The Robinhood business model operates an online brokerage that offers commission-free trading by allowing users to buy and sell assets such as stocks, exchange-traded funds (ETFs), options, American depositary receipts (ADRs), and even cryptocurrencies.
This fintech company provides a mobile phone application and the users can also check on their financials through the company’s website or smartwatch apps.
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Robinhood was founded in 2013, by Vladimir Tenev and Baiju Bhatt, the current CEOs of the company, who met when they both studied at Stanford.
Sometime after they had their first work experiences post-graduation, they launched their first own company — that was back in 2009. Celeris, the business, was a hedge fund that used an algorithm to help make investment decisions. Two years later, the idea was abandoned.
So, in 2011, the business was Chronos Research. The startup — which never took off either — would sell low-latency trading software to banks, hedge funds, or other financial institutions.
The duo saw an opportunity in combining the familiarity that people have with smartphones and the lack of access that the average citizen faces to invest — since investments in America used to be reserved for only 1% of society.
To get started, they got to convince Tim Draper of Index Ventures and Marc Andreessen of Andreessen & Horowitz to invest $3 million into the startup’s seed round, in April 2013.
Within the first year, Robinhood got close to one million users, responsible for processing over $1 billion in transactions, and, in 2016, the fintech became the fastest brokerage in history to hit $2 billion in transactions.
In 2020, with the quarantine, Robinhood added another 3 million users to its platform and their customers began to make even riskier bets. Unfortunately, the flood of new users brought a few problems: 3 outages over the course of 2 weeks, which led to some filing class-action lawsuits, that are still up in the air.
In January 2021, the company blocked users from purchasing GameStop, AMC, and other stocks, and they were criticized for instating a trading halt. As a result, Robinhood had to raise more than $3.4 billion in funding to settle its collateral demands, as well as to comply with SEC regulations.
In June of that year, the Financial Industry Regulatory Authority (FINRA) issued a $70 million fine, stating that Robinhood had misled customers. Despite the fine, the fintech managed to go public in July, raising another $1.9 billion in the process. Nowadays, over 18 million customers are using Robinhood.
The founders of Robinhood Markets Inc., Vladimir Tenev and Baiju Bhatt, are still today the current owners of the company, with Tenev being the CEO and Bhatt the CCO (Chief Creative Officer).
To democratize finance for all.
When users buy or sell stocks, ETFs, and options, Robinhood sends the order to market makers or exchanges. Market makers offer rebates to brokerages while ensuring better prices for users.
Robinhood’s algorithm seeks to send the order to the market maker most likely to give the best execution and a small portion to an exchange. Under proper exchange fee schedules, the fintech pays the exchange when it takes liquidity, and gets paid when provides liquidity.
The same occurs to Robinhood Crypto, which receives volume rebates from trading venues, that provide competitive prices.
The user pays $5 a month to have access to Morningstar research reports, NASDAQ Level II Market Data, bigger instant deposits, and margin investing. When investing on margin, if the customer uses more than $1,000 of margin, they will pay 2.5% yearly interest on the settled margin amount above $1,000.
Robinhood earns money from lending margin securities to counterparties.
Robinhood earns income on uninvested cash that isn’t swept to the Cash Management network of program banks, by depositing this cash in interest-bearing bank accounts.
Robinhood offers a debit card in connection with a brokerage account provided through Robinhood Financial LLC, a member of SIPC and FINRA. Sutton Bank, which issues the card pursuant to a license by Mastercard, receives an interchange fee that is passed to Robinhood. The fintech also receives fees from program banks for sweeping funds to them.
Let’s take a look at the Robinhood Business Model Canvas below:
Robinhood’s customer segments consist of:
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Robinhood’s cost structure consists of:
Below, there is a detailed swot analysis of Robinhood:
The entrance of Robinhood into the online investing industry in 2019 has shaken the market, even making some of the biggest players — such as Charles Schwab and E*Trade — drop their fees for good.
The company’s rise has been based on some key factors, especially permitting users to trade for free, in a so simple way that enables them to start right away.
The brand has great opportunities yet to grow furthermore in the market, it just needs to ensure accurate compliance with regulatory frameworks to reduce risks.
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