How Robinhood Makes Money - YouTube

It's a theme as old as money itself. The struggle between the rich and the poor.

And it became especially apparent after the financial crisis. People were losing

money hand over fist in the market, millions lost their jobs and their homes.

Trust in Wall Street was at its lowest point in memory. People were protesting

in the streets. One company launched a stock trading app in the shadow of the

crisis, Robinhood. Named after the English fairy tale character who took

from the rich and gave to the poor.

Good sword. Good archers. Good fighters. Are you with me? (Cheers)

But those guys didn't start a 5.6 billion dollar company. These guys did.

It's an eye-popping valuation for a financial company with opaque metrics

and plenty of competition. The young company had its share of missteps as

well. Too good to be true? Well for Robin Hood that might be the case. We know that

this practice is highly criticized, not only from regulators but also from

consumer advocates. Yhey say that they were inspired by the financial crisis

and all that. Well, guess what? They're getting a huge chunk of their revenue

from high-frequency trading. Prompting questions over whether or not

they can handle primetime. But let's go back to the beginning.

Today's Robinhood, the app, was founded by two people who were fed up with the way

you had to trade or at least they knew others were fed up. We're focused on

building an awesome user experience. Onboarding something like a 150,000

customers in such a short period of time is is pretty much

unprecedented in the brokerage industry. The cost to trade had come down so far

in the last 20 years. Since online trading began, why not make it free?

Now if you want to invest in the stock market without paying fees, there's an

app for that. Since Robin Hood came into the App Store, we've saved customers over

five million dollars in commissions. All in the theme of sticking it to the banks.

The mission of Robin Hood is to democratize America's financial system.

But there was something else that made this product work. We were already

addicted to our phones. Robin Hood made trading easy on the device we were

looking at all day. The combination incredible growth. The company launched

in 2013, just over a year late, they had hundreds of thousands of people on a

waiting list. The beginning of 2018, they had three million customers. By the

end of that year they had doubled that amount to six million users. The darling

of FinTech. Many believe the company is revolutionary. Where they are really

groundbreaking is how fast they're moving and how much they're pushing the

envelope. You know, they can't be dismissed because there is something in

being able to double time and time again where clearly you're resonating with

consumers and then this speed at which are offering new types of capabilities, I

don't think anything companies could move that fast.

But there are questions about how much money is really in the accounts. Robinhood

gets a lot of attention because the account growth has been really

impressive and everything like that. But there's very little money there. With

Schwab, Ameritrade, we have larger accounts accounts that are in hundreds

of thousands. Not single-digit thousands on average, which is the last time we

looked at Robinhood. A JMP analysis estimates

the average assets and Robin Hood accounts to be one to five thousand

dollars. That's compared to a $100,000 for Fidelity, a $110,000 for TD Ameritrade and about $240,000 for Charles Schwab.

Robin Hood would not disclose account values when asked by CNBC. We

don't know exactly where the account sizes are. I suspect that based on the

types of accounts, they're typically lower acid accounts and so

they're going to be less profitable today. But I think probably one of the

key things to think about is that a small account today could be a large

account in the future. Especially, if you're getting to the customer when

they're young or early in their financial life. Not only could they take

on brokers like TD Ameritrade and Charles Schwab, they might just challenge

the big banks too. Especially, if you add more capabilities and more service and

then service the cash in the account. Hopefully, you have an opportunity to

compete for a higher percentage of the wallet. Which some of the big incumbents

are doing quite well today. There are also other startups trying to take

advantage of this trend. A slew of investing oriented apps have come on the

market in the last few years, including Betterman,Acorns, Stash and more. But it

is not as easy to take the Silicon Valley approach of moving fast and

breaking things in FinTech. There are plenty of competitors with really deep

pockets and of course tons and tons of regulation. Some have called out a

hypocritical side to the FinTech unicorn that makes it not so different from

old-school Wall Street. In October, Bloomberg reported that the company gets

almost half of its revenue through a practice called "payment for order flow,"

meaning a company's pain Robin Hood to be the other side of your trade on the

platform or at least get the first right of refusal. it's a controversial practice

but commonplace among online brokers. It means your orders aren't happening on a

public exchange but behind closed doors in a dark pool. Some say it helps market

efficiencies because companies invest in making faster trades. Others say, it's

just a way for high-speed computerized traders to skim off every trade keeping

markets opaque. The SEC has proposed a pilot program to

look into the practice. There's a concern maybe it's taking advantage. The

arguments are to improve liquidity. That it takes what would be a small trade and

aggregates it and allows it to get a better execution quality. The reason to

run a pilot is to make sure that those claims are all actually valid. Robinhood

would not disclose how much it makes from this practice to CNBC but the

company did offer an explanation of the system on its website saying: "We send

your orders to market makers that allow you to receive better execution quality

and better prices. The revenue we receive helps us cover the cost of operating our

business and allows us to offer you commission-free trading. The question is

can accompany the built a name, literally on fairness, convinced its customers it's

on their side. One way to do it, is to offer better interest rates and that's

exactly what Robinoohd tried to do. In December, the company announced three

percent checking and savings accounts. Compare that to the national average of

.09 percent offered by most savings accounts. For the median American

house that's got about 8,000 dollars in the bank, this adds up to a

staggering 240 dollars a year. Except, the company isn't a bank.

The move ended up being a fiasco. There are a lot of concerns about masquerading

as a bank. Banks are tightly regulated in this country and so if you have

something that doesn't have the sort of safeguards put in place around those

operations and you try and present yourself as a bank they're not going to

allow that. So I reached out to Robinhood. They wouldn't provide any details

about the potential relaunch of the cash management account. They pointed me to a

blog post and said to "stay tuned." On top of all of that, the market may be turning.

While accounts were almost surely growing with a broader stock market for years,

Millennials, already scarred by entering the job

market during the financial crisis, have now gotten just a taste of their first

bear market. Robinhood gained millions of users just after announcing you could

trade Cryptocurrencies on the platform in early 2018. But for the people who

invested in Bitcoin the day the company started allowing crypt

trades, things probably aren't looking so great. They lost almost two-thirds of

their money by the end of the year. At the same time, a younger generation of

traders may be willing to stomach more risk and volatile markets could be an

opportunity for Robinhood. When times are volatile, consumers typically look

for help or they look for more types of professional capabilities. So volatility

in the moment can be chilling and can be startling to the customer. But it tends

to actually accelerate growth. So what's next for Robinhood? The company claims

its users have transacted over a 150 billion dollars on the

platform and saved over a billion in commission fees as of May 2018. It's

beefing up its executive staff, hiring an Amazon veteran as its first CFO, as it

tiptoes towards an IPO. It's not like Robin Hood hasn't faced challenges before.

We'll see if today's financial product can live up to the legend.