Business Behind Code: Robinhood

Robinhood, a prominent fintech firm in the US, has revolutionized the financial services landscape by offering a range of trading services at no cost to its users. This unique approach to business, more reminiscent of tech giant Google than a traditional finance company, has allowed Robinhood to democratize trading and make it accessible to a wider audience.

Robinhood: The Democratizer of Trading

Robinhood operates as a brokerage service, but without the usual fees. It offers a web-based trading platform and a mobile application, making its services easily accessible. The process of creating an account with Robinhood is straightforward and free, including the transfer of funds between the bank account and the Robinhood brokerage account. All trades made on Robinhood are also commission-free.

Brief History

Robinhood was established in 2013 by Vladimir Tenev and Baiju Bhatt, with the vision of making the financial market accessible to all. Starting as a simple commission-free trading app, Robinhood quickly disrupted the industry, leading many traditional brokerage firms to eliminate their commissions. Despite facing controversies, such as accusations of gamifying trading and inadequately educating its users about risks, Robinhood remains a significant player in the investing world, boasting 11 million monthly active users as of 2023

Business Model

This approach, pioneered by Google, involves offering free services, collecting user data, and using it to sell targeted advertisements. Robinhood is no exception to this rule. According to public disclosures, Robinhood generates substantial income from a method known as "Payment for Order Flow" (PFOF). Instead of relying purely on user subscriptions or fees, the firm makes money by routing user trades to high-frequency trading firms in return for a small payment.

Consumer Facing (B2C) Business

Robinhood's core offering to consumers is zero-commission stock trading. This is an attractive value proposition, especially for younger and less affluent investors who may find traditional trading costs prohibitive. Its user-friendly interface and easy-to-use app have also played significant roles in its success. Robinhood offers a premium account subscription, Robinhood Gold, which costs $5 a month. Subscription gives users access to additional investment tools and benefits. Robinhood also offers debit cards. Whenever a user makes payments using these debit cards, the firm makes a small amount on interchange fees. However, these sources account for less than 7% of revenue.

Business Facing (B2B) Business

While less visible to the average user, Robinhood's B2B side is another critical aspect of its business. The company essentially sells its customers’ orders to larger brokerage firms, who then execute the trades and generate profits from the slight differences between buy and sell prices, or spreads. This model allows Robinhood to generate revenue, despite its zero-commission promise. The PFOF accounts for 39.6% of its revenue.

Mix

Another substantial revenue source for Robinhood is listed as “Net interest revenue”. Net interest revenues can be derived from a mix of B2B and B2C activities. This might include interest earned from securities lending (often B2B), margin lending to individual investors (B2C), and interest on cash balances in customer accounts (B2C). Currently, it accounts for 53.7% of its revenue.

What's Next?

Robinhood’s business model, which encourages more trades by its customers, has been a source of controversy. Critics argue that the company gamifies the process and fails to educate its customers about the financial decisions they are making. The PFOF method, considered unethical by some, was banned in June of 2023 across the EU economic region.

Navigating this evolving landscape will be an intriguing challenge for Robinhood. As a pioneer in commission-free trading, Robinhood has set a benchmark in the industry, but the future may dictate a shift in how it generates revenue to continue providing its signature service.