Robinhood’s Upcoming Brand Crisis
Robinhood and his merry band of outlaws. Throughout the week that relationship was strong in the world of Wall Street and the financial markets, as the Robinhood app enabled a merry band of “Reddit bros” to challenge big institutional hedge funds at their own game — a quasi steal from the rich, give to the poor story. By offering free trading, Robinhood was the tool used by millions of every day, non-institutional retail traders to buy GME, AMC and other heavily shorted stocks to create what is termed as a short squeeze, costing the hedge funds who shorted these stocks billions of dollars due to their risky bets. On the 28th of January, this all changed as Robinhood turned against his merry band of bros and banned the trading of GME, AMC and other stocks, causing the market to flood with sell orders and forcing a price drop, which then potentially allowed institutional traders to close their short options and stem their losses.
In the end, while the hedge funds will survive and the Reddit traders will take satisfaction in the impact they forced (and continue to force as these stocks are all back up in price), there is one clear loser in this whole battle: Robinhood.
Robinhood’s Broken Brand Promise
When I was a consultant at LEVEL5, my old boss used to always say your “brand is only as valuable as a promise consistently kept” (he even wrote a book about it). Prior to Thursday, Robinhood was a brand that was as high on success as one could be. The app truly democratized the financial markets, allowing you to finally trade without paying high $20–40 fees. I remember learning about Robinhood 3–4 years ago and being devastated it wasn’t available in Canada, where I lived at the time. While it has had a few SEC scandals and hiccups in dealing with regulatory requirements, the company was set to IPO this year at a value of about $20 billion (USD) and is currently worth about $11 billion as a private company. With a reported 13 million customers as of last year (and probably more over this past week of chaos), Robinhood was about to be a top player in the world of finance, finally giving the little guy a place at the table next to the wolves of Wall Street.
But Robinhood didn’t keep its promise. Actually, they completely tarnished it with their actions on Thursday. Let’s look at their corporate commitments and about us pages to really drive the point home:
- We’re on a mission to democratize finance for all — By halting trading for millions of investors and customers (a very non-democratic move), Robinhood will have a hard time claiming they value democratic trading for all.
- We pioneered, and will continue to offer, commission-free trading to enable access for everyone — The decision to halt trading was made by Robinhood and other low-cost platforms, not the SEC or the stock exchanges (which might often halt trading based on volatility). As institutional traders could still buy GME and AMC stock, Robinhood had a hand in creating instability in access to securities, which is not ‘enabling access for everyone’.
- Your money is protected — Reports are out that Robinhood sold the shares of many people who bought on margin (borrowed money from Robinhood to buy securities) to protect them against volatility. While these margin calls are technically allowed, by selling at the lowest price of the day (~$118/share), Robinhood could be seen as complicit in causing financial losses for thousands of people. So maybe your money isn’t very protected?
- A transparent business model — Well I don’t even need to point out where the contradictions lie in this statement. Let’s let the CEO, Vlad Tenev, try to explain why the company did what they did (hint: it’s not a very good interview for him)
When you think of brands, the good ones come to mind, but what about the other one’s who had their reputation ruined. BP had that oil spill everybody remembers. There was the Enron scandal that brought down the whole company. Equifax, who is literally there to protect your personal information, had a data breach problem back in 2017. The list goes on, and while some of these companies survive, some don’t. The difference here is while BP spilt a ton of oil and ruined the planet, or Equifax lost some information, people were not directly impacted by those events, so those companies live to see another day. In Robinhood’s case, a large number of customers literally lost a lot of money because of the halt in trading, which is something people don’t tend to forget. How would you feel if some person stole a winning lottery ticket from you and claimed it was for your own good? Yeah, I would be pissed too.
So What’s The Blowback?
Well if you have spent any time on r/wallstreetbets or Twitter, you will know that no investor is happy with Robinhood (same with a bunch of notable financial celebrities and politicians). With this one action, the firm faces three forms of reputational crisis that will likely harm the company in the short- and long-term:
- The Trust is Gone — Overnight the reviews of Robinhood went from 4.3/5 on Google Play stores to much lower, causing Google to delete about 100,000 negative reviews. The r/wallstreetbets subreddit is awash in annoyed traders claiming foul on the app and the hedge funds. Twitter hashtags like #robinhoodboycott and #robinhoodlawsuit were trending throughout the day yesterday. While companies often recover from these lows in brand reputation, the very people who are classifying Robinhood as a villain are the customers it relies on to operate. Without the millions of retail traders trusting that the app will do right by them, what chance does Robinhood have of surviving and growing in the future?
- Lawsuits, the Class-Action Kind — Market manipulation is a serious offence, and Robinhood will have to answer for that to the courts. At the end of the day on Thursday, a class-action lawsuit was filed in New York claiming “Robinhood’s actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood’s customers,” as per the lawsuit. A subreddit r/ClassActionRobinHood has 40,300 members and having viewed r/wallstreetbets as the trading was going on, I saw countless screenshots of Robinhood halting trading or selling margin shares, which will likely be evidence in an interesting trial. Even if the class action does not win, Robinhood will have to prove it’s innocence by handing over documents as to why they halted trading, as nothing was publicly announced by the SEC or stock exchanges as to why the trading should be halted. This will make for a great court-room movie in 2025 when the lawsuit is eventually settled!!
- Bi-partisan Congressional Agreement — Speaking as a political junkie, I can say that seeing bi-partisan support of anything seems like a bygone era. But, alas, for a brief period of time there was agreement between Donald Trump Jr., Ted Cruz and Alexandra Ocasio-Cortez that there needed to be a congressional hearing over what happened. While congressional hearings often produce nothing substantial, this paves the way for some increased financial regulation that might be well over-due. No matter what, it keeps Robinhood in the spotlight concerning this unfortunate affair, and no company wants to IPO when they are being investigated by the SEC and Congress.
In the end, I did not write this as a scathing report of Robinhood. I think their product is great, their democratizing finance goals are admirable, and the company has done well to build a strong brand. I actually really want them to succeed, as they stand for the little guy in a world that often forgets normal people should be able to invest too. BUT reputation is everything and when you piss off the majority of your loyal customers to the degree they did on Thursday, you risk never coming back from that. The Robinhood brand will be forever tarnished, complicit with the established elite that run Wall Street. Whether that is true or not doesn’t matter, it is what everybody believes and what people will remember, especially if they lost a ton of money.
Companies need to realize the fragile state of their brand, and the consequences an ill-fated decision can have, even if you say it is being done for the right reasons. In the end, a brand that breaks its promises is worth a whole lot less than one that stays true to their word. In other words, it takes years to build a good reputation, and minutes to destroy all of that hard work.
In the world of growing start-ups, this needs to be constantly re-iterated. Your brand reputation might currently be defined by an innovative idea, a cool workplace, a funky name and a high valuation. These are all great things and that is why people love new start-up companies. But when the time comes and you have to make a tough decision, remember your founding corporate promise and values. In the end, those define you and your brand, and without those, your company might not live long for this ever-volatile world.
I am a Simulation & Strategy Consultant using stats and analytics to inform Digital Twin models that re-invent the way companies approach strategic decisions. In my free time, I’m obsessed with politics and policy, blogging about it all the time at Policy In Numbers. You can find me there or at my LinkedIn and Twitter accounts (feel free to connect or give me a follow). Opinions are my own and not that of my employer.