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Robinhood Business Model Breakdown: How Robinhood makes money?

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Robinhood Markets Inc. is an American financial services company founded on April 18, 2013, and is headquartered in Menlo Park, California. The company is known for offering commission-free trades of stocks and exchange-traded funds by the way of a mobile app that was introduced in March 2015. Robinhood was founded by Vladimir Tenev and Baiju Bhatt who had previously built high-frequency trading platforms for financial institutions in New York City. The company’s name comes from one of their missions to “provide everyone with access to the financial markets and not only the rich and wealthy”. Robinhood is a FINRA (Financial Industry Regulatory Authority) regulated broker-dealer, which is registered with the U.S. Securities and Exchange Commission. Robinhood is also a member of the Securities Investor Protection Corporation. The company has a total of 1,281 employees as of 2020.

Index:

How Robinhood works?

Robinhood works just the same as other investment platforms just without the need to pay the fees. You can buy or sell stocks whenever you want and can follow any investing strategy you like. These are some steps you need to follow:

  1. The first step is to sign up for Robinhood, which takes just a moment of time and requires only your basic information. They also don’t require any minimum deposit to open an account with them.
  2. Once, you create an account, you can either use their service on their mobile app or on the web.
  3. After creating the account, you need to submit your application for review, and if everything checks out, you will be up and running in no time.
  4. To actually trade on Robinhood you will have to transfer the money to your account. And now you are good to go.

Business Model:

Now, let us see the business model of Robinhood:

Key Partners:

Robinhood has partnered with so many companies such as DST Global, D1 Capital Partners, Sequoia Capital, IVP, TSP Consumer Partners, and Ribbit Capital.

Key Activities:

Robinhood earns by following activities:

  • Robinhood gold is a margin trading service that starts at $6 a month.
  • Earn interests from customer cash and stocks just like a bank collects interest on cash deposits and from rebates from market makers and training venues.

Key Resources:

Robinhood customers can access the trusted news sources through the newsfeed with the app WSJ Markets coverage, as well as news from Reuters and Barron’s and video from CNBC Business, Reuters, and Cheddar. Robinhood is a high-frequency trading platform with low latency trading systems. The technical and financial team works together.

Value Propositions:

To democratize access to the financial markets, to give inspiration to new generations, to make the public feel comfortable storing money and trading stocks using its applications, to allow individuals to invest in public traded companies and exchange-traded funds which is listed on U.S. stock exchanges without paying a commission are some of the value propositions of Robinhood.

Customer Relationship:

Robinhood always takes care of his customer by giving the services, charging zero commission, giving free stocks in exchange for referring new users, telling customers real-time market data, sending them smart notifications, and assuring them with securitization.

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Customer Segments:

The most important customers of Robinhood are the retail brokerage market, high-frequency traders, millennials (people between the ages 18-29), and electronic trading funds.

Channels:

Robinhood always tries its best to keep in touch with the customers and for this Robinhood is on many platforms like Robinhood’s smartphone mobile app, website, API, social media, Email, Hacker News, TechCrunch, PandoDaily, VentureBeat, TheStreet.

Cost Structure:

Robinhood passes the fees to the customers, except for the sales of 50 shares or less. The fee is $0.000119 per share (on equity sells) and $0.002 per contract (on options sells). This fee is rounded up to the nearest penny but no greater than $5.95.

Revenue Streams:

Robinhood revenue for the year 2020 is $673 million (only payments for order flow revenue, which reportedly accounts for between 40 to 55 percent of all Robinhood revenue). Robinhood does not disclose any public revenue or profit figures apart from the order flow payments in front of the public.

Valuation, expenses, and revenue:

During the latest series Ground, announced in August 2020, the company’s investors valued Robinhood’s business at $11.7 billion. This represents a 36% increase from the $8.6 billion valuations Robinhood received during its Series F round. Robinhood revenue for the year 2020 is $673 million (only payments for order flow revenue, which reportedly accounts for between 40 to 55 percent of all Robinhood revenue). Robinhood does not disclose any public revenue or profit figures apart from the order flow payments in front of the public. Now, let us have a look at the graph:

robinhood revenue

Investor’s details and funding:

Robinhood has raised a total funding of $5.6 billion, according to Crunchbase. The company investors include DST Global, Index Ventures, Sequoia Capital, IVP, and many more. Also, Robinhood is planning to go public in 2021.

Now, let us see a graph of the valuation of Robinhood:

robinhood valuation

Competitor Analysis:

  • E-Trade: It offers a large variety of investable securities, but it still has the commission fee.
  • Charles Schwab: Company is similar to E-Trade but has recently reduced the commission to zero to compete with Robinhood.
  • Freetrade: One of the closest alternatives in the U.K. although it does not use payment for order flow.
  • eToro: Popular trading broker with younger generation and is popular across Europe.
  • Coinbase: One of the biggest competitors in cryptocurrency market.

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Related Articles:

What is Robinhood?

Robinhood offers commission-free trades of stocks and exchange-traded funds by the way of a mobile and web app.

Who founded Robinhood?

Robinhood was founded by Vladimir Tenev and Baiju Bhatt who had previously built high-frequency trading platforms for financial institutions in New York City.

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