M1 Finance is a North American online trading platform for common and preferred stocks and exchange-traded funds (ETFs). The company also offers margin lending, cash management, and a checking or debit account service. M1 Finance has a standard assortment of revenue streams for an investment platform. As a market maker earns money on the bid-ask spread, M1 Finance also offers a single premium subscription dubbed M1 Plus, and through interest and interchange fees.
Table of Contents
Origin Story
M1 Finance is a North American online trading platform for common and preferred stocks and exchange-traded funds (ETFs). The company also offers margin lending, cash management, and a checking or debit account service.
M1 Finance was founded by Brian Barnes, who developed a passion for investing after his parents opened a brokerage account in his name during the fifth grade.
As an adult, Barnes became disenfranchised with the financial services industry.
He argued that fund managers were only concerned with building their own wealth and not the wealth of clients whose funds they were supposed to be managing.
Barnes also noted that the industry as a whole lacked innovation, was overly complex, and the barriers to entry were high.
In 2015, the M1 Finance platform launched in 2015 to offer a low-cost, convenient, and automated means of investing. Just six years later, the company had approximately $3.5 billion in assets under management.
M1 Finance revenue generation
M1 Finance has a standard assortment of revenue streams for an investment platform. Following is a look at each.
Order flow payment
When a user places an order on the M1 Finance app, the order is forwarded to a market maker who then compensates the company for facilitating order flow.
Here, the market maker earns money on the bid-ask spread as they try to match buyers and sellers of the same security.
When a customer opens a sell position, the market maker facilitates the transaction by selling the security.
To make a profit, the selling price the market maker offers is lower than the price the customer might receive selling on the open market.
This profit is essentially very small but is amplified over thousands or even millions of daily transactions. A portion of this profit is shared with M1 Finance.
Subscriptions
M1 Finance also offers a single premium subscription dubbed M1 Plus.
For $125/year, customers get access to three core products:
M1 Borrow – a lending service for amounts exceeding $10,000. In this case, M1 Finance charges a 2% interest fee. Note that users on the free M1 Basic plan are charged an interest rate of 3.5%.
M1 Spend – a checking account with 1% cashback where ATM and international fees are reimbursed.
Cash interest
M1 Finance also makes money by lending out consumer funds to other financial institutions. They then collect interest from these institutions, otherwise known as net interest margin.
Short sale interest
The company makes further revenue by charging interest on securities it lends out to short-sellers.
The exact rate is dependent on market demand and supply.
Interchange fees
Through its VISA debit card linked checking account, M1 Finance collects an interchange fee when the card is used to make an eligible purchase.
The interchange fee is a percentage of the total purchase amount paid by the merchant in question. Typically around 1%, an undisclosed portion of the interchange fee is shared with M1 Finance.
Key takeaways:
M1 Finance is a North American online trading and personal financial services platform. It was founded by avid investor Brian Barnes who noted the industry was complex, lacked innovation, and self-serving.
M1 Finance makes money through order flow commissions facilitated by market makers. It also charges access to a premium subscription plan encompassing the M1 Spend, Borrow, and Invest products.
M1 Finance collects interest fees from financial institutions and short-sellers to whom it lends securities. Through its VISA debit card linked checking account, it also earns shares interchange fees with merchants.
Key Highlights
Origin and Founding: M1 Finance is a North American online trading platform for stocks and ETFs, founded by Brian Barnes. Barnes, inspired by his childhood experience with investing, aimed to create a low-cost, innovative, and automated investment platform to disrupt the traditional financial services industry.
Challenges and Innovation: Barnes observed that the financial industry lacked innovation and was overly complex. He sought to address these issues and create a platform that prioritized clients’ wealth and convenience.
Platform Launch and Growth: M1 Finance launched in 2015 with a focus on providing an automated and user-friendly means of investing. Within six years, the company accumulated approximately $3.5 billion in assets under management.
Revenue Generation Strategies: M1 Finance employs various revenue streams commonly used in investment platforms:
Order Flow Payment: M1 Finance facilitates order flow for users, earning compensation from market makers who make profits from bid-ask spreads during transactions. A portion of this profit is shared with M1 Finance due to the high volume of daily transactions.
Subscriptions (M1 Plus): M1 Finance offers a premium subscription called M1 Plus, providing access to three core products: M1 Invest (commission-free trading), M1 Borrow (lending service), and M1 Spend (checking account with benefits). Subscribers pay $125/year for this enhanced suite of services.
Cash Interest: M1 Finance lends consumer funds to other financial institutions, collecting interest income from these lending activities.
Short Sale Interest: M1 Finance generates revenue by charging interest on securities it lends to short-sellers.
Interchange Fees: Through its VISA debit card-linked checking account (M1 Spend), M1 Finance earns interchange fees when users make eligible purchases. Interchange fees are shared with M1 Finance.
Holistic Platform: M1 Finance offers a comprehensive platform that encompasses trading, lending, and cash management services. This holistic approach provides users with a range of financial tools and benefits.
Innovative Pricing Model: M1 Finance’s subscription-based model (M1 Plus) offers an array of features and benefits to users, enhancing their experience while providing a predictable revenue stream for the company.
Efficiency in Scale: M1 Finance’s revenue streams, particularly order flow payments and interest income from lending, benefit from the high volume of transactions and lending activities on the platform.
Positive Disruption: M1 Finance’s journey highlights how innovative platforms can disrupt traditional financial services by offering cost-effective, user-friendly, and innovative solutions to common investment challenges.
Acorns is a fintech platform providing services related to Robo-investing and micro-investing. The company makes money primarily through three subscription tiers: Lite – ($1/month), which gives users access to Acorns Invest, Personal ($3/month) that includes Invest plus the Later (retirement) and Spend (personal checking account) suite of products, Family ($5/month) with features from both the Lite and Personal plans with the addition of Early.
Starting as a pay-later solution integrated into merchants’ checkouts, Affirm makes money from merchants’ fees as consumers pick up the pay-later solution. Affirm also makes money through interest earned from the consumer loans when those are repurchased from the originating bank. In 2020 Affirm made 50% of its revenues from merchants’ fees, about 37% from interests, and the remaining from virtual cards and servicing fees.
Alipay is a Chinese mobile and online payment platform created in 2004 by entrepreneur Jack Ma as the payment arm of Taobao, a major Chinese eCommerce site. Alipay, therefore, is the B2C component of Alibaba Group. Alipay makes money via escrow transaction fees, various value-added ancillary services, and its Credit Pay Instalment fees.
Betterment is an American financial advisory company founded in 2008 by MBA graduate Jon Stein and lawyer Eli Broverman. Betterment makes money via investment plans, financial advice packages, betterment for advisors, betterment for business, cash reserve, and checking accounts.
Chime is an American neobank (internet-only bank) company, providing fee-free financial services through its mobile banking app, thus providing personal finance services free of charge while making the majority of its money via interchange fees (paid by merchants when consumers use their debit cards) and ATM fees.
Coinbase is among the most popular platforms for trading and storing crypto-assets, whose mission is “to create an open financial system for the world” by enabling customers to trade cryptocurrencies. Its platform serves both as a search and discovery engine for crypto assets. The company makes money primarily through fees earned for the transactions processed through the platform, custodial services offered, interest, and subscriptions.
Compass is a licensed American real-estate broker incorporating online real estate technology as a marketing medium. The company makes money via sales commissions (collected whenever a sale is facilitated or tenants are found for a rental property) and bridge loans (a service allowing the seller to purchase a home before the revenue from the sale of their previous home is available).
Dosh is a Fintech platform that enables automatic cash backs for consumers. Its business model connects major card providers with online and offline local businesses to develop automatic cash back programs. The company makes money by earning an affiliate commission on each eligible sale from consumers.
E-Trade is a trading platform allowing investors to trade common and preferred stocks, exchange-traded funds (ETFs), options, bonds, mutual funds, and futures contracts; acquired by Morgan Stanley in 2020 for $13 billion. E-Trade makes money through interest income, order flow, margin interests, options, future and bonds trading, and other fees and service charges.
Klarna is a financial technology company allowing consumers to shop with a temporary Visa card. Thus it then performs a soft credit check and pays the merchant. Klarna makes money by charging merchants. Klarna also earns a percentage of interchange fees as a commission and for interests earned on customers’ accounts.
Lemonade is an insurance tech company using behavioral economics and artificial intelligence to process claims efficiently. The company leverages technology to streamline onboarding customers while also applying a financial model to reduce conflicts of interest with customers (perhaps by donating the variable premiums to charity). The company makes money by selling its core insurance products, and via its tech platform, it tries to enhance its sales.
NerdWallet is an online platform providing tools and tips on all matters related to personal finance. The company gained traction as a simple web application comparing credit cards. NerdWallet makes money via affiliate commissions determined according to the affiliate agreements.
Robinhood is an app that helps to invest in stocks, ETFs, options, and cryptocurrencies, all commission-free. Robinhood earns money by offering: Robinhood Gold, a margin trading service, which starts at $6 a month, earns interests from customer cash and stocks, and rebates from market makers and trading venues.
SoFi is an online lending platform that provides affordable education loans to students, and it expanded into financial services, including loans, credit cards, investment services, and insurance. It makes money primarily via payment processing fees and loan securitization.
Stash is a FinTech platform offering a suite of financial tools for young investors, personalized investment advice, and life insurance. The company primarily makes money via subscriptions, cashback, payment for order flows, and interest for cash sitting on members’ accounts.
Wealthfront is an automated Fintech investment platform providing investment, retirement, and cash management products to retail investors, mostly making money on the annual 0.25% advisory fee the company charges for assets under management. It also makes money via a line of credits and interests on the cash accounts.
Zelle is a peer-to-peer payment network that indirectly benefits the banks’ consortium that backs it. Zelle also enables users to pay businesses for goods and services free for users. Merchants pay a 1% fee to Visa or Mastercard, who share it with the bank that issued the card.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
