By Katanga Johnson and Anna Irrera
WASHINGTON/NEW YORK (Reuters) - A bipartisan group of U.S. senators sent a letter to regulators on Thursday expressing concern that financial technology startup Robinhood may not be offering full transparency to its customers over the botched launch of its new cash management service.
The senators asked for an update on how regulators "carefully monitor fintechs who, intentionally or not, blur financial products for a competitive advantage."
"Indeed, robust competition should not come at the expense of customer clarity, and every effort should be made not to mislead customers," said the letter, addressed to the heads of the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and the Securities Investor Protection Corp.
The letter was sent by Republican senators John Kennedy and Jerry Moran and Democratic senators Doug Jones, Brian Schatz, Jack Reed, Robert Menendez and Mark Warner.
A Robinhood spokesman declined to comment.
Last Thursday Robinhood announced that it was launching a "checking and savings" service paying 3 percent interest and said customer deposits would be insured by SIPC for up to $250,000. A day after the announcement, the CEO of SIPC, an industry nonprofit created by Congress to help recover customer assets when brokerages go under, told reporters he did not believe the fund would actually insure Robinhood's accounts.
In response Robinhood altered the product's name on its website to "cash management" and removed references to SIPC insurance. A blog from the company's founders did not clarify whether the new service would be insured.
"We are concerned that rebranding Robinhood's original announcement to cash management may simply be a way to circumvent regulatory scrutiny without offering full transparency to its customers," the letter said. "As of December 20, over 850,000 people have signed up for the wait list for Robinhood's new service, and some of these individuals may have signed up before Robinhood retracted its SIPC insurance claim."
Robinhood, which is valued at $5.6 billion, is best known with young consumers for its commission-free stock trading app. Like other fintech startups, it has been trying to branch out into other financial services, such as deposits.
The issues it faces over its new cash management service highlight the regulatory gray area that many fintech startups operate in as they seek to take advantage of digital technology to challenge traditional financial institutions.