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Robinhood's Business Model: How Do They Make Money?

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US-based fintech company Robinhood provides users with a variety of web-based and mobile financial services related to trading stocks and other assets — all for free. In fact, Robinhood was one of the pioneers of commission-free trading. 

So, how exactly does Robinhood make money if it doesn’t charge users any fees?

Looking at Robinhood’s business model can provide some interesting insights into how one of the most famous US trading platforms works.

What Is Robinhood?

Robinhood markets itself as a fee-free brokerage that’s accessible to all. The company offers a mobile trading app for iOS and Android devices and a browser-based platform.

Robinhood

Robinhood gives investors the option to buy and sell traditional stocks, exchange-traded funds (ETFs), options, American depositary receipts (ADRs), and cryptocurrencies (in certain geographic locations).

All users have to do to get started with Robinhood is download the mobile app or visit the Robinhood website and create an account. Once logged in, users can transfer funds to their brokerage account from a bank account or credit card and start trading.

There’s no cost for users to open and maintain accounts, and it’s free to transfer funds back and forth between a Robinhood brokerage account and a bank account. Additionally, all stock, options, and ETF trades are totally commission-free.

Robinhood currently has more than 15 million monthly active users and is particularly popular among new investors, especially in the 18- to 44-year-old age range.

A Brief History of Robinhood

Robinhood was founded in 2013 by Vladimir Tenev and Baiju Bhatt, who met while studying at Stanford University.

Vladimir Tenev and Baiju Bhatt

After launching two previous fintech startups and selling trading software to hedge funds, the two came up with the idea for Robinhood as a way to democratize trading for everyone.

The idea arose from the discovery that large Wall Street firms pay basically nothing to trade millions of dollars in financial products, while individual traders were paying hefty commission fees on even the smallest of trades.

Tenev and Bhatt set out to build a mobile-focused trading platform that would give everyone — not just the wealthy — the same access to investing in the financial markets, no matter how much money they had available to invest.

The main drive behind Robinhood is leveraging technology to encourage everyone to participate in the financial system, especially from a relatively young age (18+).

Tim Draper of Index Ventures and Marc Andreessen of Andreessen & Horowitz were the first venture capitalists to back Robinhood, investing a total of $3 million in a seed round in April 2013.

In its first year of operating, Robinhood gained nearly a million users and processed an impressive $1 billion in transactions. By 2016, just three years after launching, Robinhood hit the $2 billion in transactions milestone.

The COVID-19 pandemic and its accompanying lockdowns in 2020 saw Robinhood experience a growth spurt of more than three million additional users. However, this sudden growth also led to a few problems, including several major outages leading to class-action lawsuits.

In January of 2021, Robinhood experienced some more difficulties when they restricted users from purchasing GameStop, AMC, and other stocks that were part of the “meme stock” trading frenzy taking place at the time.

Robinhood cited “market volatility” as the reason for these bans, but users were outraged and the company was criticized for instating a trading halt. 

The controversy resulted in angry users flooding app stores with negative reviews of Robinhood, a lawsuit being filed, and an investigation by the Securities and Exchange Commission (SEC).

Ultimately, Robinhood was forced to raise more than $3.4 billion in funding to deal with the fallout from the trading halt, which included paying a $70 million fine issued by the Financial Industry Regulatory Authority (FINRA).

Despite its setbacks, Robinhood managed to go public in July 2021, selling shares at $38 each during their IPO and raising nearly $2 billion.

Robinhood IPO

Today, more than 15 million people use Robinhood as their daily trading platform.

How Does Robinhood Make Money?

Robinhood’s business model has a few different revenue streams. These include payment for order flow (PFOF), Robinhood Gold subscription fees, interest on margin loans and securities loans, income generated from cash, and interchange fees.

1) Payment for Order Flow

Whenever users trade stocks, options, and ETFs through their Robinhood brokerage accounts, Robinhood sends those trades to different market makers and trading venues that execute them.

In order to compete with exchanges, these market makers and trading venues pay brokerages (in this case, Robinhood) through rebates for sending them buy/sell orders, which is a process known as payment for order flow, or PFOF.

Robinhood uses an algorithm known as a smart order router to direct orders to market makers that are most likely to give the best price. The algorithm also sends a small portion of orders to exchanges, paying them when they take liquidity and being paid when they provide liquidity.

This type of transaction-based revenue accounts for approximately 72.8% of Robinhood’s total revenue and is the reason why the platform can offer commission-free trading to its users.

Payment for Order Flow

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2) Robinhood Gold Subscription Fees

Robinhood offers a premium account membership program called Robinhood Gold, which costs users $5 a month.

Robinhood Gold

A Robinhood Gold account grants users access to additional investment tools and benefits, including Morningstar research reports, NASDAQ Level II Market Data, bigger instant deposits, and margin investing at discounted rates.

Robinhood Gold subscription fees account for less than 10% of Robinhood’s total revenue.

3) Interest on Margin Loans and Securities Loans

Robinhood earns interest on two types of loans: margin and securities.

Margin loans are funds Robinhood gives investors on the platform, so they can invest in more securities than they have funds available for.

Robinhood charges users who invest on margin 5% interest on total margin loans above $1,000.

Robinhood also earns money from lending securities to counterparties.

The revenue Robinhood earns from these two types of interest makes up about 17.5% of the company’s total income.

4) Income Generated From Cash

Like all financial companies, Robinhood also earns a small income from uninvested brokerage cash, which they deposit into interest-earning bank accounts. 

Income generated from cash is a tiny revenue stream for Robinhood that gets lumped in with “other revenue,” including Robinhood Gold fees, as less than 10% of their total income.

5) Interchange Fees

Robinhood offers users debit cards through the Robinhood Spending Account program (formerly through the Cash Management program). 

Whenever users make payments using the Robinhood debit card, the company makes a small amount of money on interchange fees, which are basically transaction processing fees charged by card providers.

How Much Money Does Robinhood Make?

Robinhood generated $1.81 billion in revenue in 2021, representing a 90% year-over-year increase from 2020, when the company reported a total revenue of $0.95 billion.

For the first two quarters of 2022, Robinhood reported revenues of $299 million and $318 million, respectively.

These numbers were down significantly (more than 40%) from the same two quarters of the previous year.

Is Robinhood Making a Profit?

Despite its growing revenue and use base, Robinhood is not yet profitable. The company’s net loss for the first quarter of 2022 was $392 million, and for the second quarter, it was $295 million.

Analysts are skeptical about whether Robinhood will become profitable in 2022, and the company has recently taken measures to cut costs. 

For example, Robinhood cut 23% of its staff in August 2022. This followed an announcement that the company would cut 9% of its employees just a few months earlier, in April 2022. Both of these announcements resulted in drops in Robinhood’s stock price.

Even with recent losses and uncertainty about Robinhood’s business model and future, some analysts argue that reduced spending, rising interest rates, and continued organic growth are putting Robinhood on the right path toward profitability.

How Much Money Has Robinhood Raised?

According to Robinhood’s profile on Crunchbase, the company has raised $6.2 billion in funding over 27 rounds.

The latest funding round took place on May 13, 2022, and was a Post-IPO Secondary round.

Notable venture capitalist firms that have recently invested in Robinhood include Emergent Fidelity Technologies, 9Yards Capital, Sequoia Capital, New Enterprise Associates, Salesforce Ventures, Bossanova Investimentos, Rockpool Capital, and Friends & Family Capital.

What Is Robinhood’s Ownership Structure?

Robinhood is a publicly-traded company, with institutional investors owning approximately 33% of shares in the company. Private individual investors from the general public own about 52% of Robinhood’s shares.

Robinhood’s co-founders, CEO Vlad Tenev and CCO Baiju Bhatt, are minority owners, holding an estimated 10% or so of Robinhood’s shares together.

Robinhood’s largest shareholder is Index Ventures SA, with 9.9% of shares in the company.

It’s interesting to note that Robinhood’s shares are widely dispersed, and the top 25 shareholders collectively control less than half of Robinhood’s shares.

Since there’s no dominant shareholder and the general public controls more than half of Robinhood’s shares, there are many different stakeholders that hold some level of sway over the fintech company’s business decisions.

How Much Is Robinhood Worth?

At the time of writing this article, Robinhood has a market cap of $8.65 billion. Compared to its valuation of around $20 billion during its IPO in 2021, the company has taken a sharp dive in value since going public.

Who Are Robinhood’s Competitors?

Robinhood’s biggest competitors include Webull, eToro, TD Ameritrade, E*Trade, TradeStation, and SoFi Active Investing.

Webull

Webull is a free trading platform for investing in stocks, options, ETFs, OTCs, and ADRs. It’s better for investors who already have some experience in trading but can still be learned by novice investors.

Webull

Like Robinhood, Webull offers commission-free trading, making it one of Robinhood’s top competitors.

Webull is a Chinese-owned company founded in 2017 and has headquarters in New York, Hong Kong, and Singapore.

Webull earns income from PFOF, short selling fees, interest on margin accounts, and subscription fees charged to platform users.

eToro

Israel-based eToro is a social investing platform that gives users access to assets, including 0%-commission stocks, ETFs, cryptocurrencies, Forex currencies, and more.

eToro

eToro also offers ready-made investment portfolios and the ability to copy top investors, making it a popular platform among new investors.

eToro makes money from spreads it applies on trades, overnight and weekend fees, withdrawal fees, currency conversion fees, and inactivity fees

TD Ameritrade

TD Ameritrade is one of the easiest investment platforms to use. On both web and mobile, TD Ameritrade gives users a straightforward trading process, including screening tools for filtering stocks by asset type, industry, market cap, and more.

TD Ameritrade

The platform also offers commission-free trading on online stock, ETF, and options trades.

One thing that sets TD Ameritrade apart from Robinhood and other trading apps is that the company has 175+ brick-and-mortar branches.

Like Robinhood, TD Ameritrade makes money from PFOF, as well as investment advisory fees, net interest margin, and management fees.

E*Trade

E*Trade is a popular trading app among advanced investors, including day traders and derivatives traders.

E*Trade

The company doesn’t charge any base commissions, but does charge $0.65 per options contract, as well as fees for transferring money out of an E*Trade brokerage account.

E*Trade is a financial services subsidiary of Morgan Stanley, an American multinational investment management and financial services company headquartered in New York.

E*Trade’s biggest revenue streams are payment for order flow and interest payments.

TradeStation

TradeStation offers commission-free stock and options trading on an easy-to-use yet advanced trading platform. It also gives users access to asset types not available on Robinhood, including futures, mutual funds, and bonds.

TradeStation

The company does charge small fees of around $0.50 to $1.50 per contract on things like options and futures contracts.

SoFi Active Investing

SoFi Active Investing is a competitor to Robinhood that’s specifically designed for young investors.

SoFi Active Investing

The platform offers free educational seminars and meetings with financial advisors, in addition to commission-free trading of stocks, ETFs, and fractional shares.

SoFi’s revenue streams include interest earned on cash, securities lending, payment for order flow, and margin lending.

What’s Next for Robinhood’s Business Model?

According to its Q4 2021 report, Robinhood’s fastest growth was in its cryptocurrency revenue. The company is focusing on expanding its crypto business segment in 2022, after its full launch of crypto wallets at the beginning of the year.

Robinhood also plans to expand its crypto offerings to international users, although the platform is currently only available to US citizens.

Robinhood distinguishes itself from other crypto trading platforms with the ability to buy fractions of coins for as little as just $1.

Cryptocurrencies the company advertises on its site are Bitcoin, Ethereum, Dogecoin, Litecoin, Ethereum Classic, Bitcoin Cash, and Bitcoin SV.

As with all of Robinhood’s trading options, there are no commission fees for buying and selling cryptocurrencies through the platform.

Despite its continued organic growth and expanded cryptocurrency offerings, the future of Robinhood remains uncertain, as the company could be seriously affected by SEC rulings down the road.

For instance, the SEC’s chairman, Gary Gensler, has been highly critical of Robinhood’s PFOF business model, and it’s possible that the SEC is considering banning payment for order flow altogether because it creates a conflict of interest.

If this were to happen, it would significantly affect Robinhood’s main revenue source, as PFOF accounts for more than 70% of the company’s income.

Crypto trading is also a big “what if” as a business model, because the cryptocurrency market could be hit with regulation eventually.

Wrapping Up

Looking at case studies of fintech business models, such as Robinhood’s business model, is always interesting because every company does things a little differently.

Although fintech startups are changing the modern finance sector, especially in terms of how millennial-aged and younger investors are getting into trading, it remains an extremely volatile market that’s subject to sudden changes at any minute.

New rules and regulations set forth by the SEC and other governing bodies can change the financial industry at any minute, especially concerning things like PFOF revenue streams and cryptocurrency trading.

If big changes do occur, Robinhood and other similar trading platforms may be forced to do a 180 on how they make money.

Whatever happens, Robinhood is certainly a company to keep your eye on over the next few years!

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