It’s a theme as old as money itself. The
struggle between the rich and the poor. And it became especially apparent after
the financial crisis. People were losing money hand over fist in the market,
millions lost their jobs and their homes. Trust in Wall Street was at its lowest
point in memory. People were protesting in the streets. One company launched a
stock trading app in the shadow of the crisis, Robinhood. Named after the
English fairy tale character who took from the rich and gave to the poor. Good sword. Good archers. Good fighters. Are you with me? (Cheers) But those guys didn’t start a 5.6
billion dollar company. These guys did. It’s an eye-popping valuation for a
financial company with opaque metrics and plenty of competition. The young
company had its share of missteps as well. Too good to be true? Well for Robin
Hood that might be the case. We know that this practice is highly criticized, not
only from regulators but also from consumer advocates. Yhey say that they
were inspired by the financial crisis and all that. Well, guess what? They’re
getting a huge chunk of their revenue from high-frequency trading.
Prompting questions over whether or not they can handle primetime. But let’s go
back to the beginning. Today’s Robinhood, the app, was founded by
two people who were fed up with the way you had to trade or at least they knew
others were fed up. We’re focused on building an awesome user experience.
Onboarding something like a 150,000 customers in such a short
period of time is is pretty much unprecedented in the brokerage industry.
The cost to trade had come down so far in the last 20 years. Since online
trading began, why not make it free? Now if you want to invest in the stock
market without paying fees, there’s an app for that. Since Robin Hood came into
the App Store, we’ve saved customers over five million dollars in commissions. All
in the theme of sticking it to the banks. The mission of Robin Hood is to
democratize America’s financial system. But there was something else that made
this product work. We were already addicted to our phones. Robin Hood made
trading easy on the device we were looking at all day. The combination
incredible growth. The company launched in 2013, just over a year late, they had
hundreds of thousands of people on a waiting list. The beginning of 2018,
they had three million customers. By the end of that year they had doubled that
amount to six million users. The darling of FinTech. Many believe the company is
revolutionary. Where they are really groundbreaking is how fast they’re
moving and how much they’re pushing the envelope. You know, they can’t be
dismissed because there is something in being able to double time and time again
where clearly you’re resonating with consumers and then this speed at which
are offering new types of capabilities, I don’t think anything companies could
move that fast. But there are questions about how much
money is really in the accounts. Robinhood gets a lot of attention because the
account growth has been really impressive and everything like that. But
there’s very little money there. With Schwab, Ameritrade, we have larger
accounts accounts that are in hundreds of thousands. Not single-digit thousands
on average, which is the last time we looked at Robinhood. A JMP analysis estimates the average assets and Robin Hood
accounts to be one to five thousand dollars. That’s compared to a $100,000 for Fidelity, a $110,000 for TD Ameritrade and about $240,000 for Charles Schwab. Robin Hood would not disclose
account values when asked by CNBC. We don’t know exactly where the account
sizes are. I suspect that based on the types of accounts, they’re
typically lower acid accounts and so they’re going to be less profitable
today. But I think probably one of the key things to think about is that a
small account today could be a large account in the future. Especially, if
you’re getting to the customer when they’re young or early in their
financial life. Not only could they take on brokers like TD Ameritrade and
Charles Schwab, they might just challenge the big banks too. Especially, if you add
more capabilities and more service and then service the cash in the account.
Hopefully, you have an opportunity to compete for a higher percentage of the
wallet. Which some of the big incumbents are doing quite well today. There are
also other startups trying to take advantage of this trend. A slew of
investing oriented apps have come on the market in the last few years, including
Betterman,Acorns, Stash and more. But it is not as easy to take the Silicon
Valley approach of moving fast and breaking things in FinTech. There are
plenty of competitors with really deep pockets and of course tons and tons of
regulation. Some have called out a hypocritical side to the FinTech unicorn
that makes it not so different from old-school Wall Street. In October,
Bloomberg reported that the company gets almost half of its revenue through a
practice called “payment for order flow,” meaning a company’s pain Robin Hood to
be the other side of your trade on the platform or at least get the first right
of refusal. it’s a controversial practice but commonplace among online brokers. It
means your orders aren’t happening on a public exchange but behind closed doors
in a dark pool. Some say it helps market efficiencies because companies invest in
making faster trades. Others say, it’s just a way for high-speed computerized
traders to skim off every trade keeping markets opaque.
The SEC has proposed a pilot program to look into the practice. There’s a concern
maybe it’s taking advantage. The arguments are to improve liquidity. That
it takes what would be a small trade and aggregates it and allows it to get a
better execution quality. The reason to run a pilot is to make sure that those
claims are all actually valid. Robinhood would not disclose how much it makes
from this practice to CNBC but the company did offer an explanation of the
system on its website saying: “We send your orders to market makers that allow
you to receive better execution quality and better prices. The revenue we receive
helps us cover the cost of operating our business and allows us to offer you
commission-free trading. The question is can accompany the built a name, literally
on fairness, convinced its customers it’s on their side. One way to do it, is to
offer better interest rates and that’s exactly what Robinoohd tried to do. In
December, the company announced three percent checking and savings accounts.
Compare that to the national average of .09 percent offered by most
savings accounts. For the median American house that’s got about 8,000
dollars in the bank, this adds up to a staggering 240 dollars
a year. Except, the company isn’t a bank. The move ended up being a fiasco. There
are a lot of concerns about masquerading as a bank. Banks are tightly regulated in
this country and so if you have something that doesn’t have the sort of
safeguards put in place around those operations and you try and present
yourself as a bank they’re not going to allow that. So I reached out to Robinhood. They wouldn’t provide any details about the potential relaunch of the cash
management account. They pointed me to a blog post and said to “stay tuned.” On top
of all of that, the market may be turning. While accounts were almost surely growing
with a broader stock market for years, Millennials,
already scarred by entering the job market during the financial crisis, have
now gotten just a taste of their first bear market. Robinhood gained millions
of users just after announcing you could trade Cryptocurrencies on the platform
in early 2018. But for the people who invested in Bitcoin the day the company
started allowing crypt trades, things probably aren’t looking so
great. They lost almost two-thirds of their money by the end of the year. At
the same time, a younger generation of traders may be willing to stomach more
risk and volatile markets could be an opportunity for Robinhood. When times
are volatile, consumers typically look for help or they look for more types of
professional capabilities. So volatility in the moment can be chilling and can be
startling to the customer. But it tends to actually accelerate growth. So what’s
next for Robinhood? The company claims its users have transacted over a 150 billion dollars on the platform and saved over a billion in
commission fees as of May 2018. It’s beefing up its executive staff, hiring an
Amazon veteran as its first CFO, as it tiptoes towards an IPO. It’s not like
Robin Hood hasn’t faced challenges before. We’ll see if today’s financial product
can live up to the legend.