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Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.

Vlad and his impalers

Vlad and his impalers

Hello and welcome to Protocol | Fintech. This Friday, Robinhood's CEO says sorry, Stripe and Coinbase valuations are soaring, and why Gusto's CEO wants to set unpaid wages free.

Also, join the Protocol | Fintech team for a Clubhouse chat on fintech in the GameStop era on Feb. 24 at 2 p.m. PST. We'll be joined by Sheel Mohnot, lead seed fintech investor at Better Tomorrow Ventures. It's going to be fun!

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The Big Story

Grilling Robinhood

A humbled and apologetic Vlad Tenev dialed into the Capitol yesterday for a grilling on Robinhood's controversial response to the GameStop stock revolt.

  • "Look, I'm sorry for what happened," he told the House Committee on Financial Services. "I apologize, and I'm not gonna say that Robinhood did everything perfect, and that we haven't made mistakes in the past."

But the CEO did little to assure experts and analysts who watched the hearing that the GameStop stock trading fiasco won't happen again, or that the Robinhood platform doesn't expose amateur investors to enormous risks, or that Tenev even really knows what he's doing.

  • "If I were an investor in this company, I'd be very worried," Santa Clara University law professor Stephen Diamond, a securities law expert and veteran Silicon Valley observer, told Protocol. "If I were a board member or advising their board, I'd say, 'Look, you can't put this guy out there. It doesn't sound like he understands the industry.' … He comes off as kind of asleep at the wheel, like he just woke up and rolled out of bed. He doesn't seem to be in command of the facts. It felt like a deer in the headlights."
  • Peter Lazaroff, chief investment officer of BrightPlan, a digital financial advisor, echoed the longtime criticism that Robinhood is turning investing into a game: "Good investing is boring and research strongly suggests that increased trading activity is detrimental to returns."

Tenev took some hits during the hearing itself. In particular, Rep. Alexandria Ocasio-Cortez tried to debunk Robinhood's claim that trading on the platform is free.

  • Tenev told her that the company's "payment for order flow" system made it possible for it to offer commission-free trading. "It's a much larger source of revenue [for brokers than] in the past," he said.
  • "But if removing the revenues that you make from a payment for order flow would cause the removal of free commissions, doesn't that mean that trading on Robinhood isn't actually free to begin with?" she asked.
  • "Congresswoman, Robinhood is a for-profit business and needs to generate some revenue to pay for the costs of running this business," Tenev said.
  • She also said Robinhood "owes its customers a lot more than an apology," adding: "I believe that the decisions made by you in this company have harmed your consumer customers."

The hearings highlighted how equities trading is complex and confusing, and increasingly risky in an era of social media and mobile technology.

  • The GameStop fiasco "ignited interest in investing for people of all ages," Tim Sheehan, CEO and co-founder of Greenlight, a platform that helps parents teach their kids how to manage their finances, told Protocol. "It's critical that we take this opportunity to teach our children early on about how to invest for the long term and understand risk."
  • "I'm very happy about this hearing because it is a complex issue," Diamond said. "I do think that it's a signal from Maxine Waters that there is going to be a very aggressive regulatory agenda in this area of [the] market and fintech."
  • "The real broad problem here is social media has developed to a certain point that it's interacting with traditional structures in the financial markets in ways we don't understand," Diamond continued. "We have to be extremely cautious. I think it's very important for regulators to be shining a light on this sector because this intersection between Reddit and Robinhood clearly was in this case very, very dangerous and people lost money and arguably one individual gave up his life."

Tenev reflected on the death of Alex Kearns, who committed suicide after mistakenly believing he had racked up huge losses on his Robinhood account, during the hearing. And apologized yet again.

  • "I'm sorry to the family of Mr. Kearns," Tenev said. "The passing of Mr. Kearns was deeply troubling to me and to the entire company. And we have vowed to take a series of very aggressive steps to make our options products safer for our customers."
Ultimately, the hearing showed that — unsurprisingly — some lawmakers wanted more regulation while others wanted less. That means Tenev won't be forced by law to change Robinhood's operations any time soon. But he almost certainly still has a lot of explaining left to do, even if he has started to say sorry.

A MESSAGE FROM BROADRIDGE

Broadridge

The future is positively digital. Ready? Consumers, investors and shareholders are savvier than ever. Everyone needs to create more engaging experiences that keep pace with today's new expectations. See how you can stay ahead with next-gen technologies that deliver on what matters most. We can help.

New on Protocol | Fintech

IBM's financial cloud bet: Can Big Blue take care of the regulatory compliance and security needs of banks and fintechs on the cloud? IBM's Howard Boville sure thinks so.

Build your own tech stack: Current's CTO Trevor Marshall went to Juilliard hoping to become a professional musician before launching his tech career. His left-field approach helped him build the challenger bank's secret weapon.

Why the SPAC? We spoke to Payoneer CEO Scott Galit and investor Betsy Cohen about the fintech's decision to go public the 2021 way.

Visa after Plaid: Its fintech boss says the financial services giant is looking to strengthen its presence in the growing market, and didn't rule out more M&A in the future, even if its recent fintech plan didn't quite play out as it hoped.

Overheard

  • "I was also treated to a gothic horror story about software design. I had nightmares all night about checking the wrong boxes on the computer." Bloomberg columnist Matt Levine on U.S. District Judge Jesse Furman's opinion in ruling against Citi's bid to claw back $900 million that it accidentally wired to some hedge funds.
  • "Not a surprise. But, still wow." —Venture investor Jason Lemkin on Stripe's new fundraising.
  • "Absolutely not." —Citadel's Ken Griffin when asked Thursday at the GameStop hearing whether anyone at Citadel contacted Robinhood about restricting trading in GameStop.

Three Questions With...

Gusto CEO Josh Reeves

What fintech trend are you excited about or you would like to see?

I would like to think there's a trend around access to unpaid wages becoming free. And I really hope it becomes something everyone does. There could be profound impacts to real pain points for a lot of people to get caught up in overdraft debt, to get caught up in credit card debt, to get caught up on their payday loan debt. And it's not necessary if you could access unpaid wages for free. It's a trend that I believe in and hope to catalyze further.

Which fintech trend worries you?

I think there is a broader pitfall in [the] Silicon Valley ethos around "do things quickly and it'll all work out in the end." I worry sometimes, especially when you apply it to things like healthcare or fintech. This is really really important stuff that has to be done right. This is people's money. It's not our money. I think there's a potential trend around building out an abstraction layer [or] creating an API. The fear I would have is making mistakes and it's going to be people's livelihood, someone's savings getting wiped out or someone's debt profile getting destroyed. So how do we navigate this change but keep staying grounded to the responsibility we have to the customer, to be good, positive, trusted stewards of their money, their data?

What was your biggest blunder and what did you learn from it?

In 2008, I started my first company. It was me and a friend. And we saw that the Facebook platform had launched and we wanted to build tools on Facebook for small businesses. It was both an incredible learning experience and a blunder, to use your term. We didn't start really with the problem. We just started with wanting to build stuff, and wanting to have a company. [We] were in stealth for a long time. We didn't have a purpose, which is what I would say in retrospect. The biggest learning from that is what drove Gusto. With Gusto, it started with: What is the problem, what is the customer pain, what is the thing we want to fix in the world that is so broken, that is causing real frustration for lots of people? A lot of that learning is what drove the approach which we've taken with Gusto, and which I hope to keep spending decades of my life doing.

Need to Know

  • Stripe and Coinbase are seeing soaring valuations. Investors are valuing Stripe at $115 billion and Coinbase, which is expected to go public via a direct listing this year, at an estimated $77 billion in trading of privately-held shares on secondary markets. Meanwhile, while we're talking of highs: Bitcoin broke the $50,000 barrier.
  • Venmo rolled out a credit card. PayPal's mobile payments app is making its Visa-powered credit card generally available to all its customers, having introduced it to select users in October.
  • Atom Bank is working with Plaid. The U.K.-based mobile bank is using the partnership to introduce open banking services to its customers.
  • Varo Bank raised more funds with an assist from an NBA superstar. The neobank raised another $63 million in a round led by Russell Westbrook, who will also join the fintech company as an advisor on programs geared to underserved communities and communities of color.
  • Financial Venture Studio announced its latest cohort of fintech startups, including LGBT+ neobank Daylight, anti-bias lending startup FairPlay and digital document authenticator DIRO.
  • Albert is rolling out a "white glove" service for the younger clientele of its personal finance app.

A MESSAGE FROM BROADRIDGE

Broadridge

The future is positively digital. Ready? Consumers, investors and shareholders are savvier than ever. Everyone needs to create more engaging experiences that keep pace with today's new expectations. See how you can stay ahead with next-gen technologies that deliver on what matters most. We can help.

Thanks for reading. We'll be back with Protocol | Fintech on Tuesday.

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