How Does Robinhood Make Money? An Overview

Robinhood Markets Inc. is a monetary know-how (fintech) firm that operates an internet low cost brokerage providing commission-free buying and selling. It supplies a web- and mobile-based monetary companies platform that permits customers to spend money on and commerce shares, exchange-traded funds (ETFs), choices, and American depositary receipts (ADRs). It additionally permits customers to spend money on sure cryptocurrencies primarily based on their geographic location. The corporate makes cash by fee for order movement, premium membership charges, inventory loans, curiosity on uninvested money, interchange charges associated to its debit card, and different smaller income streams.

After saying a confidential IPO submitting on March 23, 2021, Robinhood submitted an S-1 registration to the U.S. Securities and Trade Fee on July 1, 2021. On July 19, 2021, it amended its S-1 to announce that it will be promoting 52.4 million shares with its founders and CFO promoting one other 2.6 million for a complete of 55 million. Robinhood went public at $38 a share, giving it a valuation of $32 billion. The shares are listed underneath the ticker HOOD on the Nasdaq.

Robinhood faces vital competitors from different low cost brokerages, new and established fintech firms, banks, cryptocurrency exchanges, asset administration companies, and know-how platforms. A few of its main rivals embody Charles Schwab Corp. (SCHW), Morgan Stanley’s (MS) E*TRADE Monetary Holdings LLC, Coinbase International Inc. (COIN), Sq. Inc. (SQ), and River Monetary Corp. (RVRF).

Robinhood’s Financials

In its most up-to-date quarterly report for This autumn FY 2021, ended Dec. 31, 2021, Robinhood posted a web lack of $423.3 million as in contrast with web earnings of $13.0 million for the prior-year quarter, in addition to 14.2% year-over-year (YOY) development in complete web revenues. Web loss was impacted by share-based compensation bills totaling $318 million for the quarter. The corporate has quickly grown its crew in 2021, greater than doubling its complete variety of workers.

Robinhood’s web cumulative funded accounts, a key metric that gauges the variety of accounts into which customers made an preliminary deposit or cash switch throughout a specified interval, rose by over 81% YOY for This autumn FY 2021 to 22.7 million. The corporate’s month-to-month lively person base grew by about 48% YOY however declined by roughly 8% on a sequential foundation for This autumn FY 2021.

The corporate additionally supplied outcomes for FY 2021, which ended Dec. 31, 2021. Robinhood posted a web lack of $3.7 billion for the yr, in contrast with web earnings of $7.4 million for FY 2020. Share-based compensation bills have been practically $1.6 billion for FY 2021, considerably larger than $24 million in these bills for FY 2020. Annual income rose 89.3% from the earlier yr to $1.8 billion.

Robinhood’s Enterprise Segments

Robinhood operates and stories its monetary outcomes as one enterprise phase. Nevertheless, it does present a breakdown of income into the next classes: transaction-based revenues; web curiosity revenues; and different revenues. We take a better take a look at these income classes under.

Transaction-based revenues

Robinhood generates transaction-based revenues by routing its customers’ orders for choices, equities, and cryptocurrencies to market makers, which is a course of generally known as fee for order movement (PFOF). Brokerage companies that use PFOF obtain a small fee as compensation for steering orders to a selected market maker. The fee is normally solely fractions of a penny per share however is usually a vital income for firms coping with a lot of orders. PFOF is a significant purpose Robinhood is ready to provide zero-commission buying and selling. Robinhood’s transaction-based income rose 12.2% to $362.7 million in This autumn FY 2021, accounting for practically 73% of companywide income.

Web curiosity revenues

Robinhood generates web curiosity income (curiosity income minus curiosity bills) on securities lending transactions. Curiosity can be earned on margin loans to customers, and curiosity bills are incurred in connection to the corporate’s revolving credit score services. Web curiosity revenues rose 0.5% to $63.4 million in This autumn FY 2021, comprising 17.5% of Robinhood’s complete income.

Different revenues

Robinhood’s different sources of income primarily encompass memberships charges for Robinhood Gold. Robinhood Gold is a paid subscription service that gives customers premium options, together with enhanced prompt entry to deposits, skilled analysis, Nasdaq Stage II market knowledge, and entry to margin investing for accepted customers. Different revenues additionally embody proxy rebates and miscellaneous person charges. Income from these sources rose 84.0% to $35.4 million in This autumn FY 2021, accounting for about 9.8% of companywide income.

Robinhood’s Latest Developments

For This autumn 2021, Robinhood’s fastest-growing space inside transaction-based revenues was cryptocurrencies. Cryptocurrencies greater than quadrupled for that interval, as the corporate launched Crypto Items, a platform enabling prospects to ship crypto to household and mates. Robinhood’s crypto presence is prone to proceed to broaden in 2022, as the corporate anticipates a full launch of cryptocurrency wallets and associated companies in Q1 2022. It additionally expects to open its crypto platform to prospects internationally in 2022.

In early June 2021, the SEC introduced that it was conducting a broad examination of market construction after the meme-stock buying and selling frenzy that drove the share costs of firms like GameStop Corp. (GME) and AMC Leisure Holdings Inc. (AMC) as much as astronomical ranges earlier this yr. The SEC will likely be paying particular consideration to the PFOF course of whereby commerce orders from particular person buyers are routed by brokerage companies to off-exchange, high-speed merchants generally known as wholesalers, akin to Citadel Securities LLC and Virtu Monetary Inc. (VIRT). These off-exchange merchants should provide costs which might be not less than pretty much as good because the nationwide greatest provide, which is what is obtainable by the official exchanges. However with an rising variety of trades taking place exterior of the official exchanges, the SEC is worried a few lack of transparency over the costs that off-exchange merchants provide to their prospects.

SEC Chairman Gary Gensler has been a critic of PFOF, believing the observe creates a battle of curiosity for brokerages as a result of it incentivizes them to ship buyer orders to the very best bidder versus the market maker that gives the most effective costs or quickest execution. The SEC is reportedly contemplating quite a lot of different points that will influence Robinhood as effectively, together with so-called “digital buying and selling prompts” which gamify the buying and selling course of to encourage extreme buying and selling, problems with market focus and pricing, and settlement instances. Retail brokerages have been prompted to pay additional collateral following the meme-stock buying and selling volatility, in case of default by both celebration, because of the two-day settlement course of. The SEC could shorten the settlement cycle to in the future.