Fintech’s bring about ideas of supporting the average person, providing easy access to financial services. It is commonly perceived as a consumer-oriented technology, evening out the financial playing field. As fintech’s are embedding their roots deep into the economy, their place in society is becoming established. Due to the nascent nature of the field, many details have remained elusive about the potential or reach. The GameStop event showed the true colors of the fintech start-up Robinhood, outlining an example of Fintech’s power.
Robinhood’s Role In The GameStop Rally
Robinhood is a fintech company, founded in 2013, with a $20 billion valuation. As Reddit users from r/WallStreetBets collaborated to drive up GameStop prices, coining the newly created ‘meme stock’ sub-genre, they used Robinhood to facilitate the stock transactions. Storming the market drove up the GME stock price by 1,700%. Many progressive thrived while watching Wall Street descending in chaotic scramble amid the meme stock short squeeze, seeing the amateurs get the upper hand on the Goliath.
Following the chaos, Robinhood decided to ban buying the GameStop stock through their app, preventing further disruption and showing their hidden agendas. Ironically, the tale of Robin Hood takes from the rich and distributes to the poor, which cannot be applied to the events. Robinhood has shown the power that fintech possesses, and the true colors on which side they support. Dan Egan, Betterment’s managing director of investing and behavioral finance, said ”When you brand yourself as the company helping the little guys take on the big guys, and then shut it down, you shouldn’t call yourself Robinhood.”.
Robinhood outlined their rationale as “We continuously monitor the markets and make changes where necessary. In light of recent volatility, we are restricting transactions for certain securities to the position closing only,” in a recent blog post. This ignites cries of hypocrisy, cultivating anger from Redditors and others alike. Robinhood isn’t shouting alongside the progressive investors at the downturn of financial institutions and is not seeking the abolishment of financial capitalism. Robinhood warned against market volatility it was facilitating, shutting down GameStop trading, causing lawsuits and uproar.
Mission Of FinTechs: Democratizing Finance For All
Robinhood has openly marketed itself as a mission to ‘democratize finance for all’, which is rhetorically distracting from its behind-the-curtain dealings. It pledges ‘commission-free financial services, which has opened the door into the financial world for many who could previously not enter. It is usually given that when the application is free, you are the commodity. Robinhood turns its customers into products and earns a healthy profit in doing so. From a financial standpoint, Robinhood is indifferent to whether its users are making money or not, they only care about whether there is trading activity.
How Does Robinhood Make Money?
Robinhood makes money by selling data on trades to large Wall Street firms, who react and take their footing based on how the amateur investors are operating. This information is sold prior to the trade execution, giving large firms valuable insider data, effectively putting the amateur’s card hand on public display. It is unfair to the average Joe investor, but beneficial to financial institution buyers as they hold a privileged position and Robinhood who earns a healthy profit. Citadel Securities is Robinhood’s largest customer, and Citadel LLC tried to bail out Melvin Capital, subsequent to the billions lost from Gamestop short positions. Citadel pays fintech companies tens of millions for order flow information, which the Citadel makes back, taking the opposite side of the order, and pocketing the difference.
Is The Democratizing Of Finance As Easy As It Seems?
In the first quarter of 2020, Robinhood received $90 million for selling order flow data, which accounted for 70% of its total income. This doubled to $180 million for the next quarter of 2020. The system makes a lot of money for the big guys and kicks the user to the curb. Therefore Robinhood has feet in both pools, wanting the open-access of fintechs alongside the retention of traditional financial models, contradictory to the advertising of ‘democratizing finance’. CEO of Financial Health Network, Jennifer Tescher, said “When a crusading group of retail traders bid up the price of GameStop shares, the target was Wall Street. They also unknowingly squeezed Robinhood. The volatility of GameStop trading led [Robinhood] clearinghouse to increase deposit requirements tenfold, and Robinhood blocked trading of GameStop stock while it scrambled to raise additional capital from its venture capital backers”.
J.E Karla, the editor of Contention, said “Robinhood users thought the service was accountable to them, but actually it exists to serve giant Wall Street institutions like Citadel and other market makers. They will suicide bomb their own business models to protect the real powers from the consequences of their internal contradictions. When a system approaches a terminal crisis, its institutions will break their own rules to suppress elements that threaten the system’s continued viability. That’s what’s happening here. This specific episode may be over in a week or two, but it’s a symptom of something very ominous.”
Power Of FinTech Vs The Power Of The Policymakers
The power that Fintech possesses is evident, but it is the policymakers that steer the direction of the ship. Fintech can revolutionize the finance industry, as it is becoming evidently clear that it is not a fad and is here to stay. Fintech could squander amateur investors through ill-advised trading, and create new risks in the financial system if not guided. Regulatory bodies need to monitor and establish rules in order for fintechs to operate with true transparency, especially in terms of what they do with user data. The Office of the Comptroller of the Currency (OCC), is considering whether it is a major invasion of individual privacy.
Rohan Grey, professor at Willamette University College, said “Fintech, is just the newest, brightest, shiniest manifestation of a long struggle over public commerce. All the debates over ‘fintech,’ once you get beyond the scams and the hype, are really a debate about the future of money. The recent rise of ‘fintech’ is just the latest saga in a centuries-old struggle between democratic accountability and unaccountable private power, with the latter hiding behind promises of technological innovation.”. Regulators need to develop a holistic picture of fintech, in order to steer innovation in a positive direction.
Various investment firms hold the majority of the GameStop stocks, and those are the real winners, the ones who received the most money. Fintech firms such as Robinhood have shown their power at playing the board on both sides, hunting with the hounds, and running with the wolves. The power of data and its ability to convert into cash is more evident than ever, the user is becoming more of a commodity than ever, creating a further dichotomy between the average investor and the financial establishments. However, at the end of the day, the kings and prawns go back into the same chessboard, and we are all victims of the economy.
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