bank or credit union can help, but he isn't sure where to look. He's also a little embarrassed to ask about $50.

So he opens an investing app on his phone because it made the first step feel so easy. Nothing in the process makes $50 feel too small to bother with. Within a few minutes, he has a recurring investment set up. Six months later, it's become a habit, and he has never once thought of himself as shopping for a new bank. It all happens kind of automatically. He checks it now and then, and the company behind it is the one that comes to mind when he thinks about his financial future. Then that company offers him a checking account that pays interest with fees that go away once a qualifying direct deposit arrives. He has no complaint about your organization, but the offer arrives from a company he already uses regularly. He has already set up. He already trusts it with money that he's building. So he takes a serious look at moving his paycheck. Again, Daniel is still happy with your organization, and he may not even close his account with you. The question is what you had ready on the evening. He decided to start investing $50.

Daniel's story shows how a customer's decision could unfold. Robinhood's early numbers don't tell us how often it actually unfolds that way, or whether these new banking relationships will last.

Early adopters can be the most motivated ones, so the numbers could look different as the offer reaches a broader array of people. But Robinhood is a financial technology company, with banking services provided by Coastal Community Bank. Everything feels familiar to a new customer. For your institution, the useful question is whether a customer who wants to begin investing knows whether you can help them today. That's the answer to the question from the opening. What keeps a paycheck where it is may depend quite a bit on whether your organization was there to help when the customer first wanted to build something new. Suppose Daniel had looked at your institution first.

You may offer investment services, but if Daniel never saw it, having the capability didn't help him expand his relationship. The investing option may sit under a menu he never opens, or be difficult to open if he does know where to look.