Robinhood Business Model

The Robinhood Business Model Canvas: Best Guide For 2022

Khyati Hooda
By Khyati Hooda 9 Min Read

Robinhood offers a variety of ways to invest in stocks, ETFs, options, and cryptocurrencies. Robinhood makes its money by offering Robinhood Gold, which starts at $6 per month for margin trading services, interest on your cash and stocks, and fees paid by market makers/trading venues. We will take a deep dive into the Robinhood Business Model canvas and explore it in detail.

You can invest in stocks, ETFs, options, and cryptocurrencies commission-free right from your phone or desktop.

Banks collect interest on cash deposits, the same way Robinhood receives interest on customer investments. They also collect rebates from market makers and trading venues. Robinhood generates revenue through Robinhood Gold, a margin trading service that starts at $6 per month.

Robinhood claims its mission is to democratize access to the American financial system.

Robinhood’s primary value proposition is its investment platform, which allows you to buy and sell stocks, exchange-traded funds options, and cryptocurrencies without commissions.

There are three main elements of the platform:

  • User-friendliness
  • Suitable for all types of investors, including newbies
  • Convenience

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They pitched the idea to seventy-five investors before eventually receiving an investment round that allowed them to launch the platform.

The app concept came from the two founders’ experience selling software to Wall Street hedge funds.

They knew that these transactions would cost the average American up to $10 per trade, while they had no costs. This made them realize that they could democratize the trading of stocks and shares by making it easy for any American to invest.

In December 2013, they introduced the service on Hacker News, even before it was available: Robinhood-hacker-news.

And the marketing strategy worked and Robinhood quickly became popular, reaching over 3 million accounts in 2018. The convenience of the app is its strength but also a weakness.

However, the friendly user experience and convenience have made the app extremely popular among Millennials.

How does Robinhood make money?

The above question has made almost everyone curious! Well if you want to find out, keep reading.

1. Discounts received from market makers and trading venues

When you buy or sell stocks, ETFs, and options on Robinhood, your order is routed to either the market maker or an exchange. Market makers offer rebates to brokers while providing better prices for our users.

The revenue from these rebates covers the costs of running the business and providing commission-free trading. Robinhood earns 2.6 cents for every dollar traded in this way.

Robinhood sends orders to the market maker most likely to provide good execution and only a small portion of the order to an exchange. The fintech pays exchanges when it takes liquidity and receives compensation from them when they provide liquidity.

Like Robinhood in general, Robinhood Crypto receives volume rebates from trading venues that offer competitive prices.

2. Robinhood Gold

Users pay $5 per month for access to Morningstar Research reports, larger instant deposits, NASDAQ Level II market data, and margin investing. For margin investing, if the client uses more than $1,000 in the margin, they must pay 2.5% interest per year on the cleared margin amount over $1,000.

3. Stock Lending

Robinhood generates income by lending margin securities to counterparties.

4. Income from cash

Robinhood generates income from uninvested cash that is not deposited into the program banks’ cash management network by depositing the cash into interest-bearing bank accounts.

5. Cash Management

Robinhood offers a debit card in conjunction with a brokerage account provided through Robinhood Financial LLC, a member of SIPC and FINRA. Sutton Bank issues the card under a license from Mastercard and receives an interchange fee, which is then passed on to Robinhood. Fintech also receives fees from the program banks for passing funds to them.

Robinhood Business Model

The business model is the blueprint of any business and the roadmap to profitability. Business models hold vital information about the various aspects of the business. It describes how an organization creates, distributes, and gains value from its business.

We’re here to help you to guide through the Robinhood Business Model!

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Robinhood Business Model: Key Partners

Key partners are your business’s relationships with other companies or individuals to make your business model work. Key partners are essential to reduce risk, acquire more assets, or optimize the business in a business model. 

  • Investors
  • FINRA
  • SIPC
  • Tech providers
  • Robinhood key activities
  • App maintenance
  • Software development
  • IT operations
  • Security measures
  • Marketing
  • Expansion

Robinhood Business Model: Key Resources

Key resources are the most important resources to ensure your business model works. Key resources allow your business to succeed by offering a value proposition, targeting specific markets, and maintaining relationships with various customers.

  • The technical and financial team
  • Online trading platform
  • Real-time market data
  • Investor or user database
  • Security measures
  • Venture capital funding

Robinhood Business Model: Value Proposition

A value proposition is a product or service your business sells that solves a problem of a customer segment. It is the reason why customers would buy your product or service.

  • Democratize access to the American financial system
  • Free trading of stocks Real-time market data for trading purposes
  • Convenient storage of money and trade stocks via app
  • Enabling commission-free investments in publicly traded companies and exchange-traded funds
  • Enabling users to invest in crypto assets
  • Inspiring a new generation of investors

Robinhood Business Model: Customer Segments

Customer segments refer to the different segments or groups of customers you target. Segregating the customers allows the business to cater to the needs of different types of customers.

  • Millennials – young people who are interested in trading (18 to 29years old)
  • Retail brokerage marketing
  • High-frequency traders
  • Electronic trading companies

Robinhood Business Model: Customer Relationships

Customer relationship describes the type of relationship your business has with its customers or potential customers. An organization’s type of relationship maintained may be short-term, long-term, transactional, occasional, automated, or personal.

  • Email and Social Media
  • Smart notifications – real-time market data
  • Free shares for referrals of new users
  • Automation
  • Self-service

Robinhood Business Model: Channels

Channels refer to the various pathways chosen by businesses to maintain relationships with their customers and the general audience. These channels are adopted to deliver the customer experience your value proposition states.

  • Mobile App
  • Website
  • Application Programming Interface – API
  • Social media

Robinhood Business Model: Revenue Streams

Revenue streams are the different sources that generate revenue for a business. The revenue streams often differ with the customer segments. Sales, Subscription, Licensing, Commission, Leverage, and Renting are some of the revenue streams.

  • Interests on cash balances and margin lending of customers
  • Rebates
  • Premium subscription
  • Payment for order flow

Robinhood Business Model: Cost Structure

Cost structure defines all the costs incurred for running your business. Emphasis should be given to minimizing the costs. The two broad classes of cost structures include cost-driven cost structure and value-driven cost structure.

  • The technical and financial team
  • R&D
  • Automation of processes
  • Marketing
  • Storage
  • IT architecture
  • Security policies
  • Legal

Conclusion

The majority of the company’s revenue comes from transaction-based revenue, including order flow payments. Robinhood’s competitors include E* TRADE, TradeStation, SoFi Active Investing, TD Ameritrade, Moomoo, and M1 Finance

However, in 2021, Robinhood’s funded accounts increased by 81%, with approximately 10 million new accounts added during the year. Robinhood plans to expand its crypto platform to international customers in 2022.

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Posted by Khyati Hooda
Khyati is an entrepreneur, marketing consultant and growth hacker. She helps sustainable revenue growth through marketing for SaaS and subscription companies. Her expertise lies in building scalable customer acquisition strategies and implementing effective digital marketing campaigns that drive high-quality, low-cost leads for startups. Khyati has managed over $50M in marketing budgets across various industries including technology, finance, education, retail, consumer goods and more - successfully delivering over 15x ROI for her clients.
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