DEEP DIVE with Robinhood: Commission-free Disruption

Robinhood screenshot (Image Credit -  Investopedia )

Robinhood screenshot (Image Credit - Investopedia)

DEEP DIVE is a series of in-depth articles on FinTechtris that explores a particular fintech company, discussing its history, products / services, and how it has grown to be a leader in the industry.

Robinhood’s Value Proposition:

Democratize the American financial system (through a commission-free service for transacting stock, ETFs, options, and cryptocurrencies).

Robinhood is a U.S. based online brokerage platform (headquartered in Menlo Park, CA) that empowers retail investors to trade U.S. stocks, exchange traded funds, and cryptocurrency without paying any commissions.  The added subset of Robinhood, Robinhood Crypto, launched over a year ago and is currently available in over 30 states (with recent approval for New York), allowing investors to buy, sell, and store 7 types of cryptocurrency without charging additional fees. 

As one of the newest FinTech unicorns valued over $5 billion (as of April 2018),  Robinhood has disrupted the wealth management sector of financial services, competing with established companies such as E*Trade and TD Ameritrade.  But how did Robinhood get its start?  How does the company make money without charging fees? What is the future outlook for Robinhood and this sector of FinTech?

The History of Robinhood

Robinhood’s founders (Image Credit -  NY Times )

Robinhood’s founders (Image Credit - NY Times)

Robinhood was founded by Vladimir Tenev and Baiju Bhatt (Stanford graduates), who originally worked on developing high-frequency trading software for Wall Street banks and hedge funds. Upon the premise that these larger companies shouldn’t be the only ones trading without fees, they built and launched Robinhood in April 2013, as an offering to all retail investors (regardless of investment balances) of commission-free trading with a smartphone app.

The customer demand was tremendous with an initial wait list of 100,000 after being live for 30 days (50,000 in the first weekend), and 500,000 three months later! Over the next 3 years, the company has continued to grow from the hype, to over 3 million active users (as of February 2018), which rivals established competitor E*Trade.

On January 25, 2018, Robinhood announced cryptocurrency commission-free trading leading a waitlist of 1,250,000 on the first day! The added service rolled out to a few states (California, Massachusetts, Montana) and has grown to over 30 states at the end of 2018.

In December 2018, Robinhood announced yet another offering that created a huge waitlist: a checking and savings account earning a high-yield interest rate (3%), insured by SiPC (Securities Investor Protection Corporation). Unfortunately, the SiPC denied that it was providing this coverage, and the product offering was changed to a “cash management account” the following day and the signup page completely removed from the site by January 2019.

How Robinhood Makes Money

Robinhood User Screens (Image Credit -  Trustnodes )

Robinhood User Screens (Image Credit - Trustnodes)

As disruptive as commission-free trading to the masses has been, how does a company like Robinhood generate revenue without fees? Here are few ways:

  • Cash balances: Robinhood earns interest on univested cash in customers accounts;

  • Complex transaction processing fees: any transactions made over the phone with a broker or with a certain foreign stock have fees;

  • Margin accounts and after-hours trading: available for a fixed monthly fee, customers have these additional services also available;

  • Payment for order flow: a long-held, but controversial practice in a which a company gains higher profit margins by selling orders and processing transactions with market makers instead of other brokers;

What’s Next for Robinhood?

Robinhood graphic (Image Credit -  RH blog )

Robinhood graphic (Image Credit - RH blog)

Despite the company’s impressive growth over the last 5 years, its average user balance is $1K - $5K while competitors such as TD Ameritrade are over $100K. The long-term expectation is that Robinhood will organically grow with its younger user base of millennials (18 - 29 yrs. old) who are starting to accumulate wealth. Adding other complementary services will also help attract larger balances from customers who are unhappy with traditional banks and brokerages. Expect a second attempt at a deposit-type product and increased cryptocurrency offerings in 2019. Robinhood also announced in September 2018, that there were plans for the private company to go public in 2019.

Large banks and online brokerages are aware of Robinhood as a threat, but still see their proprietary products, services, and brand as having significant overall value over the young, bare-bones FinTech. By providing a deep set of analytics, real-time customer service, and individual advisory services, these established pwerhouses feel comfortable in retaining current market share while still being able to create promotional offers of free trades to entice new customers.

Future Outlook

Comparison of brokerage companies (Image Credit - )

Comparison of brokerage companies (Image Credit -

Overall, Robinhood has accomplished significant growth in less than 5 years within the brokerage landscape (see above) by executing on its value proposition of free access to all through a simple, seamless mobile experience. As the company matures and looks for an IPO this year, the FinTech industry looks on in anticipation of what comes next as it transitions from private to public.

The battlefield between FinTechs in the wealth management sector and legacy institutions will only intensify as opposing sides overlap with services offered — banks promoting commission-free trades and FinTechs adding deposit accounts. Ultimately, the firm that provides best overall value to customers looking for low-cost, high-yield investment options on a convenient platform will be the industry leader.