Robinhood Changed Online Trading, But Can It Repeat The Feat?

The cost of equity trades in the electronic era should have been zero for some time. Finally, Robinhood’s free-trading model is becoming the norm. But what does Robinhood do next?

Robinhood’s meteoric rise as a trading platform was predicated on the union of low-cost services and mobile accessibility. Offering free trades on the go, Robinhood became a popular hub for younger traders to get into buying and selling equities for less.

Rounds and rounds of capital later (Robinhood has raised $862 million to date), the company’s model, proven out by swelling usage numbers, is attracting copycats. As we reported a few weeks back, traditional online brokerages have begun swinging towards Robinhood’s most-famous price by offering zero-cost trades.

Robinhood showed the market that customers were ready to stop overpaying for equity trades. But now that Robinhood has shamed incumbents into following suit, what’s next for the company?

Now What?

Robinhood has changed its market, yes, but in the process has seen one of its key advantages diluted by larger trading companies following suit. The scale of the copying is now pandemic. Here’s CNN from earlier today (condensed and reformatted by Crunchbase News):

Fidelity announced Thursday that it will no longer charge customers to trade US stocks, [ETFs] or options. The company […] joins a growing list of brokers that have slashed online trading fees in quick succession. Charles Schwab last week eliminated commissions for trading stocks [while] TD Ameritrade and E-Trade have also ditched commissions.

So much for low-cost trades setting Robinhood apart.

Robinhood’s mobile app could remain an advantage, but certainly its pricing scheme is no longer going to direct as many users through the door as it once did. Could the changed reality of the market that the unicorn is competing inside of slow Robinhood’s growth, and thus curtail its future fundraising ability?

Perhaps, though the company is well-capitalized. DST Global led Robinhood’s $110 million 2017 Series C. And its $363 million 2018 Series D. And its $323 million 2019 Series E. Surely Robinhood has a chunk of that money left over. But past having cash-on-hand, the trendy unicorn has something else up its sleeve.

Banking

It would be too easy to say that the increasingly competitive, zero-fee trading landscape is very worrisome for Robinhood if the company didn’t have other products that could pick up slack in its growth figures.

You recall that Robinhood has crypto trading (notably crypto competitor Coinbase recently raised its trading fees to some discontent). However, Robinhood has also moved, yet again, into banking services.

Here’s TechCrunch on the latest from Robinhood, announced earlier in the week:

This time it actually has insurance. Zero-fee stock-trading app Robinhood is launching Cash Management, a new feature that earns users 2.05% APY interest on uninvested money in their account with the ability to spend it through a special Mastercard debit card.

Crunchbase News has learned that Robinhood has more than 300,000 people on the waitlist for the feature.

Moving into banking is something of a regular step in 2019 for companies that work with money in some capacity. SoFi moved into the cash-and-debit market earlier this year with an offering called SoFi Money which it called “a new, hybrid account offering high-yield interest” after starting out with student loan services. Acorns added a debit card after starting in savings accounts and easy investing. Chime started off as a bank, but also features the usual debit card service. (Axios reported that Chime is raising new money at a new, higher $5 billion valuation.)

Competition

Why is every service getting a debit card into the hands of its users? In 2014, back when Chime raised its $18 million Series B, TechCrunch reported that the company “earns about 1.5 percent in fees per transaction” that went through its debit card.

So Robinhood has a second and third act underway while its former rivals match its low-cost equity trades. But will crypto trading and banking move the needle when each category has a host of well-funded competition?

The funding point isn’t an exaggeration. Coinbase, a crypto trading competitor, has raised $547.3 million in known capital to date from investors like a16z, IVP, and Tiger Global. Chime has raised $308.8 million in known capital to date, including money from Menlo, Crosslink, Cathay Innovation, and, notably, DST Global. Acorns, completing our point, has raised $207 million, including raising from Comcast Ventures and Greycroft.

There are two stories here, then. First, that Robinhood attacked a market with radically low pricing (thanks to the power of software), drawing blood early and forcing change from competitors after it had racked up a substantial user base. However, Robinhood’s second act could prove tricky given the number of players in the cash-and-debit-card game.

In a nearly ironic sense, then, Robinhood’s runaway success growing its market footprint with free trades worked so well that its competitors broke out the copy machines. Now Robinhood has to craft a more diversified growth path, but where there’s more competition and it’s not the first mover.

We’ll see!

Illustration: Li-Anne Dias.