Robinhood, a US-based financial technology company, provides users with web and mobile-based financial services for trading stocks, ETFs, and other assets. This trading platform offers commission-free trading that allows users to buy/sell all assets for free.

So, how does Robinhood make money if they do not charge any fees and commissions? Robinhood makes money in several ways, mainly from a system called payment for order flow. In addition, the company makes money through net interest revenues, Robinhood gold premium service, interchange fees, and other small revenue streams. This blog will deeply explore Robinhood's business model to see how they make money. Let's get into it!

What is Robinhood?

Robinhood is a US-based trading company offering a mobile phone application and a web-based platform for trading that is accessible to all. The company operates as a fee-free online brokerage that allows investors to buy and sell assets such as stocks, options, exchange-traded funds (ETFs), and cryptocurrencies with no commissions. It makes the brokerage both accessible and affordable to the average user.

When launched, Robinhood was the first fintech company to offer commission-free trading. However, this model became highly popular and influential for the average customer, so many large trading firms like TD Ameritrade and Charles Schwarb started adapting and providing a zero-commission trading model to their customers. If you're thinking about how Robinhood works, it's pretty simple.

To start with Robinhood, you must download the Robinhood mobile application or visit their website and create an account. The application is available for both iOS and Android devices. Once you're logged in and registered the account, you can transfer funds from your credit or debit cards to their brokerage account and start trading.

You can open and maintain your account totally free. Also, there is no cost involved in transferring funds between a bank account and a brokerage account. All stock, ETFs, and option trades are 100% commission-free.

Robinhood Competitors

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

Some of its top competitors include Square, Webull, eToro, Charles Schwab, Coinbase, River Financial, TradeStation, and E*Trade.

How does Robinhood make money?

Robinhood business model has different revenue sources, including transaction-based revenues, Gold premium fees, net interest revenues, and other sources. According to the company's online disclosure, Robinhood makes money through the following revenue streams.

1. Payment for Order Flow

When investors trade stocks, Exchange Traded Funds, and options through their brokerage accounts, the company uses different market makers and trading venues to execute them. To outbid stock exchanges, these market makers pay brokerages (like Robinhood) via rebates for sending them orders, which is a method called payment for order flow or PFOF.

Moreover, Robinhood employs a smart order router algorithm to direct buy/sell orders to market makers who are likely to offer the best price. Additionally, the algorithm sends a small fraction of orders to stock exchanges and pays them when they take liquidity and are paid when they give liquidity. Robinhood makes 73% of its revenue from this transaction-based revenue, which is a significant reason why the platform is able to offer commission-free trading.

2. Net Interest Revenues

Robinhood earns net interest revenues on two types of loans: securities and margins. The company gives margin loans to investors for trading. Users who invest in margin loans pay a 5% interest rate on all loans over $1,000. In addition, Robinhood also makes money by lending securities loans to counterparties. Robinhood makes 18% of its total income from these two types of interest.

3. Robinhood Gold Subscription Service

Robinhood has a premium membership program called Robinhood Gold which charges users a $5 monthly fee. The Gold account provides users with a suite of investing tools and benefits which includes Morningstar research reports, larger instant deposits, NASDAQ market data, and margin trading. Robinhood Gold subscription service comprises less than 10% of the company's total revenue.

4. Income from Cash

Robinhood earns a small income on uninvested cash (the cash that is not automatically swept into their bank's cash management network) by depositing them into interest-bearing bank accounts. However, income from cash is a tiny revenue source for the company that comes in "other revenue," which is less than 10% of Robinhood's overall revenue.

5. Interchange Fees

Another source through which Robinhood makes money is interchange fees. Robinhood provides users with debit cards through the Robinhood spending account program. When investors use the Robinhood debit card to make payments, the company earns a small amount of income from interchange fees which are primarily transaction processing fees charged by card issuers.

Furthermore, users have to pay a $75 transfer fee to move their money from Robinhood to another broker. Among additional fees, the company also charges $5 for paper statements, $5 for paper confirmations, and $20 for overnight check deliveries.

The Bottom Line

Robinhood is a popular discount brokerage offering investors a zero-commission investing and trading platform. The company makes the bulk of its money from transaction-based revenues, which account for 73% of company-wide revenue, 17% from net interest revenue, and 10% from other revenue streams such as Gold premium service and income from cash and interchange fees.

The entrance of Robinhood in the discount brokerage industry has shaken the market and made some of the biggest players, such as E*trade and Charles Schwab, drop their fees and commission. Robinhood's success and popularity are based on a few key factors, most notably allowing users to invest and trade for free in such a seamless way that they can start trading right away.