The Robinhood Value Proposition

The spirit of transformation has infused the financial services industry, as inventive start-ups apply new technologies and outside-the-box business models to disrupt established trading conventions. In many ways, Robinhood Markets exemplifies the ways that these innovators can shake up financial services, while delivering value in ways long considered impossible. Yet the Robinhood case study also illustrates the strategic value of effective compliance archiving for any company seeking success in this highly regulated sector.

The meteoric rise of financial services company Robinhood Markets shows how innovation can boost a little-known brokerage firm into the limelight. At the same time, its recent barrage of negative publicity offers a rich cautionary tale about innovation and regulatory compliance.

The company's strategic reliance on its mobile app to give its customers direct access to transactions led to revenue growth of nearly 220% between 2015 and 2020. Its corporate mission to democratize access to financial markets by automating back-office processes to drive down costs proved irresistible to millennials, who made up 80% of its customer base in 2015.

Robinhood’s direct-to-consumer business model, its reliance on high-frequency trading technology, and its smartphone app make it a disruptive challenge to industry stalwarts as well as a harbinger for future financial service innovators.

Growing Pains

For all its success, Robinhood has faced a raft of controversy. Numerous issues – challenges by regulatory authorities, technology problems, controversial management decisions, etc. – have led to incidents that have dogged the company.

These incidences include a $1.25 million fine from the Financial Industry Regulatory Authority (FINRA) in December 2019 for failing to ensure the best pricing for its customers’ orders, as well as a related class-action lawsuit the following year. Robinhood also suffered data breaches over the past few years, the most recent a social engineering exploit in November 2021 that compromised the email addresses of approximately five million people, as well as more sensitive personal data for a subset of over 300.

Technical issues affecting Robinhood’s operations and reputation include a systemwide, all-day outage that occurred on March 2, 2020. This happened to coincide with the largest daily point gain in the history of the Dow Jones index, and prevented users from conducting most operations on the platform amid a rise in the S&P 500 of more than 4.6%.

The Nature of Regulated Markets

The Robinhood case shows how vital compliance archiving and supervision are for brokerage businesses, no matter what stage of growth they're in. Each of these incidents involved questions pertaining to business decisions, customer data, and technology issues. For each, electronic communications data provide a central body of evidence not only for defending the interests of Robinhood, but for assessing the strength of the company’s case.

The ability for Robinhood’s legal and compliance teams to build its case and respond effectively to these charges depends on how effectively it can conduct deep searches quickly on the petabytes of data retained in company archives. Furthermore, settlements negotiated after these incidents typically require companies to commit to a higher level of due diligence to avoid similar incidents in the future.

This stepped-up due diligence can be achieved through the use of supervision and surveillance technologies designed to sample communications data and automatically analyze it for suspicious or high-risk key terms.

What All High-Growth Financial Service Providers Need

It takes a lot – ingenuity, leadership, creativity, perseverance, and (frankly) a bit of luck – to build a business devoted to transforming the financial services marketplace. Innovation leaders need to focus their resources on defining their core value propositions, especially, in Robinhood’s case, to an entirely new generation of investors.

It goes without saying that financial service innovators also need to manage regulatory compliance risk. Unfortunately, this can be a resource-intensive operation prone to all-hands-on-deck crises that can compete with core business operations and initiatives.

For this reason, high-growth financial service providers need compliance archiving solutions that deliver high ease of use as well as high performance, with fast search and robust Early Case Assessment (ECA) tools. Regulatory bodies such as the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) can also require routine supervision and surveillance of electronic communications among employees and between employees and clients.

To successfully manage both these competing interests, trailblazing service providers require compliance archiving and supervision solutions that are intuitive to use and that provide powerful search, review, and export capabilities. Because a growing portion of business communications data is generated on social media and collaboration tool platforms subject to frequent updates, the best archiving and supervision solutions are SaaS-based offerings, delivered using a managed service delivery model, and staffed 24/7 by a team of experts steeped in regulatory risk mitigation and information governance technologies.

Finally, to maximize agility while accommodating growth surges, high-growth financial service firms need compliance archiving and supervision solutions that offer simple pricing. Service firms with their sights set on disruption must demand simple, predictable pricing for these solutions.

Conclusion

The financial services industry is rife with innovation today, as a growing list of new providers try to break away from established business models and connect with previously underserved people and institutions. As these providers test new strategies and business models, they are bound to encounter challenges and rough patches as new entrants into this highly regulated industry.

To mitigate against these risks, this new breed of financial service providers needs a compliance archiving and supervision solution that offers high search-and-export performance, captures and retains the gamut of social media and collaboration tool data that define today’s business communications, and offers a streamlined, intuitive user experience.

The right compliance archiving and supervision solution will minimize the cost and burden of reducing compliance risk, and thus enable financial service innovators to focus on competitive differentiation and customer service.

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