Robinhood, a fintech disruptor is worth 8.82 billion dollars! This is an eye-popping value for a company with opaque metrics, regulation troubles and plenty of competition. But how did it grow so big? This report analyzes how Robinhood's innovation disrupted the financial industry, leading to rapid growth and market impact.
Genesis and Founding Ideals
Robinhood was founded by Baiju Bhatt and Vlad Tenev with the mission to democratize finance. They sought to provide access to financial markets for everyone, regardless of their financial background, by eliminating trading commissions. This revolutionary concept challenged traditional brokerage models that relied on fees for revenue.
Innovative Features and Differentiation
Robinhood's innovation lies in several key areas:
a) Commission-Free Trading: Robinhood's core innovation was offering commission-free trading. This disrupted the industry, as most brokers charged fees for each trade, making investing less accessible to small investors. According to Vlad Tenev, Robinhood has saved up to 1 billion dollars in commission fees. In this, company lives up to its legendary namesake: Robin Hood a fictional bandit who lives in the Sherwood Forest in Nottingham, England. His mantra – Rob the rich and pay the poor!
b) User-Friendly App: The company developed a user-friendly mobile app that simplified the trading process, attracting a younger and tech-savvy user base. The premise is simple. How do you make your company grow fast and become noticeable within a short period of time? Easy, put it on a phone! Since you look at your phone every day, then it is possible you could use the app on an almost daily basis.
c) Fractional Shares: Robinhood introduced fractional share trading, enabling investors to buy fractions of expensive stocks, further lowering barriers to entry. Fractional share trading has existed for decades, with its origins in dividend reinvestment plans, which allowed investors to reinvest their dividends into additional shares, even if the dividend amount was not enough to purchase a whole share. The growth of Robinhood has contributed significantly to the growth of Fractional trading in the market; with fractional trading reaching an estimated 3 billion dollars in shares traded in the first quarter of 2023!
d) Cryptocurrency Trading: Robinhood expanded its offerings to include cryptocurrencies, making it one of the first mainstream platforms to do so. But as the volatility of the Cryptocurrencies began to manifest itself particularly after the pandemic, Robinhood has announced they are moving to restrict the holding and trading of certain major cryptocurrencies on its platform. They also announced that they will examine their crypto offerings following the lawsuits. This was a week after the U.S. Securities and Exchange Commission filed lawsuits against crypto exchanges Binance and Coinbase.
Early Growth (2013-2018)
Robinhood's journey began with a waitlist for their app. Their initial user base grew through word of mouth and referrals. During these years, the company raised over 3 million dollars capital through venture funding and partnerships, enabling them to expand their offerings.
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Scaling Up (2018-2019)
Robinhood introduced Robinhood Gold, a premium subscription service, and expanded its product line to include options trading. The platform continued to grow, reaching 5 million users by the fourth quarter of 2018. However, Regulatory challenges and service outages occasionally marred their reputation during this phase. In June 2018, it was reported that Robinhood was in talks to obtain a U.S. banking license, with a spokesperson from the company claiming the company was in "constructive" talks with the U.S. OCC. In December 2018, Robinhood announced checking and savings accounts, with debit cards issued by Ohio-based Sutton Bank would be available in early 2019. Robinhood claimed the accounts would have a 3% annual interest rate; at the time of the announcement, the highest interest rate on a savings account from a licensed bank was 2.36%. Robinhood initially claimed the accounts would be SIPC insured, which the SIPC denied. The products were rebranded as "Cash Management" the next day. In January 2019, the waitlist and sign-up page were removed from the app.
A Cash Management feature was announced in October 2019, with FDIC insurance from various partner banks and an annual 2.05% interest rate, though lowered before launch to 1.8% after a federal rate cut. The feature launched in December 2019. (Wikipedia)
Turbulence and Regulatory Scrutiny (2020-2021)
On the 1st of July 2021, Robinhood filed to go public. However, they have faced challenges, particularly during the GameStop trading frenzy in early 2021. The company temporarily restricted trading in certain volatile stocks, sparking outrage and regulatory scrutiny. Robinhood had restricted trading in these stocks to meet collateral requirements at their clearinghouse, the National Securities Clearing Corporation. (Wall Street Journal & Fortune 2021). This event highlighted the complexities of balancing user freedom with market stability. It seemed that Robinhood had a master after all!
Beyond Trading & Future Expansion. (2021 – Present)
As of 2022, Robinhood has 22.8 million funded accounts and 15.9 million active users. They have embarked on a journey to evolve into a comprehensive financial services platform. In March 2022, Robinhood launched the Robinhood Cash Card, a debit card that allows users to automatically invest in assets like stocks and crypto when spending money. With the launch of the Cash Card, the company retired its Cash Management debit card.
In January 2023, Robinhood introduced traditional individual retirement accounts (IRAs) and Roth IRAs. Robinhood matches 1% of eligible contributions that customers put into their IRA. (Wikipedia)
Robinhood's Impact and Challenges Ahead
Robinhood's innovation disrupted the financial industry by making investing accessible to a broader demographic. Its user-friendly app, commission-free model, and introduction of new financial products set new standards. However, the company has faced growing pains and regulatory scrutiny, highlighting the need for robust risk management and transparency.
In 2023, The company decided in Q4 to terminate its deal with Ziglu, resulting in a $12 million charge. For many, this was going to be the company’s springboard to UK expansion, casting doubt on Robinhood’s plans to go global.(Fintech nexus 2023).
In addition, Payment for order flow (PFOF), which allows Robinhood to allow zero commission trading, is a banned practice in almost every major country except the U.S. As a result, global expansion isn't a straightforward proposition.And with the walls potentially closing in domestically, combined with a retail investor base that is somewhat disengaged relative to two years ago, there are real questions about Robinhood's future. (The Mortly Fool 2023)
