While Millennial-targeting app Robinhood may not be stealing from the rich to feed the poor, it's well on its way to becoming a household name in stock trading. Digital natives often harbor ill will towards traditional banks, and instead turn to fintech solutions like alternative lending firms--which are often cheaper and easier to use.
"We're the fastest-growing brokerage of all time, primarily on behalf of this younger generation of customers that are actually more willing to trust a company like Robinhood than your traditional big bank or brokerage," says Vlad Tenev, the company's co-founder and CEO.
On Wednesday, Robinhood announced that it would extend its services into China, allowing residents there to trade U.S. stocks and ETFs through its partnership with Baidu, a Chinese-language Internet search giant. Tenev says the process of becoming certified abroad has been relatively painless, mainly because it's still operating within the U.S. Financial Industry Regulatory Authority (FINRA), and complying with the SEC.
Users will only be able to trade American securities through Baidu's StockMaster app, not Chinese ones. Prior to launching in 2015, it took roughly a year for the company to become a member of FINRA (during which time Tenev and co-founder Baiju Bhatt were not allowed to market Robinhood).
The Palo Alto, Calif.-based startup has attracted more than one million users looking to trade securities for free. (They'd still fork over the standard regulatory fees, like the SEC charges on certain types of orders. One spokesperson points out, though, that these typically cost a penny or less.)
"We had to invest well over a year and a significant amount of capital before we could even launch a landing page," he recalls, adding that this was an early and significant challenge.
Poised to disrupt a massive market
Nonprofessional traders in the U.S. retail brokerage industry have accounts worth nearly $2 trillion in assets, according to research firm Aite Group. Robinhood hopes to steal business away from old-guard trading companies such as Charles Schwab, TD Ameritrade, E-Trade, and Scottrade. Many of these generally charge between $7 and $10 per transaction.
By contrast, Robinhood takes the bulk of its revenues from add-on features, such as interest earned on cash balances, or stock loans. "We'll have access to all of the traditional brokerage revenue streams, aside from commissions," explains Tenev. Those streams include margin lending, where the startup extends a line of credit to a customer to fund more trades, or interest it charges on cash balances, for example.
The company declined to share its revenues, though it is flush with venture capital. To date, Robinhood has raised $66 million in funding from such firms as NEA, Index Ventures, and celebrity figures like Jared Leto, Snoop Dogg, and Nas.
The company, however, is unlikely profitable. According to Tenev, who skirted the question: "Typically, venture-backed companies of our age and scale are not profitable by design," he said.
Individual securities are still risky
Some studies have found that individual investors who tend to make frequent stock trades seriously under-perform the market. And Robinhood, at just over one year old, has yet to weather a major economic downturn, so it's unclear how--and to what extent--its user-base would react.
Tenev says he isn't fazed, largely because Robinhood has benefited from earlier market swoons. "We've been fortunate that the market has done fairly well over the last couple of years, but there have been times of increased volatility, back in August, for instance, or earlier this year, and those were some of our best days ever," he said. "When there were significant market drops, that's when we saw a lot more sign pus, a lot more people buying stock than at other times, because the demographic difference between our customers and typical brokerages leads to different behavior."
From a security perspective, users might be pleased to know that some Robinhood staffers come from tech companies like Google and Facebook -- and it also enlists the "white hat" community, offering bounties for those who attempt to hack into the system, and thereby catch its own security flaws.
"Data breaches have traditionally happened to large, big-box retailers and brick-and-mortar shops," Tenev said, nodding to recent incidents at Target and JP Morgan. "The security posture is in some ways a little bit simpler for a tech company. A traditional bank would not only have the engineering component, they also have physical security where money and customer information is stored on physical premises. So there's many more vectors that way."