How Robinhood makes its money
Here are three of the week's top pieces of financial insight, gathered from around the web:
New rules leave banks flying blind
The federal stimulus package created a "credit blind spot" for banks, said AnnaMaria Andriotis at The Wall Street Journal. A provision in the government's March aid bill stipulated that "lenders that allow borrowers to defer their debt payments can't report these payments as late to credit-reporting companies." This has left banks asking "whether the credit scores and reports they have relied on for decades are reflecting applicants' true risk." More than 100 million Americans deferred their debt payments between March and June. Banks have started asking some credit-reporting companies to "remove borrowers in deferment programs from solicitation lists for credit cards and other loans." Lenders are looking at new streams of data, such as phone and utility records and cash flows in checking accounts.
How Robinhood makes its money
Robinhood pioneered commission-free trading, but it still makes money off your trades, said Jeff John Roberts and David Morris at Fortune. How? The answer is PFOF, or "payment for order flow." The online brokerage app collects fees from "electronic market makers for passing on customer orders." When you buy a share of a stock on your phone, "Robinhood sends that order to a trading giant like Citadel Securities and receives a few pennies in return" while Citadel completes the transaction and earns a small commission itself. "For Robinhood, those pennies add up": Citadel and other hedge funds paid the platform nearly $100 million in the first quarter of 2020, leading to questions about whether Robinhood is getting customers the most favorable prices.
No change to spare
A nationwide coin shortage is making retailers count their pennies, said Susan Selasky at the Detroit Free Press. Last month, the Federal Reserve revealed it's been running low on change because the pandemic has slowed production at the U.S. Mint. With businesses reopening, one bank said "its supply from the Fed has been cut by 90 percent." Retailers have started "rounding sales up or down" to conserve coins; the Kroger supermarket chain said it will stop giving coins as change, instead putting small balances on customer reward cards. The owner of a market with a coin kiosk has been bagging coins from the machine and recycling them for use in his store. For the first time, however, "an armored-car service offered to buy his coins" for $8,000.
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