Robinhood is one of my favorite apps these days.
I’m personally super interested in personal finance, and the fact that I can participate in the market without having to pay commissions on every trade makes me very happy. (If you think Robinhood is truly “free”, you’d be wrong. Keep reading why)
Today, I wanted to explore Robinhood’s monetization strategy as well as their history and future plans. Let’s start with how Robinhood was founded.
>>> You can sign up for Robinhood here and get a free stock.
While Robinhood does not charge for commissions, they make money from Order Flow.
History of Robinhood
Robinhood was started by Vlad Tenev and Baiju Bhatt, who first met at Stanford.
After the 2008 financial crisis and the 2011 Occupy Wall Street movement, a lot of people had lost faith in the financial system, and sophisticated tools and access to resources were mostly limited to the wealthy.
So, Tenev and Bhatt were inspired to create a meaningful way to empower both professionals and first-time investors.
They first launched Robinhood in 2013, a mobile-first commission-free brokerage app. They initially envisioned the app to be a way to easily invest in stocks and made it accessible to everyone, specially to the millennials.
However, it took their team over one year to go over regulations and get approval from the Securities and Exchange Commission (SEC) and become a FINRA member. The one-year waiting and further working on improvements did not disappoint because it also took them just one year to skyrocket to a million-person waitlist on their app. (I remember being position 200k+ on this list and not being able to contain my excitement)
They eventually re-launched their app on Apple smartphones and tablets with a sleek interface and enhanced features in 2014, and their Android app in 2015.
Robinhood is currently valued at $12B (2021) according to Forbes.
Services that Robinhood Offers
As of 2021, you can buy and sell the following securities on Robinhood:
- Exchange traded funds (ETFs)
- Interest on your uninvested cash
All without paying a cent in commissions.
How Can Robinhood Afford Commission-Free Trades?
Robinhood has a few monetization strategies:
1. Robinhood Gold
Robinhood earns revenue from premium subscriptions. They offer a “Gold Subscription,” which is a premium margin account starting at $10 per month with the following benefits:
- Gold Buying Power. Robinhood Gold lets you enjoy up to a 2x buying power so you can invest more, and access your funds immediately after selling stocks. (i.e. if you have $10,000 on your cash account, you could borrow another $10,000 from Robinhood)
- Larger Instant Deposits. Instead of waiting 2-3 days for your bank funds to transfer to your Robinhood account, Robinhood Gold allows you to access them immediately.
Moreover, if you have a premium account holding a minimum amount of $2000, Robinhood lets you buy stocks on Margin. What does it mean?
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Basically, Robinhood allows you to borrow money to boost the potential earning you can make when a stock goes up. However, if you make a wrong bet and stocks go down, Robinhood might sell that stock on your behalf to cover the borrowed money.
2. Interest from Customer Cash and Stocks, Much Like a Bank Collects Interest on Cash Deposits
Robinhood earns interest from the available cash deposits sitting in your account, similar in a way with how banks collect interests. For instance, if you have a $500 in your Robinhood account and interest rates are 2%, they would make $10 off your money per year. It’s not that much but just imagine multiplying it to the 5 million accounts they currently have now, that’s equivalent to a significant amount of earnings.
3. Rebates from Market Makers
The fintech company also earns revenue from rebates by directing its order flow to market makers, including Two Sigma, Citadel, and Virtu. It gains approximately $0.00026 in rebates per dollar traded, which means for every $100 of stock bought by a customer, Robinhood earns about 2.6 cents from the broker-dealer.
According to Tenev, the money they make from this allows the company to cover operating costs, which makes the company able to offer zero-commission trading.
Robinhood’s Dark Pool: and How They Sell Your Order Data
It was previously mentioned that Robinhood accepts payment for order flow, but it also seems that the company is selling their customer’s orders and earns far more from it than their competitors.
This can lead to a conflict of interest and can be terrible for you as a customer because the people which Robinhood sells your data, such as Two Sigma, Citadel, or Wolverine Securities, have records of violations of securities laws and regulations.
The SEC requires all brokerage firms that sell order flows to disclose who they sell it to and reveal how much they pay. However, there have been speculations that there is a material difference with the disclosures being released. Some suggest that there must be something happening behind the scenes at Robinhood that is kept secret from the public.
Brand New Checking and Savings from Robinhood
In 2019, Robinhood announced that they are planning to offer a 3% checking and savings accounts on all account balances. However, they quickly retracted due to legal troubles.
Robinhood initially said that their new service is being insured by the Securities Investor Protection Corp. (SIPC), but it might not actually be true. According to SIPC, Robinhood had not consulted them in advance of its announcement last December 13 of utilizing checking and savings accounts.
SIPC CEO Stephen Harbeck said that this could lead to some regulatory problems for Robinhood. He had already lodged a complaint with the SEC as regards to this matter.
The SEC hasn’t given its response to Harbeck’s inquiries, but once they conduct an investigation against Robinhood, they might find that the commission-free trading company might not be properly stewarding the accounts of its users. Robinhood might also face problems with SIPC, which could pull their certifications. Eventually, they might run into unwanted issues with banks and other institutions that they’re working with, such as the Wall Street exchanges.
Is Robinhood Making Money?
Robinhood has been investing a ton of money to grow, but the question still remains: is Robinhood profitable?
Robinhood has a sound business model, and they seem to be making enough money to attract big firms, like Venture Capital, to invest large sums of money in them. Also, they’ve been very attractive to millennial investors because of their ease of use and ability to trade stocks for free.
According to this site, Robinhood made $673M in 2020.
The company has doubled the number of its users in the past year with 5 million brokerage accounts, surpassing its rival company, E-trade.
In February this year, it launched its cryptocurrency trading for bitcoin which earned the interest of many more users. In 2018, year they surpassed $150B in trade volume.
It might sound that the company is not earning much from offering a $0 for each trading, but they have utilized well their monetization strategies to grow and expand into the big company they are today.
They have so far proven that even in the competitive markets of brokerage services, financial technology upstarts like them has the ability to make it big by bringing new consumers into the financial services market who weren’t exactly aware that they can participate in this market.
In my opinion, Robinhood is one of the most innovative and disruptive apps in the financial space.
I was super glad to have had the chance to speak with Robinhood’s CEO Vlad Tenev at UCLA in 2016.
I know that I’m personally stoked for Robinhood’s IPO. With their new move to attack Coinbase and the banking system in general, I’m confident they can secure a lot of deals from big the firms in the market. In a couple of years from now, I can see Robinhood becoming one of the top full-service financial services company.
You can sign up for Robinhood here and get a free stock.
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