Robinhood angered banks. Now it wants to be one

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WASHINGTON — The fintech brokerage Robinhood was forced to rebrand its cash management product last year after misleading marketing caused a backlash among bankers and others. But now, the Menlo Park, Calif., company has mounted an even more ambitious effort: applying for a full-fledged bank charter.

Yet the company known for its trading and investment app may face an even more uphill battle getting a national bank charter from the Office of the Comptroller of the Currency. Previous fintech applicants have yet to get final approval for banking powers, suggesting that tech-focused companies still have work to do to satisfy regulatory standards.

"There is some skepticism just sort of generally about the more tech-oriented firms entering banking," said Brian Knight, a senior fellow at George Mason University’s Mercatus Center.

Meanwhile, the company's damage control last year over a brokerage product it had first described as a federally insured deposit account "doesn't help," Knight said. The company had suggested its backing from the Securities Investor Protection Corp. was akin to the Federal Deposit Insurance Corp., but criticism from bankers, SIPC and others forced Robinhood to backtrack.

The OCC will certainly weigh Robinhood’s missteps in December in its consideration of the company’s application, but it wouldn’t necessarily prevent them from being granted a national bank charter, said Christopher Cole, the executive vice president and senior regulatory counsel at the Independent Community Bankers of America.

"They're now getting into banking the right way, which is through applying as a national bank charter,” Cole said.

The company's banking arm, Robinhood Bank, would be separate from the brokerage service, a Robinhood spokesperson said. Yet both are intended to be offered to clients as part of a package of services. The cash management feature in brokerage accounts would still be available through Robinhood Financial, a broker-dealer.

Robinhood's OCC charter application was first reported by the San Francisco Business Times.

The OCC charter application "is a first step towards being granted a national bank charter which would allow Robinhood to offer traditional banking products and services," said Jack Randall, the company spokesperson. "Robinhood’s goal is to be able to offer its customers a full suite of financial products to service their needs."

Like its current brokerage arm, Robinhood Bank would be based on a user’s smartphone and would require no monthly fee.

But Robinhood would have to overcome several obstacles to obtain national bank status, which no fintech has yet accomplished.

Varo Money’s application to become a national bank is currently pending, the OCC said. The regulator granted Varo conditional approval last year, but the firm hit a roadblock when the FDIC raised concerns.

Observers said it was noteworthy that Robinhood, like Varo Money, has opted to try to become a full-fledged bank rather than apply for the OCC's new special-purpose charter designed for fintechs.

The agency has yet to receive any takers for the new fintech charter, which observers say could be due to state regulators' legal challenge over the charter as well as doubts that it will allow firms to offer deposit accounts.

“It is somewhat unexpected that a fintech company would pursue a fully-fledged national bank charter. At the same time, given Robinhood’s interest in providing what seems to be a traditional checking and savings product, that seems to be the route that they would need to take because the OCC’s special-purpose charter for fintech companies wouldn’t allow an applicant to take deposits,” said Andrew Morris, senior counsel for research and policy at the National Association of Federally-Insured Credit Unions.

Morris added, “The OCC’s special-purpose charter has been challenged in court, so there’s the cloud of litigation that could cause uncertainty over the whole process.”

Knight said the OCC exercises plenty of diligence in considering whether or not to issue a charter to a financial institution and Robinhood should expect close and thorough examination.

“They're not going to want a particularly splashy fintech firm like Robinhood to come in and then fall flat on its face or hurt somebody, and there's going to be a lot of skepticism aimed at Robinhood because of that issue, he said.

Thomas Curry, a partner at Nutter McClennen & Fish and the former comptroller of the currency, who initially proposed the OCC's limited-purpose charter, said there are pros and cons to each type of federal bank charter.

“There’s a real appeal to have FDIC-insured deposits which are both stable and a cheaper source of funding,” he said. “But if you’re going to be a full-service bank, there may be higher regulatory expectations in terms of what is expected from a risk management perspective and other factors."

This article originally appeared in American Banker.
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Licenses and charters Fintech Fintech regulations Broker dealers Automated investing OCC FDIC Varo Money