Sep 210 min read

Case Study: The Rise of Robinhood in the Fintech Industry

Robinhood has revolutionized the investing landscape, making waves in the fintech industry with its innovative approach to stock trading. This no-fee trading platform has disrupted traditional brokerage models, attracting millions of young investors to the world of finance. By leveraging cloud computing and user-friendly technology, Robinhood has transformed the way people interact with the stock market, offering a seamless and accessible investing experience.

The rise of Robinhood presents both opportunities and challenges in the ever-evolving fintech sector. This case study explores Robinhood's groundbreaking business model, its cutting-edge technology infrastructure, and the regulatory hurdles it faces. We'll also examine the company's strategy for market expansion and new product offerings, shedding light on how Robinhood makes money and its mission statement. By analyzing Robinhood's journey, we gain valuable insights into the future of investing and the potential reshaping of the financial services industry.

Robinhood's Innovative Business Model

Zero-commission trading

Robinhood has revolutionized the online brokerage industry with its groundbreaking commission-free trading model. This approach allows users to buy and sell stocks, options, and other securities without incurring any trading fees [1]. By removing the traditional barriers associated with investing, Robinhood has made it possible for individuals from all walks of life to engage in the financial markets [2].

The company's commitment to accessibility is evident in its efforts to eliminate the costs typically associated with investing. This strategy has proven highly effective, leading to high trading volumes and liquidity on the platform. It has also attracted a large user base, particularly among younger and first-time investors [1]. The average Robinhood user is around 31 years of age, with an average account size of $3,500 [3]. This stands in stark contrast to competitors like Charles Schwab, which has an average account size of $240,000.

Revenue streams

Despite offering commission-free trading, Robinhood has developed several revenue streams to support its business model. These include:

Payment for Order Flow (PFOF): Robinhood sends user trades to market makers and trading venues that execute them. These entities pay Robinhood rebates for sending them buy/sell orders, accounting for approximately 72.8% of the company's total revenue [4].
Robinhood Gold subscriptions: This premium account membership program costs users $5 a month and provides access to additional investment tools and benefits [4].
Interest on margin and securities loans: Robinhood earns interest on margin loans given to investors and by lending securities to counterparties. This makes up about 17.5% of the company's total income [4].
Income from cash: Robinhood Securities generates income on uninvested brokerage cash by depositing it in interest-bearing bank accounts [5]
Interchange fees: The company earns a small amount from transaction processing fees when users make payments using the Robinhood debit card [4].

User acquisition strategy

Robinhood's innovative approach to user acquisition has played a crucial role in its rapid growth. The company has utilized a four-step strategy to attract and retain users:

Gamifying the investing experience: Robinhood has designed its platform to be user-friendly and engaging. The mobile app has received high ratings and has become one of the most popular on the Apple App Store. In 2020, it garnered more than half of all new downloads for mobile investing and trading platforms [6]
Creating anticipation around their launch: Robinhood generated buzz and excitement leading up to its release, building a sense of anticipation among potential users [3]
Producing educational content: The company launched Robinhood Learn, which focuses on teaching new and experienced investors about the stock market. This initiative builds trust with consumers and incentivizes them to use the app [3]
Utilizing a referral system: Robinhood implemented a social aspect to its marketing by offering incentives for users to refer friends, family, and colleagues. This referral scheme has helped humanize the app and improve customer attitudes towards it [3]

By identifying Millennials and Gen Z as interested in trading and investment, Robinhood has successfully tapped into a previously underserved market segment. This approach has not only disrupted the traditional brokerage industry but has also inspired other financial brands to create targeted content and products that appeal to younger demographics [3].

Technology Infrastructure

Cloud-based platform

Robinhood has built its infrastructure on a cloud-native foundation, leveraging Amazon Web Services (AWS) as its primary cloud hosting provider. This decision has allowed the company to scale rapidly and handle the increasing demands of its growing user base. In 2020, Robinhood's cloud hosting fees paid to AWS amounted to $60 million, representing a significant 5x increase from the previous year's expenditure of $12 million [7].

The company's technology stack has evolved over time. Initially, Robinhood was primarily a Python/Django shop, but it has been gradually shifting towards Go for improved performance and scalability. The majority of Robinhood's APIs are now written in Python and Go, with some components utilizing Java and Rust [7].

For data storage, Robinhood relies on Amazon RDS (Relational Database Service) with Postgres as the database engine. This choice allows for efficient management and scaling of their database infrastructure while maintaining high performance and reliability [7].

Mobile app development

Robinhood's success can be attributed in part to its mobile-first approach. The company has developed a user-friendly mobile application that has gained significant popularity among users. In fact, the majority of Robinhood's users place trades directly from their mobile devices, highlighting the importance of the app in the company's overall strategy [7].

The mobile app provides an electronic trading platform that facilitates commission-free trades of stocks, exchange-traded funds (ETFs), and cryptocurrencies. In addition to trading capabilities, the app also offers cryptocurrency wallets, credit cards, and other banking services, creating a comprehensive financial ecosystem for users [8].

Robinhood has continued to expand its mobile app offerings. In April 2022, after amassing a waitlist of over 2 million customers, the company issued cryptocurrency wallets to those on the waitlist and added trading support for several popular cryptocurrencies, including Shiba Inu, Solana, Compound, Chainlink, and Polygon [8].

Cybersecurity measures

As a financial technology company handling sensitive user data and transactions, Robinhood has implemented various cybersecurity measures to protect its users' accounts and information. The company employs robust security tools and is committed to fully reimbursing direct losses caused by unauthorized activity that is not the fault of the user [9].

However, Robinhood has faced challenges in maintaining the security of its platform. In July 2019, the company admitted to storing some customer passwords in an unencrypted cleartext format, raising concerns about data security [8]. Additionally, in October 2020, Robinhood discovered that almost 2,000 customer accounts had been compromised, resulting in the theft of customer funds [8].

To address these issues and improve overall security, Robinhood has implemented several measures:

Two-factor authentication
Prompting users to update passwords regularly
Proactive monitoring for account takeovers
Cybersecurity awareness campaigns
Real-time voice support for customers [10]

Despite these efforts, Robinhood continues to face cybersecurity challenges. In November

2021, a voice phishing scheme targeting a Robinhood employee resulted in the theft of

email addresses for approximately 5 million customers, full names for 2 million customers,

and dates of birth for 300 customers [8].

Regulatory Challenges

As Robinhood has grown rapidly in popularity, it has faced increasing scrutiny from regulatory bodies. The company's innovative approach to investing has brought both opportunities and challenges, particularly in the realm of compliance with financial regulations.

SEC Investigations

Robinhood has found itself under the microscope of the Securities and Exchange Commission (SEC) on multiple occasions. In 2020, the company faced investigations regarding its March service outage and its practice of selling client order flow to third-party firms [11]. These investigations highlighted the need for greater transparency and improved operational reliability.

In a significant development, Robinhood agreed to pay $65 million to settle SEC charges in December 2020. The SEC alleged that the company had not executed trades at the best prices for its customers due to agreements to send its order flows to certain firms [12]. This settlement underscored the importance of prioritizing customer interests in trading practices.

FINRA Fines

The Financial Industry Regulatory Authority (FINRA) has also taken action against Robinhood for various violations. In a landmark case, FINRA fined Robinhood $57 million and ordered the company to pay approximately $12.6 million in restitution to harmed customers [13]. This sanction, the largest financial penalty ever ordered by FINRA, reflected the scope and seriousness of the violations [13].

FINRA's findings against Robinhood included:

Communicating false and misleading information to customers regarding critical issues such as margin trading and account balances [13].
Failing to exercise due diligence in approving customers for options trading [13].
Inadequate supervision of technology relied upon for core broker-dealer services [13].
Failure to report tens of thousands of written customer complaints to FINRA [13].

These violations resulted in significant harm to millions of customers, including those who received false or misleading information and those affected by system outages [3].

Compliance Improvements

In response to these regulatory challenges, Robinhood has taken steps to enhance its compliance efforts. The company has invested heavily in improving platform stability, enhancing educational resources, and building out its customer support, legal, and compliance teams [3].

A significant move in this direction was the appointment of Daniel Gallagher Jr., a former SEC Commissioner, as Robinhood's chief legal officer in June 2020 [14]. Gallagher's role has been to help build the firm's legal, compliance, and government relations operations [14]. This appointment demonstrates Robinhood's commitment to addressing regulatory concerns and improving its compliance framework.

Robinhood's founders have shown a strong commitment to enhancing the company's control environment. As Gallagher stated, "We've made so many meaningful improvements at Robinhood just in 2020 to the control environment. We're in a really good place right now" [14].

Despite these efforts, Robinhood continues to face ongoing regulatory scrutiny. The company's IPO documents reveal that it has reserved millions of dollars for a potential settlement with the New York Department of Financial Services over anti-money laundering and cybersecurity-related issues [15]. Additionally, there are outstanding investigations not resolved by the FINRA order, including issues with customer support procedures and arbitration agreements [15].

Market Expansion and New Products

Cryptocurrency Trading

Robinhood has expanded its offerings to include cryptocurrency trading, allowing users to buy and sell various digital assets without commission fees. The platform supports trading for several popular cryptocurrencies, including Bitcoin, Ethereum, and Dogecoin [16]. Users can purchase as little as $1 worth of crypto, with the exception of Dogecoin, which has a minimum of 1 DOGE [16].

To ensure security, Robinhood Crypto stores nearly all user cryptocurrencies in cold storage and performs regular audits [16]. The platform is available in all US states, the US Virgin Islands, Puerto Rico, and the District of Columbia [16]. However, it's important to note that cryptocurrencies are not securities and are not protected by FDIC insurance or SIPC [16].

In a significant move to expand its crypto offerings, Robinhood acquired Bitstamp, a major cryptocurrency exchange. This acquisition marks Robinhood's largest push into the digital assets industry, positioning it as a competitor to larger crypto trading firms like Binance and Coinbase [17].

Cash Management Features

Robinhood has introduced several cash management features to enhance its financial services offerings. The Robinhood Cash Management account is an interest-bearing account that functions similarly to checking and savings accounts [18]. This account comes with no monthly maintenance fees, no account minimums, and no overdraft or transfer fees [18].

The company has partnered with several major banks, including Goldman Sachs Bank USA, HSBC Bank USA, and Wells Fargo Bank, to support these services [18]. Account holders receive a complimentary customizable debit card issued by Sutton Bank and have access to over 75,000 ATMs, including more than 15,000 international ATMs [18].

Additionally, Robinhood offers the Robinhood Cash Card, a prepaid card linked to a Robinhood Spending Account [19]. This card provides features such as cash back on purchases and the ability to round up transactions to invest the spare change in stocks, ETFs, or cryptocurrencies [19].

IPO Access for Retail Investors

In a move to democratize retail investing, Robinhood has introduced IPO Access, allowing amateur investors to participate in initial public offerings (IPOs) [20]. This feature gives retail traders the opportunity to buy shares at their initial listing price range, something historically reserved for institutional investors or high-net-worth individuals [20].

Through IPO Access, Robinhood clients can request to purchase shares before they begin trading on public exchanges [20]. The platform partners with investment banks to receive a limited number of shares, which are then allocated to users based on various factors, including customer demand [21].

It's worth noting that while this feature opens up new opportunities for retail investors, IPOs can be risky and speculative investments [21]. The first company to offer its shares through Robinhood's IPO Access was medical scrubs company Figs [20].

Conclusion

Robinhood's journey in the fintech industry has been marked by groundbreaking innovations and significant challenges. The company's commitment to making investing accessible has led to a revolution in the financial services sector, attracting millions of young investors to the stock market. Its no-fee trading model, user-friendly mobile app, and expansion into cryptocurrencies and cash management features have positioned Robinhood as a key player in reshaping how people interact with financial markets.

Despite its rapid growth and popularity, Robinhood faces ongoing regulatory scrutiny and cybersecurity concerns. The company's efforts to improve compliance, enhance platform stability, and bolster customer support show its dedication to addressing these issues. As Robinhood continues to evolve and expand its offerings, its impact on the investing landscape and its ability to navigate regulatory challenges will likely play a crucial role in shaping the future of retail investing and the broader fintech industry.

FAQs

Q1: What qualifies Robinhood as a fintech company?

Robinhood is a US-based fintech company that offers a range of web-based and mobile financial services, including stock trading and other asset transactions. It is recognized for pioneering the model of commission-free trading.

Q2: What led to Robinhood's rise in popularity?

Robinhood gained significant popularity by being the first major brokerage platform to eliminate commissions on stock and options trading. This model of commission-free trading has since been adopted across the industry, allowing users to trade stocks, ETFs, options, and cryptocurrencies without incurring commission fees.

Q3: What is the cost of subscribing to Robinhood Gold?

Robinhood Gold is available at a subscription fee of $5 per month or $50 annually, following a 30-day free trial period.

Q4: How do investment apps generate revenue?

Investment apps can earn revenue through various methods that should align with their business model, target audience, and the value they offer. Common revenue streams include in-app advertising, premium subscriptions, and transaction fees, among others.