Fraud is a growing issue for fintech companies, as bad actors are doing everything from stealing identities to exploiting the slow U.S. bank-to-bank transfer network to siphon off money. The problem has gotten so bad that some fintechs, including investment service Betterment and digital banks HMBradley and One, have temporarily banned transfers from other digital banks for fear of being on the hook for a fraudulent transaction.
Forbes has learned that Robinhood, the dominant free stock trading app with 22 million active users, has become the latest fintech to ban transfers from a specific list of institutions as a blunt tool for fighting fraud. In a statement to Forbes, a spokesperson confirmed: “Robinhood prevents transfers from routing numbers that display a high pattern of return and fraud rates.” (Routing numbers are the bank identification numbers used by the bank-to-bank transfer system in America.)
“It is a standard practice to prevent transfers from institutions that are sources of sustained levels of fraudulent activity, whether digital banks or traditional banks,” the statement continues. “When Robinhood and other financial institutions take the step to prevent transfers from a particular routing number, it’s because the fraud problem originates at that institution.”
Robinhood declined to disclose the specific institutions on the list, but Forbes has learned that it contains a wide variety of banks, including a heavy concentration of neobanks and the moderate-sized banks they partner with, plus a small number of large, traditional brick-and-mortar institutions. Some of the names on the list include:
LendingClub; Ohio-based Sutton Bank (one of the partner banks that Square’s Cash App uses to store customer deposits); Tennessee-based First Century Bank (one of the partner banks for PayPal’s Cash Card); prepaid card issuer and digital bank Green Dot; New York-based Metropolitan Commercial Bank (the partner bank for digital bank Current); and Iowa-based Lincoln Savings Bank (one of the partner banks for fintech apps such as Cash App and Acorns). Pittsburgh-based PNC Bank–the nation’s seventh largest bank by assets–and its recent acquisition BBVA USA are also on Robinhood’s banned list, Forbes has been told.
LendingClub, First Century Bank, Green Dot and Metropolitan Commercial Bank didn’t respond to Forbes’ requests for comment. A Sutton Bank spokesperson says, “the fraud rates we experience across our programs are in line with or below industry averages” and that ACH returns (when a transaction fails because the customer doesn’t have enough funds in his or her account) are more likely the culprit. PayPal says it has never had an integration with Robinhood. Lincoln Savings Bank says it has no knowledge of such a ban, and that it hasn’t heard any complaints from customers. PNC also says it found no evidence of Robinhood’s ban.
The slow speed of America’s bank-to-bank transfer network makes certain types of fraud possible. Since transactions can take days to settle, people can move money from one account to another and then withdraw the same funds from both accounts while a transfer is in process–that’s why some fintechs are afraid to accept transfers.
Many financial institutions have lists of banks whose customer deposits they view as higher risk, and they apply extra scrutiny to transactions with those institutions. But outright bans on transfers are unusual and reflect the difficulty some fintechs have had controlling fraud.
Robinhood’s ban comes as it grapples with a variety of troubling security issues. In early November, the brokerage disclosed a breach that exposed personal data of roughly seven million users to hackers that demanded an extortion payment from the company. (Robinhood wrote in a blog post that it “contained” the hack, and said there was “no financial loss to any customers” as a result of the incident.)
And this summer, Robinhood reported that its provision for credit losses for the first half of the year surged 54%, largely due to increased fraudulent activity. Tommy Nicholas first encountered Robinhood’s ban last month when he tried to move money from his personal digital bank account (he declined to say where) to Robinhood.
The brokerage app abruptly rejected it, even though he had been moving funds between the two institutions without issue for three years. This naturally piqued Nicholas’ interest, since he’s the cofounder and CEO of Alloy, a startup whose software helps fintechs to prevent fraud and to comply with “know-your-customer” regulations (aimed at controlling money laundering, tax evasion and other illicit activity).
“Banks and fintech companies are banning deposits and transfers from fintech companies at a rate I’ve never seen before,” Nicholas tweeted after the experience. A wide range of factors have contributed to the problem fintechs are now having controlling fraud. One is that startups aim to have a “frictionless” signup process, where it’s quick and easy to join, making them a tempting target for scammers.
Another is that fraud is on the rise everywhere—fraud attempts on merchants rose 140% in 2021 compared with 2019, according to LexisNexis. Nicholas thinks one of the biggest causes of digital banks’ outsized fraud problem is simply their young age. Since they’re new and fast-growing, they have a larger concentration of new customers. And at any financial institution, new customers have a higher propensity to commit fraud than long-standing ones.
In early December, Forbes reported on merchants like Avis and Holiday Inn rejecting digital bank cards over fraud concerns, but fintechs blocking each other presents a different and potentially bigger challenge. So far, the total amount of transfers being blocked by fintechs isn’t large, Nicholas says. And a Robinhood spokesperson says that only a “single-digit percentage” of its users have been affected by its fraud-prevention bans—which means up to 2 million customers could encounter the block.
Yet if the practice continues to spread, digital banks’ brands could well suffer, as consumers won’t want to rely on a banking service that isn’t accepted by other apps for money transfers. In a blog post describing the challenges for fintechs, Nicholas writes: “The calculation used to be customer acquisition cost vs. lifetime value vs. fraud risk. Now, your institution’s reputation at the network level determines what your users can and can’t do. It’s no longer in each institution’s control.”
If bans between digital banks become common and long-lasting, all the startups could suffer, Nicholas says. That, he warns, could tilt the playing field further in incumbents’ favor and discourage entrepreneurs from starting new neobanks. “Fewer fintech companies means less innovation and less competition, which negatively affects the consumer, especially those underbanked or niche populations who may want something that traditional banking institutions aren’t providing,” Nicholas writes.
For example, Chime has attracted millions of customers partly because people can use it like a regular bank. It has helped lower-income Americans avoid monthly and overdraft fees and has pushed the entire banking industry to reduce or remove fees, with Capital One being the latest established bank to eliminate overdraft fees.
If blanket bans aren’t the right approach, what is? Nicholas believes companies can do more to identify each specific type of fraud they see–there are many ever-changing varieties–and deploy custom tactics to combat each one, such as requiring users to submit more documentation or a valid phone number to complete a transaction.
He also thinks fintechs need to collaborate more: “We all win by lowering the fraud risk of the entire ecosystem, but the growth mindset of the last five to ten years has lacked the incentives for deep collaboration at almost all levels. There are efforts underway to correct some of this, but I think more needs to be done.”
12/20/21: Updated to include comment from PNC.
I’m a reporter on Forbes’ wealth team covering the world’s richest people and tracking their fortunes. I was previously an assistant editor for Forbes’ Money & Markets section, and I worked for Bloomberg and Pitchbook News before that. I studied history and economics at the University of Virginia, where I also wrote for the student paper and a very secretive underground satire magazine.
- “Robinhood Company Profile”. Craft. Archived from the original on December 9, 2019. Retrieved July 7, 2020.
- With $13 Million, Robinhood Aims to Share the Stock-Trade Wealth”. Recode. Archived from the original on March 23, 2019. Retrieved March 23, 2019.
- “Robinhood lures digital coin traders from Coinbase with a free service”. Digital Trends. February 22, 2018. Archived from the original on May 18, 2018. Retrieved May 17, 2018.
- Forget $10 Trades, Meet Robinhood: New Brokerage Targets Millennials With Little Cash”. Forbes Magazine. Archived from the original on September 12, 2014. Retrieved September 26, 2014.
- “Robinhood Faces SEC Probe for Not Disclosing Deals With High-Speed Traders”. wsj.com. September 2, 2020. Retrieved October 22, 2020.
- With No Frills and No Commissions, Robinhood App Takes On Big Brokerages”. New York Times. Archived from the original on February 19, 2017. Retrieved March 17, 2017.
- Robinhood Is Making Millions Selling Out Their Millennial Customers To High-Frequency Traders”. Seeking Alpha. Archived from the original on March 21, 2019. Retrieved February 13, 2019.
- Robinhood Agrees to Pay $70 Million to Settle Regulatory Investigation”. Wall Street Journal. Retrieved June 30, 2021.
- (NASDAQ) https://www.nasdaq.com/articles/robinhood-says-1.6-million-people-now-on-crypto-wallet-waitlist
- Robinhood gets $3M to take from Wall St. and give to Main St. with its mobile-first, zero-commission brokerage”. PandoDaily. Archived from the original on May 13, 2014. Retrieved May 7, 2014.
- Forget $10 Trades, Meet Robinhood: New Brokerage Targets Millennials With Little Cash”. Forbes. Archived from the original on August 6, 2019. Retrieved November 9, 2019.
- “Our Story”. Robinhood. Archived from the original on November 9, 2019. Retrieved November 9, 2019.
- New Robinhood app offers free trading. Millennials jump in”. CNNMoney. Archived from the original on July 17, 2019. Retrieved July 17, 2019.
- Young, Poor and Looking to Invest? Robinhood Is the App for That”. Wall Street Journal. Archived from the original on September 11, 2017. Retrieved August 4, 2017.
- Robinhood Raises $13M To Democratize Stock Market With Zero-Commission Trading App”. TechCrunch. AOL. Archived from the original on March 18, 2017. Retrieved March 17, 2017.
- Trading startup Robinhood raises $110 million in new funding round”. Reuters. Archived from the original on August 28, 2018. Retrieved August 27, 2018.
- Robinhood’s Stock Trading App Is Valued at $1.3 Billion”. Bloomberg News. Archived from the original on May 14, 2017. Retrieved May 14, 2017.
- Free stock trading app Robinhood rockets to a $5.6B valuation with new funding round”. TechCrunch. Archived from the original on April 11, 2019. Retrieved April 24, 2019.
- Fintech Robinhood leaving Palo Alto for new HQ in former Sunset Magazine site”. San Francisco Business Times. American City Business Journals.
- “Robinhood Is Set to Raise at Least $200 Million in New Funding”. June 7, 2019. Archived from the original on June 2, 2019. Retrieved June 7, 2019.
- “Robinhood launches… UK waiting list”. TechCrunch. Retrieved November 21, 2019.
- Credit where credit is due’: Robinhood investors called the market bottom, showing ‘impeccable’ timing, Societe Generale says | Markets Insider”. markets.businessinsider.com. Archived from the original on September 17, 2020.
- Billionaires keep blaming Robinhood traders for skewing stock prices. But a new study says the upstarts have minimal impact on the overall market. | Markets Insider”. markets.businessinsider.com. Archived from the original on September 18, 2020.
seasoned investors often blamed them for driving the stock market higher. there was little to no correlation between the one-day change in stock price and the one-day change in the number of Robinhood users holding them
- Robinhood raises $280 million in push for global expansion”. Fortune. Retrieved May 4, 2020.
- “Robinhood raises $200M as IPO speculation swirls”. Fortune. Retrieved August 23, 2020.
- MARKETS Robinhood to pay $70 million for outages and misleading customers, the largest-ever FINRA penalty”. CNBC. Retrieved July 1, 2021.
- Robinhood drops 5% in stock trading app’s Nasdaq debut”. CNBC. Retrieved July 29, 2021.
- Robinhood Stock Steadies After an Early Tumble”. Barron’s. Retrieved July 29, 2021.