Millennials Are Shaking Up Wall Street, But Is It Helping Them?

Millennials are ruining everything — presumably because they enjoy drinking boomer tears as a refreshing complement to their avocado toast. And while most of this disruption seems well-deserved (will the world really miss Applebee’s when it’s gone?), there are some shifts that seem like less of a cause for celebration: the rise of the gig economy, the invention of ghosting, and so on.

But despite millennials upending everything from dating to e-commerce, there’s one industry that has proved slightly more elusive: Wall Street. While Uber may be rapidly dismantling the traditional taxi industry, Amazon is putting bookstores out of business, and Airbnb is making many a hotelier weep, the finance industry has seemed millennial-proof. However, some platforms may be changing this. Companies like Robinhood (a commission-free stock trading app) and SoFi (a millennial-focused loan company) are offering a cheaper, more savvy way to approach finance. Are they leaving the generation done dirty by banks any better off? Or have millennials just swapped one problem for another?

A Generation Shortchanged

More than any other generation, millennials have a strong incentive for changing how financial industries work. Defined, perhaps narrowly, by Pew Research as anyone born between 1981 and 1997, the oldest millennials had the misfortune of entering the job market when the Dot-com Bubble burst. While that might seem like bad luck, their younger cohorts had it even worse: entering the labor market in the fallout of the worst recession in a century.

All of this combined into the perfect financial storm for the generation known as the first Digital Natives. With job prospects being outright abysmal for much of the generations, millennials overwhelmingly pursued higher education — and in the process, young people aged 18–34 have wracked up a total of $2 trillion in loans. Saddled by this record debt, millennials unsurprisingly have record low saving rates, a situation that can’t be turned around simply by forgoing your daily Starbucks. The fact of the matter is that we’re experiencing the worst wealth inequality in over 90 years, and even though U.S. unemployment is at record lows and productivity continues to grow at a healthy 2.3% clip, we’re not seeing meaningful growth in wages. Worse, with job market mobility on a record 20-year decline, it seems unlikely that millennials will statistically get a promotion or find another, higher paying job.

Put in this context, it’s no wonder why millennials are chomping at the bit to rehaul the financial services industry. To them, more than any other generation, it’s flat-out broken, with only 28% of millennials saying they trust a bank to be fair and honest.

When There’s Blood in the Streets

In business 101, you’re taught that every cloud has a silver lining, and every failure is a new opportunity. With money being tight and distrust in financial institutions running high, several new competitors have rushed to fill the millennial financial void. On the surface of it, these companies all make the same promise: we’re not your parents’ financial institution; we save you money.

Take Robinhood, for example, the poster child of the millennial financial revolution. Founded by two Stamford grads, Baiju Bhatt and Vladmir Tenev, Robinhood is an online stock brokerage that’s more an app than a financial institution. Housed in a beautiful interface, the app allows users to buy and sell stocks without paying the $5–30 fees charged by its competitors. And while those fees might seem reasonable if you’re making thousand dollar trades, for millennials (whose average net worth is south of $8,000), they’re outright extortionate. Keeping this in mind, it’s no wonder that Robinhood has been a breakout success, with its userbase now topping 2 million. More importantly, the average age of a user is only 28.

But Robinhood isn’t the only company doing all it can to attract the disenchanted millennial. SoFi, for example, is an online lender that started out refinancing student loans, in essence giving millennials thousands of dollars in debt relief. Yet the benefits of being a “member” — literally, that is what SoFi calls its borrowers — don’t end there. They offer free social events, networking happy hours, and the ability to pause loan repayments if you lose your job. In the process, SoFi is giving the finger to the stuffy, traditional financial institutions that shortchanged a whole generation. And therein lies SoFi’s market niche. As CEO Mike Cagney explained, “The real opportunity is in taking traditional banking and recasting it into this concept of money, career, and relationships.”

Solutions without Problems

In 2017, investors saw the epitome of Silicon Valley hubris. The company’s name was Juicero, and it secured over $120 million from venture capitalists, including Google’s own parent company, Alphabet. The pitch was simple and best described in three words: high tech juicer. Simply insert a bag of freshly cut fruit, and the $600 Juicero would purportedly use four tonnes of force to make you a cup of, well, juice. The reality, though, was remarkably more anti-climatic and much funnier. The bags of freshly cut fruit were, in fact, bags of pre-squeezed mess, and using only your hands, you could get a full cup. Needless to say, by the year’s end, Juicero was out of business.

The Juicero incident is illuminating in that it serves as an example of Silicon Valley looking for solutions to non-existent problems. After all, who really needs a $600 “smart” juicer? Which makes you wonder how many real problems companies like Robinhood and SoFi are actually solving. On the face of it, quite a few. Robinhood is lowering the cost of entry into investing, while increasing the ease of use. SoFi is saving its “members” thousands of dollars in student loans, while also offering them a sense of community. And while each of these solutions addresses a unique pain point, one has to wonder: are these fundamental changes? Are fintech companies really putting millennials on track for financial success, or are they just mild upgrades of their outdated predecessor? A digital “recasting” of banks, to borrow Cagney’s phrasing.

Fast Company’s excellent 2017 write up on Robinhood hints at the answer by opening with an anecdote: how 26 year old Steven Card got into stock trading through the app. Like SoFi, or even more distantly, Facebook and Instagram, Robinhood provides Card with a sense of community. Users on average check the app 10 times a day, and Card himself likes to keep up on the market alongside his fellow Robinhood users and friends. All of this seems honestly good, even empowering, until the article mentions what’s in Card’s portfolio: Snapchat, which he uses, Ford, which he drives, AMD, which powers his computer. But here’s the thing, those are far from “safe” investments. Snapchat is down 30% from its IPO. Ford, despite paying a fat dividend, has seen declining stock prices for the last six years and has just seen its corporate debt downgraded to junk bond status. And while AMD has surged this past year in particular, the company’s beta (a measure of risk relative to general market trends) is worryingly high.

Of course, there’s a strong argument to be made that Card’s portfolio is irrelevant; what’s important is that Robinhood has given millennials a cheaper, easier way to invest. And this is absolutely true. But that fact belies another question: Has Robinhood given them a better way to invest? That answer is a little less clear.

Fintech and Fairweather Friends

While fintech companies like Robinhood and SoFi might not have the sordid ’08 history of your everyday multinational bank, their end goal is still the same: to make money off of you.

That’s not to say we should bow down to the altar of Wall Street corporate greed, but that doesn’t mean we should start performing ritual sacrifices in the name of shiny new fintech either. Robinhood, for example, has precipitated its fair share of financial calamities. With the advent of its Gold Subscription, Robinhood will let users trade on a $1,000 margin (i.e., borrowing $1,000). Free users can even buy and sell options. Option trading — which let people reserve the right to buy or sell securities at a specific price later down the line — can carry some pretty large risks, however. For example, a put option — the right to sell a security at a certain price — can incur unlimited losses, in theory. If you reserve the right to sell ten shares of a stock at $200, but its share price rips to $2,000, then you’re liable for a small fortune. While these financial tools might prove a boon to users who wanted more trading strategies, it also poses a bit of an ethical dilemma. After all, is it wise of Robinhood to encourage its userbase of mostly millennials to leverage up in the search for profits? It’s risky.

Take the infamous story of Redditor 1RONYMAN, who decided to make a $5,000 play on Robinhood that, in his own words, “literally cannot go tits up.” The idea was brilliantly stupid in its inception. The user took out a box spread, essentially four separate options that would hedge him regardless of whether or not the underlying asset went down or up (in theory, that is). When all the contracts expired in two years, he was set to make $40k or so. To make matters worse, though, Robinhood allowed him to use part of the spread as credit, letting him trade $250,000 worth of options with his initial $5,000. If this precarious arrangement seemed doomed for failure, that’s because it was. When a contract holder exercised his right to buy 28,000 shares of this stock, 1RONYMAN had to sell it to him. The only problem is that the share price had gone up. 1RONYMAN now had to buy 28,000 shares of a stock at a higher price, only to sell it at a lower one, losing the Reddit legend more money than he had to begin with. In the end, Robinhood closed his account with a negative $58k balance, and banned four way boxed spreads entirely.

1RONYMAN might be the story of one individual, but casually losing thousands of dollars on apps like Robinhood has become a recurring joke on the subreddit /r/Wallstreetbets. Joking aside, it shows how fintech companies are willing to sanction riskier financial behavior in order to add to their bottom line. Sure, most people won’t commit financial suicide in such a glorious manner, but many will be tempted to at least sign up for Robinhood’s Gold Subscription. In a literal sense, that means Robinhood gets to collect a nice 6% interest on a lot of millennials’ nest eggs, while users get to chase their higher multiples. In a more ironic sense, though, Robinhood is making its riches off the backs of its users.

The Enemy of My Enemy

Over the past few years, Capital One — one of the largest credit card issuers in the United States — has been opening bank cafes. Taking a cue from Starbucks, users can come to a cafe and do, well, whatever it is people do in a cafe. Sit, drink coffee, go on the internet, and maybe, just maybe, open another account. It’s a weird move, but it’s exactly what Robinhood and SoFi have already succeeded at: “recasting” the relationship between consumers and financial institutions. And there’s no doubt that other banks will soon follow suit, all in the hopes of courting millennials as they become an increasingly important part of the workforce. But as fintech and traditional banks rush to court younger investors with discount coffee and slick design, it’s easy to see how the new way of doings things quickly becomes much more like the old way.

In what’s becoming a norm for a generation, it seems then that millennials will have to make a tough financial choice. In choosing fintech over traditional banks, they’re picking lower fees and ease of use — even if in the process, they’re simply trading one evil for another. And while this decision might not have the same dramatic consequences as when they chose to flock to higher education in a troubled job market, there are some storm clouds in the distance. With fintech leading the push into increased borrowing, some industry professionals are worried that companies might be prioritizing the quantity of loans over the quality. But for now, millennials have to be content with the fact that the big banks are gunning for fintech, and the enemy of your enemy is your friend.