How Does Robinhood Work?

Aug 29, 2022 By Triston Martin

Robinhood's main method of generating revenue is by making tiny sums of money on single trades on a massive scale. It attracts many customers by offering incentives like "free" stocks and commission-free trading, retaining them, and encouraging them to trade using actions in the app. It also earns tiny margins on these trades using payments for order flow.

Before Robinhood's introduction, beginning to invest was not easy and took a lot of time. With a significant portion of its revenue dependent on the influx of large numbers of investors, Robinhood had to lower the barriers to entry into investing and achieved this by breaking the norms in the brokerage sector.

Robinhood's Business Model

Robinhood offers an online broker that allows commission-free transactions of exchange-traded funds, stocks, and cryptocurrency. While Robinhood doesn't charge its customers for trading, it earns profits from market makers and companies that charge for order flow fees of its traders at retail. The payments for the flow of orders, also known as PFOF, comprised approximately 75 percent of the company's earnings in the year prior. In addition, Robinhood also earns revenue from the interest earned on securities and margin loans. The company also offers services like Robinhood Gold, a Robinhood Gold premium subscription service that allows users access to features like high-quality research, margin trading, and professional analysis.

Net Interest Revenues

Robinhood generates net income from interest (interest revenues minus interest expenses) on transactions in securities lending. The company also earns interest on loans made to margin customers, and the interest expenses are paid through Robinhood's revolving credit facilities. Net interest revenues increased 0.5 percent to $63.4 million during the fourth quarter of FY 2021. They comprise 17.5 percent of Robinhood's overall revenues.

Other Revenue

Robinhood's other revenue sources are mainly membership charges to Robinhood Gold. Robinhood Gold is a paid subscription service that gives users exclusive features, such as access to deposits, expert analysis, Nasdaq Level II market information, and the ability to margin investing for registered customers. Other revenue sources comprise proxy rebates and other fees for users. The revenue from these sources grew by 84.0 percent to $35.4 million during the fourth quarter of FY 2021, representing approximately 9.8 percent of the company's total revenue.

Fees for Subscribers from Robinhood Gold

Robinhood gets subscriber charges from premium services such as Robinhood Gold, an investment toolkit that provides analysis reports, market information, margin trade, and larger instant deposit. The users pay a $5 per month fee to use this service.

Cash from a Stock Loan Margin Trading

When accounts holders utilize margin to trade the margin, they take loans, which earns the revenue from lending securities for margin to counterparties. Robinhood refers to this service as a "Stock Loan." Although margin trading is a basic feature with Robinhood Gold, with the Robinhood Gold option, customers are charged a 2.5 percentage rate of interest when they take out more than $1,000 to fund margin trading.

Cash Management Fees

Robinhood is charged fees for the cash it carries in banks' Cash Management network. Additionally, it receives interchange charges for its Robinhood debit card. These charges include things such as the processing of transactions and loss from fraud, which are typical for credit and debit card issuers.

Cash income

Suppose customers have cash that isn't invested that's not being swept through its Cash Management network of banks. In that case, Robinhood Securities may earn money, mostly through depositing the money into bank accounts.

Fees on Transfers and Other Services

If clients would like to transfer their funds from Robinhood to an alternative broker, they'll be charged $75 for the transfer. In addition to other fees, Robinhood also charges $20 for check delivery overnight as well as $5 for paper statements and $5 for paper-based confirmations.

Robinhood's Recent Developments

On the 26th of April, 2022, Robinhood founder and chief executive Vlad Tenev announced the company would lay off approximately 9 percent of its full-time employees. Robinhood expanded its workforce sixfold since 2019 to 3,800 by 2021's end. In its Q4-2021 report, Robinhood saw the fastest growth in the revenue generated by cryptocurrency, which more than tripled when the company introduced Crypto Gifts. This platform allows customers to transfer crypto to relatives and acquaintances. Robinhood's crypto offerings are likely to keep increasing in 2022, considering that the company expects to launch the full introduction of crypto wallets and other services in the first quarter of 2022. It is also planning to launch its crypto platform to customers across the globe in 2022.

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