Robinhood, founded in 2013, burst onto the stock market investment scene boasting commission-free trading while other brokerages charged fees to execute trades. Over time it has become one of the most widely used services for trading stocks, especially among younger investors. Creating an account on the Robinhood app is free, and the company also offers a commission-free model, which raises the question:
How does Robinhood make money?
Robinhood moved away from the old-school model of charging fees and commissions to trade, making the app “free” for customers to use and trade with. Well, there are no free lunches in life and the business needs to generate revenue to survive. Let’s dive into how Robinhood makes money.
5 Main Ways Robinhood Makes Money
Here are the main ways Robinhood makes money and what you should know about the popular trading app.
1. Payment For Order Flow
A core piece of the business model which has been heavily scrutinized of recent is payment for order flow. When you buy or sell securities through Robinhood, they send your orders to market makers (as opposed to public exchanges) to execute the trades.
A market maker is a 3rd party that quotes both the buy and sell price of an asset. The market maker earns its revenue on the bid-ask spread on the sale.
Source: Andreessen Horowitz
In return for routing trades to market makers, Robinhood gets a kick-back or rebate, known as payment for order flow.
Robinhood claims that this typically results in better prices than public exchanges. The SEC didn’t quite see it that way when they fined Robinhood $65M in late 2020 because they “failed to disclose the firm’s receipt of payments from trading firms for routing customer orders to them” and “with failing to satisfy its duty to seek the best reasonably available terms to execute customer orders (SEC).”
Robinhood got hit for a lack of transparency and a failure to act on their customers’ best interest.
All Of Us was founded to turn this around by being fully transparent about revenue and putting customers’ interests first (See Why I Built All Of Us).
How much do they make off PFOF?
Robinhood reportedly earned $682 million on payment for order flow in 2020, accounting for between 40-55% of its total revenue (Business of Apps).Robinhood earns nearly half of its revenue from high-frequency trading and payment for order flow.
2. Robinhood Gold & Margin Interest
Robinhood Gold is a suite of investing tools that provides traders with access to research reports and Nasdaq market data. Traders pay a $5 monthly fee for access to the service.
Robinhood also collects interest from users who choose to borrow money and trade on margin. As of December 20, 2020, the margin rate for borrowing above $1,000 is 2.5% (Robinhood).
3. Stock Lending
Robinhood earns additional income from lending margin securities to other firms. Securities lending is fairly common among brokerages as an additional stream of revenue. All Of Us currently passes along approximately 30% of what we make from securities lending to you.
4. Interest From Cash
According to its founders, Robinhood makes a lot of its money from interest made by lending investor’s cash. Essentially, they make money off of uninvested funds in their customer’s accounts outside of the Cash Management program (see next). In relation to this money,
Robinhood’s website says “Robinhood Securities generates income on uninvested cash, primarily by depositing this cash in interest-bearing bank accounts.”
All Of Us currently gives you 100% of the interest made on your cash assets.
5. Cash Management
Robinhood offers a cash management feature that acts similarly to a bank account, allowing customers to use cash via a debit card and earn interest on uninvested cash. Robinhood makes money through purchases via an interchange fee, similar to other debit and credit card issuers.
Additional Revenue Streams
According to the company’s website, Robinhood also makes money from a range of smaller revenue streams, including proxy service revenue and the fees listed here.
When asking the question how does Robinhood make money, it’s also important to understand how much additional capital the company has raised.
Considering all of the different ways that Robinhood makes money, it might be surprising to some users to learn that Robinhood has raised a total of $5.6 billion. Yes, you read that right. Notable recent funding rounds were as follows:
A Series F funding round in May 2020: $280 million at an $8.3 billion valuation
A Series F funding round in July 2020: $320 million
A Series G funding round in August-September of 2020: $660 million at an $11.7 billion valuation
An additional $3.4B in January-February of 2021
So, how did this multi-billion dollar company start?
Robinhood was founded in 2013 by two Stanford University graduates, Baiju Bhatt and Vlad Tenev. Their goal in creating the company was to democratize finance and make investing more accessible to young and less affluent investors.
This culminated in most Robinhood users being new to investing. The median age of Robinhood users is 31. Robinhood has seen substantial growth in recent years, with the number of users of its app increasing from 2 million in 2017 to 13 million in 2020.
Zero Commission Trading Model
The centerpiece of Robinhood’s business plan is undoubtedly its zero-commission trading model. Not only does Robinhood use a zero-commission trading model for its own platform, but other brokers have adopted zero-commission trading as well. Robinhood has recently suffered legal ramifications for not disclosing how it makes money when it was first founded. The company has since added more information to its website in an effort to be more transparent about its various revenue streams.
Competition In The Brokerage Industry
If brokers want to remain competitive and attract the most users, they must try to improve on what the existing platforms are offering. Commission-free trading was once a competitive advantage, but that has now become a standard. Brokerages need to find new ways to stand out.
How All Of Us Is Different
So, although Robinhood is an innovative type of brokerage offering, the next evolution of commission-free brokerage apps has arrived. Unlike Robinhood and other similar brokerage firms,
All Of Us shares every revenue stream with users. Robinhood is able to offer a commission-free service largely due to its use of payment for order flow, but does not share any of that revenue with users. When you trade with All Of Us, you currently get approximately:
10% of the payment for order flow generated from your trades on the platform
30% of the money All Of Us makes from securities lending
100% of the interest made from your cash assets
Robinhood, TD Ameritrade, and E-Trade don’t share their revenue with users. This means you could earn more money for the same trades if you trade with All Of Us.
In addition to the revenue sharing already mentioned, All Of Us rewards smart portfolio balancing every month with a 10% bonus with the Sharpeshooter challenge. Sign up for free stock trading with All Of Us and join the mission.