Negative Effects of Investing Apps on Vulnerable Populations
Mobile trading applications attract young traders and individuals who often lack financial literacy. Gamification of investing, combined with carefully designed 'behavioral-economics based' nudges are encouraging users to buy and sell the riskiest financial products and do so more frequently than customers at other retail brokerage firms. Their inexperience can lead to staggering losses, mental health-related issues, and augmenting economic mobility challenges.
According to investigative journalism by Nathaniel Popper from The New York Times, 'In the first three months of 2020, Robinhood users traded nine times as many shares as E-Trade customers and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the most recent quarter. They also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size, according to the analysis.'
The average customer of these investing apps is young and lacks investing know-how. The average age is in their 30's, and accordingly to data provided by the leading app, half of its customers had never invested before.
Results have been devastating for many, resulting, in some cases in suicide, as reported by Forbes Magazine on their Jun 17, 2020 story about a young man in Nebraska who killed himself after getting into substantial debt. The founders of the app, which is valued at over $10B, pledged to make some changes, but the time is ripe for regulations and a better understanding of the landscape.
Investors in these apps have reportedly compared them with 'legalized gambling' (New York Times) as if that was a good thing. Of course, these apps do not force anyone to invest, but in times of economic hardship, augmented by COVID-19, vulnerable populations such as individuals with a lack of financial literacy, Black and Hispanic marginalized Communities and low-income families everywhere are easy prey for these apps that make billions from commissions on these gambles.
At the core of the matter, we have a lack of financial literacy.
We can start by debunking the myth that Trading is free, as reported by the Wall Street Journal. Market-makers like Citadel Securities and Virtu Financial pay millions (Financial Times) to process the trades and put them back onto the market, making money off of the spread — the price difference between the buy and the sell.
These apps advertise no-cost trading as if that were democratizing the access to investing. These marketing gimmicks are predating on the young, the inexperienced, and the vulnerable.
The lack of friction and gamification created a large boost in retail trading, and during the COVID-19 pandemic.
At the core of the problem, we observe a lack of Financial Literacy. The Council of Economic Education reports in 2020 that, in the US, only 21 of 50 states require any form of financial education (personal finances) for high school students.
Black and Hispanic groups are particularly easy prey of the promise of quick profits due to a dangerous cocktail of lack of financial literacy and the pandemic-accelerated economic downfall, which affected in a disproportionate way some vulnerable groups such as Black and Hispanic communities in the US (see stats on this challenge: Economic Mobility For Black And Hispanic Communities
A Research paper from Malinova, Park, and Riordan, evaluated granular level data from the Toronto Stock Exchange from 2006 to 2012 (see sources) and concluded that while retail investors make persistent intra-day trading losses, institutional investors earn positive profits, and high-frequency trading (HFT) profits decline over time.
Retail losses add up to almost $500,000,000 over their six-year sample.
The Council for Economic Education highlights that 'Financial illiteracy can result in poor saving, poor spending, excessive credit card use, and bad investment decisions. The stress of financial insecurity in families can lead to divorce, suicide, domestic violence, and other crimes.'
While the U.S. is the world’s largest economy, the Standard & Poor’s Global Financial Literacy Survey ranks it No. 14 (tied with Switzerland) when measuring the proportion of adults in the country who are financially literate. The U.S. adult financial literacy level, at 57%, is only slightly higher than that of Botswana, whose economy is 1,127% smaller.
Our youth and our vulnerable populations are not only deep into debt, in most cases, under predatory rates. This creates a cycle of poverty that continues to erode the base of our society.
It is also an unbalance battle. Investment apps are extremely profitable and backed by large venture capital and private equity firms, while financial literacy efforts do not count with the same deep pockets.
Investment News reported that the disparity is 25:1, as in $25 invested in marketing financial services for every dollar invested in financial literacy.
'The financial services industry engages in consumer education efforts — but that’s dwarfed by the resources devoted to marketing its products. The industry spends roughly $17 billion annually to market products and services to consumers, but only $670 million on financial education, according to a 2013 report published by the Consumer Financial Protection Bureau.
That translates to $25 spent on financial marketing for every $1 put toward financial education — meaning the public has little access to unbiased information.'
Reach 100% states requiring personal finance education at high school and first year of college.
Reduction in credit card debt and predatory loans among vulnerable populations.
Increase Financial Literacy to 90%
New Laws and Regulations to protect vulnerable populations from the 'Investment Apps' that lack proper disclosure and disclosure of the potentially devastating effects to personal finances.
NGOs assisting low income individuals
There are multiple grants from the Federal Government, private Foundations such as Charles Schwab
MyMoney.gov is the federal government's website that serves as the one-stop-shop for federal financial literacy and education programs, grants, and other information. MyMoney.gov is available in English and Spanish.
There are Regulatory Elements needed while we address the root cause: Financial Literacy. Schools are teaching the skills of reading, writing, and arithmetic so that our children can become productive members of society, but they also need to teach the financial skills necessary to survive and thrive in today’s society.
Financial literacy must be seen as a crucial part of the whole education system. Some ideas are:
Advocate for effective laws/regulations requiring age-appropriate financial literacy education in our schools.
Create up-to-date curricula for our K-12 education system as most of our curricula is not up to date with the emergence of new mechanisms such as trading apps gamifiying the experience.
Create a Domain-Specific Knowledge Graph to power a safe-search-engine that aggregates financial literacy resources and tools, only from trusted sources. (more details in the ideas section of this challenge: Economic Mobility For Black And Hispanic Communities An example of a safe search engine powered by a domain-specific knowledge graph, is the RESOURCES tab of X4i.org and the details, including a published research paper, are documented in x4i.org/our-data
New Your Times - Nathaniel Popper - Robinhood Has Lured Young Traders, Sometimes With Devastating Results
Shifting Sands: High Frequency, Retail, and Institutional Trading Profits over Time - Malinova, Park, Riordan | University of Toronto | University of Ontario Institute of Technology
Wall Street Journal - Alexander Osipovich and Lisa Beilfuss - Why ‘Free Trading’ on Robinhood Isn’t Really Free
Council for Economic Education - The Risk of Financial Illiteracy - By Neil Johanning, Treasurer for New York State PTA
Council for Economic Education - Survey of the States (2020)
Giving Tech Labs (www.giving.tech)