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How Does Robinhood Make Money? Robinhood Business Model In A Nutshell

As pointed out on Robinhood website you can “Invest in stocks, ETFs, options, and cryptocurrencies, all commission-free, right from your phone or desktop.
Robinhood earns money by offering:
  • Robinhood Gold, a margin trading service, which starts at $6 a month
  • Earn interests from customer cash and stocks, just like a bank collects interest on cash deposits
  • And from rebates from market makers and trading venues

Robinhood’s claimed mission is to “democratize access to the American financial system.”

Indeed, Robinhood primary value proposition is fueled by an investing platform that lets you buy and sell stocks, exchange-traded funds, options, and cryptocurrencies, all commission free. As its mission is to democratize the financial system, this goes through three main elements of the platform:

  • User-friendly
  • Made for all investors–newcomers
  • And convenient also to experts (even though that is not the primary target)

As Vlad Tenev, co-founder of Robinhood told Business Insider “there were a lot of people who didn’t believe in it, and we had to bang down a ton of doors. We were really relentless.”

After seventy-five pitches they finally got a round of investing that allowed them to launch the platform.

As explained on Robinhood website, the realization of a market potential from the app came from the two founders experience in selling software to Wall Street’s hedge funds.

They figured those funds paid nothing for those transactions, while the average American would be charged for fees that would be up to $10 for every trade. From that, they realized they could democratize the whole process.

That is why in December 2013 they launched the service on Hacker News even before it was available:

robinhood-hacker-news

This strategy paid off and Robinhood grew quickly, from a waiting list of hundreds of thousands of users in 2014 to over 3 million accounts in 2018. The convenience of the app is at the same time strength and for some a weakness. As pointed out on Bloomberg “it’s a little bit like putting a casino in an investor’s pocket.”
However, that same frictionless, friendly user-experience, together with a seamless app have made it extremely popular among millennials. 
Robinhood also makes money from rebates, as pointed out on its blog “the revenue from these rebates cover the costs of operating the business and to offer commission-free trading. 
Robinhood earns ~$0.00026 in rebates per dollar traded. That means if you buy a stock for $100.00, Robinhood earns 2.6 cents from the market maker.”
At the same time, Bloomberg found out that than 40 percent of its revenue in early 2018, came from selling its customers’ orders to high-frequency trading firms, or market makers. 
 
Why does this matter? For a company that called itself Robinhood, which is supposed to democratize the financial markets. It might be paradoxical that the same company makes most of its revenues from users that have small capitals that generate income for high-frequency trading firms, which are the quintessence of Wall Street. 

Breaking down how Robinhood really makes money

If we look at the Robinhood business model more in detail, we find out it makes money with three primary ways:

  • Interest earning accounts
  • A freemium model relying on more “advanced” features
  • Monetizing via market making fees

Interests earning accounts

When the cash on Robinhood accounts are uninvested cash, those can be lent out and invested in other safe financial instruments that make Robinhood earn a small return on each dollar invested.

The freemium model

Freemium is an effective model that can help companies leverage the free offering to create a sales funnel that generates a continuous stream of leads and paying customers.

Indeed, Robinhood offers basic services for free, and it offers more advanced functionalities (like buying on margins, or after-hours trading) part of a paid package called Robinhood Gold.

Market making fees

Another more controversial way for Robinhood to make money is through market makers, which pay small fees to Robinhood for sending trades to process through their platforms.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which he brought to reach over half a million business students, professionals, and entrepreneurs in the last year | Gennaro is also Head of Business Development at a tech startup, he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

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