How Robinhood makes money? Explained by Digimagg

Robinhood Markets Inc. is a fintech firm that operates an online discount brokerage offering commission-free trading. Through its web and mobile platforms, investors can trade stocks, ETFs, options, ADRs, and certain cryptocurrencies. Robinhood generates revenue through payment for order flow, where it routes user orders to market makers for execution and receives compensation. Additionally, it earns from investing user cash deposits, margin lending, stock lending, its Gold subscription services, and its crypto business. The recent launch of its credit card in 2024 is expected to contribute further to its revenue streams.

Robinhood’s financials

In its latest fiscal year report ending on December 31, 2023, Robinhood disclosed a net loss of $541 million, a decrease from the previous year's net loss of $1 billion, alongside a 37.3% year-over-year increase in net revenue. The net loss was impacted by share-based compensation expenses totaling $871 million.

Robinhood's Funded Customers, a critical metric indicating the number of accounts where users initiated a deposit or money transfer during a specific period, grew by 2% year-over-year to reach 23.4 million. However, the company experienced a 4% year-over-year decline in its monthly active user base, which now stands at 10.9 million.

Competitive landscape

Robinhood faces stiff competition from various entities, including other discount brokerages, emerging and established fintech firms, banks, cryptocurrency exchanges, asset management companies, and technology platforms.

Robinhood's revenue breakdown

Robinhood operates and reports its financial performance as a single business segment. However, it segments its revenue into three main categories: transaction-based revenues, net interest revenues, and other revenues. Let's delve into each of these categories:

Transaction-based revenues

Robinhood earns transaction-based revenues by directing its users' orders for options, equities, and cryptocurrencies to market makers, a process known as payment for order flow (PFOF). This method allows brokerage firms to receive payment for routing customer orders to specific market makers, typically earning fractions of a penny per share. PFOF is a primary reason Robinhood can offer commission-free trading. In the reported period, transaction-based revenue declined by 3.56% to $785 million, with decreases observed in cryptocurrencies and equities, while options and other assets saw increases. This segment represents 42.1% of total revenue.

Net interest revenues

Robinhood generates net interest revenue, which is the difference between interest revenue and interest expenses, from securities lending transactions and interest earned on margin loans to users. Additionally, the company incurs interest expenses related to its revolving credit facilities. Net interest revenues surged by 119% to $929 million in the fiscal year ending December 31, 2023, constituting 49.8% of Robinhood's total revenue. The significant growth was primarily driven by interest on corporate cash and investments due to the increased rate environment set by the Federal Reserve.

Other revenues

Other sources of revenue for Robinhood include membership fees for Robinhood Gold, proxy revenues, and ACATS fees. Revenue from this segment increased by 25.8% to $151 million in the fiscal year ending December 31, 2023, representing approximately 8.10% of the company's total revenue. The majority of the growth stemmed from an uptick in proxy revenues.

Robinhood's recent updates

In March 2024, Robinhood unveiled its new credit card, the Gold Card, which offers 3% cash back across all categories and 5% cash back on travel purchases. The card, operating as a Visa Signature card, does not carry an annual fee or foreign transaction fees.

Brokerage fees with Robinhood

While Robinhood imposes trading activity fees, options regulatory fees, and OCC clearing fees as mandated by regulations, it does not charge commissions for trading U.S.-listed and OTC securities and options, including ETFs.

Withdrawal fees with Robinhood

While there are no fees associated with bank transfers, withdrawals to a debit card or bank account may incur fees of up to 1.75%.

Margin fees on Robinhood

Robinhood applies a standard margin interest rate of 12%, with Gold members benefiting from a discounted rate of 8%.

In conclusion Robinhood operates as a brokerage platform facilitating asset trading. Competing with established firms like Charles Schwab and E*Trade, Robinhood primarily earns revenue through payments for order flows. However, in 2023, it experienced a shift, generating most of its revenue from interest due to favorable rate conditions.