Robinhood Was Indeed Too Good to Be True
The SEC releases the results of its investigation.
Something for Nothing?
One wondered about Robinhood’s business model. The discount brokerage, which debuted in 2015, gives away trades. How, then, could the firm earn its keep? According to Robinhood’s early disclosure, its revenues came from two channels: 1) convincing customers to upgrade to its Gold service, 2) interest, either collected from its investors’ cash accounts or gained by lending securities.
Hmmm. The company’s Gold service, which offered extra benefits such as after-hours trading and margin trading, would never generate enough revenue to pay the company’s bills. And while interest receipts are critically important for Robinhood’s rivals, those companies boast much larger average customer accounts than does Robinhood, which targets millennials. (Charles Schwab’s (SCHW) current average account size is estimated to be 50 times larger than Robinhood’s).
John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.