How does Robinhood make money?

Steven Loeb · April 27, 2017 · Short URL:

The company introduced its premium offering, called Gold, late last year

With venture capital cooling down in 2016, we don't hear as much these days about unicorns, those magical companies that are valued at $1 billion or more. While it used be that we'd see a new entry into the club every week or so,  that has now slowed down to a trickle.

That doesn't mean it doesn't still happen. Case in point: we had a new unicorn this week, when Robinhood, a mobile financial services company, raised a $110 million round from DST Global, NEA, Index Ventures, Ribbit Capital, Thrive Capital and Greenoaks Capital. The round brought the company's value to $1.3 billion.

Robinhood is a stock brokerage application. Its servers stream market data from exchanges in real-time, while notifying users of scheduled events, such as earnings, dividends, or splits. The app is meant to give traders up to date information quickly.

The company's real selling point is that is allows investors to make stock or ETF trades without paying commissions.

"Robinhood started with the idea that a technology-driven brokerage could operate with significantly less overhead," the company says on its website. "We cut out the fat that makes other brokerages costly — hundreds of storefront locations and manual account management."

Without those commission fees coming in, how does the company make money? It actually has three revenue streams.

First, it makes money "by collecting interest on the cash and securities in Robinhood accounts, much like a bank collects interest on cash deposits." While the company doesn't say what its interest rates are, it's roughly 3.5 percent, according to Barron’s.

The company also earns revenue from rebates it gets by directing its order flow to broker dealers, though Robinhood co-founder Baiju Bhatt told TechCrunch that it doesn't sell its users data. 

Finally, it makes money from its relatively new premium service, Robinhood Gold, which it introduced in September. With Gold, trading is still commission free, but users pay a monthly fee to access extended trading hours, a line of credit to invest, as well as Instant Reinvesting, which lets users access proceeds from a stock sale immediately, and Instant Deposits, which eliminates the three day wait period for funds to transfer from the bank into Robinhood. 

The amount that Robinhood charges for Gold depends on the size of the account and the amount of Buying Power. It can be as low as $6 a month for an account that is $2,000 to $3,000, with $1,000 in credit, or as high as $200 for an account that is over $50,000, with a $50,000 credit line. 

Since its launch Robinhood Gold has seen signups go up 17 percent month-to-month.

Founded in 2013, Robinhood now has two million users, who have transacted over $50 billion and saved nearly half a billion dollars in commission fees.

The company has raised $176 million in total funding, from investors that include Google Ventures, Tim Draper and Howard Lindon.

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