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.

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 Invest – offering $0 trading commissions, smart transfers, and custodial accounts.
• 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.

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