Although Robinhood is managing multiple business offerings with multiple revenue streams, it’s essential business model is matchmaking, as a broker between individual investors and High Frequency Trading (HFT) companies. Based on this matchmaking role, Robinhood is able to develop additional product offerings to individual investors such as margin loans, deposit accounts and other investor services.
This matchmaking platform built for mobile and web only delivery has no storefront or “high street” presence. Robinhood’s first tier or “free” offering enables unleveraged cash investors to trade a range of financial instruments in US listed companies as well as in the cryptocurrency market with zero commissions or dealing charges.
Within the US market Robinhood’s main competitors are long established brokerages with digital platforms such as TD Waterhouse, Charles Schwab, Scottrade and E*Trade. Each of these companies have had to react to the significant customer outflows moving to Robinhood by introducing their own zero commission offering. However, the social sharing that Robinhood has instituted in its mobile first strategy instils a competitive advantage appealing to the upwardly mobile demographic that Robinhood seeks (Senators Call, 2018).
As Robinhood looks to enter the UK, and eventually Europe, its most notable competitor will be Freetrade, a UK based financial technology company which offers a freemium share dealing service founded by Adam Dodds and Davide Fioranelli in 2015.
Robinhood was founded in early April 2013 by two ex-Stanford, New York based HFT system builders, Vladimir Tenev and Baiju Bhatt with a mission to “provide everyone with access to the financial markets, not just the wealthy”. The fact that the cost to a broker to execute a trade wasfractions of a penny” and yet commission charges ranged from $5 a trade to as high as $10 per trade highlighted an inefficiency and an opportunity
The company was launched via crowdsourced technology site, Hacker News in December 2013 after receiving an initial seed invest of $3m. This initial funding round was led by ndex Ventures and joined by Andreessen Horowitz and Rothenberg Ventures. Fintech angels Tim Draper and Howard Lindzon also participated in the round.
Traction for the company was robust with 150,000 signing up to the prelaunch waiting list and surpassing 500,000 by September 2014. In the following three years the platforms user base grew to 2 million executing over $75 billion in transactions. Since then the company has grown to over 6 million users whilst maintaining a relatively light employee base of less than 50 team members (Techcrunch, 2013).
As of May 2018 Robinhood, had raised a further $539m in venture funding valuing the company at $5.6Bn. The further rounds of funding were led by Yuri Milner of DST Global and were supported by Thrive Capital and Greenoaks Capital (Crunchbase 2019).
Robinhood have two distinctive customer groups. The first group is individual investors primarily young people that have difficulty in financial investment. The second group is HFT companies i.e. Citadel Securities, Two Sigma, Wolverine, and Virtu. Because when orders are made by individual investors i.e. purchasing a share, the order is transferred to these HFT companies by Robinhood. So that investors did not purchase shares or options or cryptocurrencies from exchanges but from institutional investors. Therefore, Robinhood is a matchmaker.
Learn more about the Matchmaking Business Model
You identify two or more customer groups and brings them together in your marketplace.
Engagement — Value Creation Proposition
How value is created for HFT firms is not clear. It is intuitive to assume these firms will have a better price than trading in the exchange.
Most advertised values that Robinhood created are for individual investors. Robinhood’s mobile first strategy has appealed predominantly to a millennial demographic with over 80% of its current clients being born between 1980 and the mid 1990s, many of whom Tenev describes as having been previously “disillusioned with the state of the financial markets”. For many Robinhood has been a gateway to investing and has allowed clients with relatively smaller account sizes of between $1K-$5k to access the US financial markets with significantly lower costs.
In 2018 Robinhood launched a social network to provide free financial commentary and analysis inline with its narrative that access to financial knowledge and information should not be at a cost to the customer.
Bhatt and Tenev have been curious on how to connect users with each other because most people have found their way to investing through social conversations. Incentive strategies such as “Free Stock” sees users receive a free stock after a friend who has been referred to the platform funds their account, has given the platform a degree of social virality (Tearsheet 2017).
With users averaging 12 engagements with the app per day, Robinhood has greater engagement than all of its direct competitors added up, according to Bhatt. “The stock market is inherently social,” says Bhatt. “From the days of open outcry in the pit it’s always been about humans interacting and transacting. What we’ve got in our product right now is the beginning of a much longer product focused on social” (Fastcompany 2017).
Delivery — Value Chain
How Robinhood works for retail investors is that they receive commission free brokerage services and as a percentage of investment holding these savings are significant alongside the transaction service there is also the social financial insight community integrated into the platform allowing all users to access information and knowledge in line with their needs.
The secondary customer, to whom Robinhood sells the order flow of the retail investors receive value from an unsophisticated retail order flow creating additional liquidity in off exchange dark pools.
Monetisation — Value Capture
The majority of income is generated from interest charges charged to account holders paying for access to leverage facilities. The Gold Tier as it is known offers a “leverage subscription” charged at a base $5 per month. Interest is then charged at 7.2% per annum versus the 2.05% paid on cash balances. Access to professional financial reports and Level 2 market access is included in this subscription amount. Users on the Gold Tier also gain instant access to funds on withdrawal and deposit (Robinhood 2019).
The monetisation of the order flow sold to the HFT has proven to be somewhat controversial for Robinhood as by nature dark pools are not transparent. For many this is seen to be manipulation with an element of conflict of interest as the order is not routed to the exchange or to the best execution price but rather to the company paying for the flow. When challenged over this Robinhood indicated that it receives on $0.00026 per $1 (or 2.6c per $100) in trade value routed through the HFT firm, playing down the contribution of this revenue stream to the business. However, a closer look at Robinhood’s payment for order flow indicates that it generated ten times the revenue other brokers receive from market makers for the same volume. Analysis by Bloomberg of Robinhood’s submission to the Securities and Exchange Commission (SEC) calculated that the company generates almost half of its income from payment for order flow (Medium 2019).
Robinhood is relatively more open than other fintech companies about their technology. They hold tech talks and have articles about some of their technology usage and development. There seems to be two important aspects of Robinhood technology. One is its front-end application that facing users, and the other one is its back end supporting system that contains billions of financial data points. More details regarding its Andriod application development and data lake could be found at robinhood.engineering.
1) How Does Robinhood Makes Money; Theresa W Carey; 18 January 2019
2) Robinhood; Fast Company, Company notes https://www.fastcompany.com/company/robinhood
3) Robinhood; Wikipedia
4) Robinhood App Will Offer Zero-Commission Stock Trades Thanks To $3M Seed From Index And A16Z; Josh Constine; 18 December 2013 https://techcrunch.com/2013/12/18/zero-commission-…
5) Funding Rounds – Robinhood; Crunchbase
6) Why Robinhood is launching a Social Network; Tanaya Macheel; 2 November 2017
7) How Brokerage App Robinhood got Millennials to Love the Market; Ainsley Harris; 14 August 2017
8) Robinhood; Company website
9) The Millennial Robinhood: Take from the Poor and Give to the Rich; Sid Venkateswara, 26 April 2019
10) Senators Call on SEC and Other Financial Regulation After Robinhood Debacle; Kate Rooney 20 December 2018https://www.cnbc.com/2018/12/20/senators-call-on-sec- and-other-financial-watchdogs-to-look-into-fintech-regulation-after-robinhood- debacle.html
11) Robinhood Ads Ex-SEC Official Official To Board; Carleton English; September 2019;
12) Infinite leverage — some Robinhood users have been trading with unlimited borrowed money; Kate Rooney; 5 November 2019 https://www.cnbc.com/2019/11/05/some-robinhood-users-were-able-to-trade-with-unlimited-borrowed-money.html
13) Robinhood Is Making Millions Selling Out Their Millennial Customers to High-Frequency- Traders; Logan Kane; 10 September 2018 https://seekingalpha.com/article/4205379-robinhood-making-millions-selling- millennial-customers-high-frequency-traders
Disclaimer — Written by Gavin Knoeson and revised by Tong Guan under the direction of Prof Charles Baden-Fuller, Cass Business School. This case is designed to illustrate a business model category. It leverages public sources and is written to further management understanding, and it is not meant to suggest individuals made either correct or incorrect decisions. The information contained here should not be used for investment advice and is simply indicates the individual’s understanding of the company’s business models as of February 2020. © 2020