How does Robinhood make money?
A zero-commission trading app where you are the product.
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This is Edition #5 of the newsletter. You can find the previous editionsĀ here.
About Robinhood
Robinhood is a discount-brokerage service that offers investors commission-free trading through its website and through mobile apps. The investment app was designed to give the next generation inexpensive access to trading that could help them get involved earlier in the market. Taking on a proverbial "not like the other guys" mentality, Robinhood has attracted a large millennial base to use the low-to-no-fee app.Ā Ā
Stats
š£2013 Founded
š©āš»10M Users
š°60M/month Revenue in Marchā20 (3x of Febā20)
šø$1.2B Raised
š¦$8B Valuation
How Robinhood makes money
Interest
The app makes a large portion of its money from interest made by lending out investor's idle cash - basically making money off of uninvested funds in customer's accounts - much like a bank collects interest on cash deposits.
Premium Account
Other major sources of revenue include a $5 monthly fee for optional membership to Robinhood Gold, which gives the client access to margin loans and a suite of investing tools and data; interest on uninvested cash; lending stocks purchased on margin; and fees on purchases using the company's Cash Management debit card.
High-Frequency TradingĀ and Order Flow
As per a Bloomberg article from October 2018, the company was generating nearly half of its revenue from payments for order flow, a ubiquitous, although controversial, practice whereby a brokerage firm receives compensation and other benefits for directing orders to different parties for trade execution.
Instead of orders being processed on a public exchange, companies like Robinhood can make money off of processing (or directing) trades through behind-the-scenes parties that provide the other end to the trade. According to Robinhood, they use market makersĀ Citadel Securities, Two Sigma, Wolverine, and Virtu.
Robinhood refers to this source of revenue as ārebatesā from market makers and trading venues.
Future
The average age of a Robinhood user is 32. With such a massive millennial user-base, Robinhood has positioned itself as the fintech-tool for the new generation. It could very easily build additional features to serve this audience and compete with other fintech cos trying to build solutions for millennials - Acorns, Chime etc.
My bet is that Robinhood will aggressively push for acquisitions in this space and come out as a leading all-stack-millennial-fintech platform.
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