Robinhood: A Lesson In Transparency For Brands

We have all been enthralled by the stories coming out about GameStop, WallStreetBets, and Robinhood. This wild adventure offers a powerful lesson for all brands: Be transparent about the customer data you collect and how you use it.

Robinhood, a one time darling of the fintech world, is a company whose motives some are now questioning. And at the heart of it is a parable about data, transparency, and trust.

Brands can learn a lot from the Robinhood story, but first, let’s get our facts about the company straight.

Robinhood made big waves when it first came out because of its enticing offer of free trading. Competing brokers were charging $5 to $10 per trade. This quickly allowed Robinhood to capture millions of new customers nationwide and grow rapidly over the course of just a few years. They made laudable and bold claims such as, “we believe the financial system should be built to work for everyone.” Those claims would quickly be tested.

When people first heard of Robinhood’s no-fee model, they were sceptical, and rightly so. Everyone asked, “What’s the catch?”

That question came to a head in December of 2020 when the SEC fined Robinhood $65 million for “misleading customers about revenue sources and failing to satisfy duty of best execution.” They declared that Robinhood made misleading statements and omissions in customer communications about its largest revenue source when describing how it made money. And despite their previous claims, their customers’ orders were executed at prices that were inferior to other brokers. The Better Business Bureau gave the company a failing grade in matters of transparency and trustworthiness.

Robinhood achieved its no-fee trade model by utilising a practice known as PFOF (Payment For Order Flow). This means the company was selling its customers’ trade data to market makers and high-frequency traders, who then used that data to fill orders at unusually high prices. And this was Robinhood’s largest source of revenue, a fact that the company did not disclose on their FAQ page. Customers never got a clear view of what the best price for a trade was, whether their order was executed at that best price, or how much profit was captured by Robinhood and their market maker in the process.

Robinhood essentially sold overpriced stocks to their customers while selling the data of their customers to Wall Street for their own profit — and they failed to disclose that information to the public. The company placed itself in a conflict of interest as they attempted to simultaneously serve their customers and the Wall Street firms that pay them.

The SEC ruling was a setback for Robinhood, but it was one the company could have shaken off.
But then came the Gamestop short squeeze.

Robinhood suddenly found itself in the middle of a war between retail investors and Wall Street. And just when the drama hit a fever pitch, they halted the trading of GameStop stock. Robinhood likely had legitimate operational reasons for this decision, and the facts seem to support that. But, it hardly matters.

Robinhood’s practice of selling customer trade data without informing the customer had already eroded some trust in the company – many assumed that they were siding with their Wall Street partners when they restricted trading of GME.

If Robinhood had originally been more transparent about how they used customer data, the public would have slowed their rush to judgment as the company halted the GameStop frenzy. When the company most needed the benefit of the doubt, many remained sceptical of their motives.

There is a lesson in all of this: Using and profiting from your customer’s data without their informed permission may still be a standard business practice, but it won’t be for long. The public is not going to accept it anymore.

If your company isn’t completely transparent about what customer data you use, take a moment to consider how that could backfire on you. If your brand isn’t specifically asking for permission to use all of the customer data that you currently use, it’s time to reconsider that approach.

Trust is paramount when it comes to relationships between brands and consumers, and transparency is key to that. Respect their data, respect their choices and always be upfront and honest with them.

You never know when your company’s ‘GameStop moment’ might come. If you haven’t fully earned your customers’ trust, they will be reluctant to give you the benefit of the doubt.

Don’t let your brand take a hit.
Be transparent.
Ask permission.
Build trust.
And if you need help with that, just ask us. It’s what we do best.

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