DigitalBizModels

View Original

Best Fintech Biz Models: Robinhood

Robinhood’s (almost 1 dozen) revenue models

Most people assume Robinhood makes money on trading activity only. But that’s far from the truth. They have about a dozen ways of monetisation across three broad categories:

  1. Transaction revenues (includes trading)

  2. Interest revenues

  3. Other revenues

Below these there are yet more sub-types as we will see, adding up to 11.


When things went south …

In 2021 trading was by far the largest source of revenue. In 2022 and 2023 the inevitable happened and trading-based transaction revenues collapsed largely due to the Bitcoin volatility and downturn. But Interest revenues came to the help and in 2023 made the largest portion of revenues.

Does that mean Robinhood is moving to a traditional banking model?

Well, not so fast. Let’s first look into the details of their revenue models.


See this form in the original post

(1) Transaction revenue

A crucial point is that Robinhood is not a market maker of the trades they facilitate. They are also not an interest-paying bank (nor a bank for that matter). Hence, most of their revenues are generated via partner organisations for which Robinhood receives fees from these (typically, a percentage of the transaction value or the revenue of the partnering organisation).

Transaction revenues come from facilitating equities trading in a process called Payment for Order Flow (PFOF). RH receives a fixed percentage of the difference between publicly quoted bid-ask spread for when the security is traded. There was criticism of this practice a few years ago as not aligning with customers' interests. But RH states to close the most beneficial transactions for customers. In addition, for small trades this may still be less costly than the typical fees charged by other brokers.

As for crypto trading, they receive transaction rebates which are a fixed percentage of the order value from the market maker.



(2) Interest revenues

Many may not be aware that Robinhood makes various types of interest revenues including on (their own) corporate cash and investments, margin loans to users, segregated cash and cash equivalents, deposits with clearing organisations, cash sweep, and carried customer credit card balances. They also earn interest revenues and expenses on securities lending.

Interestingly, this was the biggest revenue driver in 2023 even ahead of trading revenues. And this has been helping them to grow their total revenue at a time where trading revenue receded!

(3) Other revenues

Other revenues include

  • Subscription revenues from their Gold subscription offering

  • Proxy revenues from transferring the voting rights of shares held by users

  • Fees charged for transferring out user accounts (ACATS)


Revenue breakdown 2023

In the full year 2023, Robinhood made the following revenues:

  1. Transaction revenues: $785m (=42% of total revenue)

  2. Interest revenues: $929m (=50%)

  3. Other revenues: $151m (=8%)

  4. Total Revenue: $1,865m


Robinhood business model highlights

Why we love Robinhood are the different biz model highlights:

  • Trading features focused on small investors

  • One of the slickest WealthTech apps

  • Fast-growing set of offerings beyond trading

  • A loyalty program that connects everything

  • Successful revenue diversification

  • A nice product roadmap

This is also why we have selected them in our Fintech book as one of 6 amazing examples providing insights into these biz model highlights.


See this product in the original post

The Best Fintech Biz Models Today

Robinhood’s Business Model has more fascinating aspects than covered in the article.

Learn more about Robinhood and some of The Best Fintech Biz Models Today:

Robinhood ~ Coinbase ~ PayPal ~ Fiserv ~ CoreLogic ~ Xero

We have carefully selected the best examples from different sub-verticals of Fintech that elaborate on a broad range of creative business model approaches.

~50 pages (pdf) presented in a wonderful format that is easy to read & understand.

You will love reading this book!