Robinhood: a $5+ Billion Company Disrupting the Financial World

What do Jay Z, Snoop Dogg, Jared Leto, and Nas have in common? They’re all investors in Robinhood, a fintech startup that aims to democratize access to America’s “rigged” financial system.
Source: https://robinhood.com

Prior to downloading Robinhood, I never felt motivated to invest in stocks and ETFs on my own, primarily due to the popular opinion that you need enough money and tons of financial knowledge before doing so. Surprisingly, most people are just like I was, looking for options that suited their basic needs.

Obviously, keeping most of your money in the bank is a bad idea, making a measly 1.7% return. The alternative for a majority of people is to give their money to companies like Betterment or Wealthfront, embracing a hands-off approach. All you do is deposit your money and they take care of the rest, managing your funds and trying to get you decent returns. But, what’s the fun in that? You don’t get to decide where your money goes, you never learn anything, and you never get the best outcome.

That’s why Robinhood will become the most popular financial services platform among the millennial and Gen. Z populations. It‘s already so popular that with almost zero marketing it has surpassed E-Trade in number of accounts, and a big reason why is referrals. Robinhood knows millennials love free stuff, so if a user refers the product to others, both the current user and the new user receive free stock, and you don’t even have to put any money in the account! (shameless plug: if you want free stock, sign up here).

Robinhood Founders (Source: https://bizjournals.com)

The Problem

Prior to Robinhood, investing in the stock market was always seen as a pretty complicated and expensive process. As Baiju Bhatt, co-founder of Robinhood, said, “if you’ve ever tried to open an account or trade a stock on an online brokerage account, it’s like a Rube Goldberg machine. It becomes necessary to have enough money and financial knowledge to navigate these complicated services, which tend to be designed for people who make these brokerages the most money.” With such barriers to entry, universal accessibility has been a big issue, and Robinhood is trying to solve this by providing access to the public markets for everyone, not just for people with lots of money.

Robinhood’s home screen (Source: http://fintechranking.com/)

The Product

There are two key features that make people, especially from the millennial and Gen. Z population, fall in love with this product: free trading and an easy-to-use, simple app.

Free Trading

Robinhood is an online stock brokerage that allows you to purchase stocks and ETFs with no commission. In other words, you can buy stocks and ETFs for free!

Source: http://knowyourmeme.com/

There’s also no minimum account balance necessary, and you can buy as much stock/ETFs as you like. This reduces the current financial barrier to entry to literally zero! It also allows for first-time and inexperienced investors to explore the investment world with little amounts of money.

Great, but how does the company make money?? Good question…

  1. Interest: Robinhood earns interest on the cash sitting in your account. Most people tend to avoid investing all their money at once (known as lump-sum investing), spreading their investments out over time instead (known as dollar-cost averaging). Robinhood can use this to its advantage by generating interest off unused cash deposits according to the Federal Funds rate.
  2. Robinhood Gold: This is a premium service that gives you access to extended trading hours, instant deposits, and access to buying on margin. Buying on margin means paying for a percentage of the total cost and borrowing the rest from the broker. The cost for this service is a flat fee of up to $200 per month.
  3. Order Flows: A common tactic by brokers is to direct orders to third parties for trade execution. These third parties provide brokerage firms with a small payment as compensation for directing the traffic to them.

Simple Interface

Robinhood was designed to be mobile-first, so the app itself is very simple, emphasizing real-time market data and showing you only the most important information. The home screen displays changes in your portfolio’s value over a certain time frame and two watch lists: one for the stock you own and one for the stock you want to watch closely. Clicking on a stock takes you to a screen that displays price changes, information about any shares you hold, news headlines, and two buttons: buy and sell.

Other brokerages’ apps are frequently messy, overstuffed, and outdated. Robinhood embraced similar design principles as Apple, making a simple interface that is easy to navigate and a joy to use.

Image result for robinhood app
Robinhood’s simple interface (Source: https://www.fastcompany.com)

The Alternatives

The other major brokerages used are E-Trade, TD Ameritrade, Charles Schwab, and Fidelity. Each of these charge a fee per transaction, unlike Robinhood. They were also designed to be web-first, so their mobile applications tend to be very clunky and filled with unnecessary features.

On the other hand, Robinhood does not provide the research tools that these brokerages do. Therefore, it’s harder to dive deep on a company, so more experienced investors find the transaction fees at these other brokerages to be worth it. It also does not have an IRA option, which tends to be extremely important for people in their twenties, a target audience for Robinhood.

Other alternatives are services like Betterment and Wealthfront, which take your money and handle the rest, usually building a passive portfolio of ETFs. The difference here is you have no control over where your money is invested. With Robinhood, you are still able to build this passive portfolio while also maintaining full control of every single purchase and sale. This encourages you to learn about investing in order to make good decisions, which can be seen as either a pro or con.

Possible Improvements

Robinhood is still a startup, so there are many improvements to be made. Here are a couple thoughts:

  1. The company has recently attempted to expand their target audience to include more experienced investors through products like margin accounts. However, Robinhood should not lose focus on its original target audience: millennials and Gen. Z. In fact, the median age of Robinhood users is 26, and 25% are first time investors. To take full advantage of this customer base, they need to integrate major educational tools for first time and inexperienced investors. The more the users know about investing, the more they will invest.
  2. They also need to expand rapidly into other financial services, like retirement accounts and banking. A majority of the population is not super interested in investing, so to ensure Robinhood’s user base does not plateau, they need to provide services that the general consumer would need. This will also provide the company with more revenue sources in order to attain profitability.
Source: https://robinhood.com

Clearly, Robinhood is quickly becoming popular among millennials, and the recent dive into crypto has definitely created a surge of new users. Now, it’s all about the execution, and I believe Robinhood will become a major player in the fintech space and, eventually, be a top tier tech company.

by Kevin Shah

Software Engineer @ Facebook, Computer Science Engineering 2017 @ The University of Michigan