Robinhood cuts trading fees, grows profits with in-house clearing

Robinhood cuts trading fees, grows profits with in-house clearing

As zero-commission stock trading app Robinhood starts preparing to IPO, an engineering investment two years in the making could accelerate its quest for profitability. Most stock broker services have to pay an external clearing house to reconcile trades between buyers and sellers. Now with 6 million accounts up from 4 million just 5 months ago, that added up to a huge cost for Robinhood since it doesn’t demand a trading fee like the $7 to $10 that incumbent competitors E*Trade and Scottrade charge. Relying on outside clearing also introduced bottlenecks around its innovation and user sign ups, limiting onboarding to business hours.

But today Robinhood will start migrating accounts to its new in-house clearing service over the next few months. That will save it from paying clearing fees on stock, option, ETF, and cryptocurrency trades. In turn, Robinhood is eliminating or reducing some of its edge case fees. $10 broker assisted trades, $10 restricted accounts, $50 voluntary corporate actions, and $30 worthless securities processing will all now be free. Robinhood is meanwhile cutting its margin on fees passed on by banks or FedEx, so ACH reversal fees will drop from $30 to $9, overnight check delivery from $35 to $20 and overnight mail from $35 to $20.

“What’s really interesting is that this is the only clearing system built from scratch on modern technology in at least the last decade” Robinhood co-founder and co-CEO Vlad Tenev tells me. Most clearing services ran mainframes and Terminal-based UIs  that aren’t built for the pace of startup innovation. Going in-house “allows us to vertically integrate our business so we won’t have to depend on third-parties for foundational aspects. It’s a huge investment in the future of Robinhood that will massively impact our customers and their experience, but also help us out on building the kind of business we want to build.”

There’s a ton of pressure on Robinhood right now since it’s raised $539 million to date, including a $363 million Series D in May at a jaw-dropping $5.6 billion valuation just a year after raising at $1.3 billion. Currently Robinhood earns revenue from interest on money kept in Robinhood accounts, selling order flow to exchanges that want more liquidity, and its Robinhood Gold subscriptions where users pay $10 to $200 per month to borrow $2,000 to $50,000 in credit to trade on margin. Last month at TechCrunch Disrupt, Robinhood’s other co-CEO Baiju Bhatt told me the startup is now actively working to hire a CFO to get its business ready to IPO.

Whoever that CFO is will have an easier job thanks to Christine Hall, Robinhood’s Product Lead for Clearing. After stints at Google and Udacity, she was hired two years to navigate the regulatory and engineering challenges or spinning up Robinhood Clearing. She explains that “Clearing is just a fancy word for making sure that when the user places a trade, the price and number of shares matches what the other side wants to give away. In the less than 1 percent chance of error, the clearing firm makes sure everyone is on the same page prior to settlement.

Robinhood Clearing Product Lead Christine Hall

Forming the Robinhood Securities entity, Hall scored the startup the greenlight from FINRA, the DTCC, and the OCC. She also recruited Chuck Tennant, who’d previously run clearing firms and would grow a 70-person team for the project at Robinhood’s Orlando office. They allow Robinhood to clear, settle (exchanging the dollars and shares), and ensure custody (keeping records of asset movements) of trades. 

“It gives us massive cost savings, but since we’re no longer depending on a third-party, we basically control our destiny” Tenev says. No more waiting for clearing houses to adapt to its new products. And no more waiting the whole weekend for account approval as Robinhood can now approve accounts 24/7. These little improvements are critical to Robinhood staying ahead of the pack of big banks like Charles Schwab that are lowering their fees to compete as well as other startups offering mobile trading. The launch could also blossom into a whole new business for Robinhood if it’s willing to take on clearing for other brokers, including fintech apps like Titan.

Clearing comes with additional risk. Regulatory scrutiny is high, and the more Robinhood brings in-house, the more security work it must do. A breach could break the brand of user trust it’s been building. Yet if successful, the launch equips Robinhood for an ambitious future beyond playing the markets. “The mission of the company has expanded a lot. It used to be all about stock trading. But if you look at Robinhood 5 years from now, it’s about being best-in-class for all of our customers’ financial needs” Tenev concludes. “You should be able to get everything from Robinhood that you could get from walking into your local bank.” That’s a vision worthy of the startup’s epic valuation.

Source: Mobile – Techcruch

Revolut announces a Robinhood-like trading product

Revolut announces a Robinhood-like trading product

Fintech startup Revolut likes to announce new things all the time. Even though nothing is going live today, it’s interesting to see where the startup is heading. The company is working on a trading platform for traditional shares without any commission.

You’ll find stock from public companies from the U.K. and the U.S., as well as various ETFs and options. In other words, Revolut is going to become the Robinhood of Europe.

While American customers have been using Robinhood for years, the rest of the world has been lagging behind when it comes to stock trading.

You still have to open an account on a painfully slow website and pay a few euros for every transaction. Some companies even ask you to send a letter to create an account. And if you want to buy stock through your existing bank account, it usually costs even more.

Revolut promises that you won’t pay any commission when you buy or sell shares. The company plans to make money on margin trading, securities lending and interest on cash. Unfortunately, Revolut didn’t say when the feature would launch.

Premium subscribers will be able to test the feature first. Eventually, you’ll also get additional perks if you’re a premium subscriber. Trading will be available to all Revolut users in Europe and future markets. The company plans to launch in the U.S., Canada, Singapore, Hong Kong, Australia and New Zealand in the coming months.

Revolut’s premium subscription is becoming a sort of Amazon Prime for financial products. You pay £6.99/€7.99 per month and you get unlimited foreign exchange transactions, travel insurance, access to new features and more.

It’s clear that Revolut plans on making predictable revenue on this premium subscription. And maybe the trading platform will make more people subscribe to Revolut Premium.

Additionally, Revolut now officially has 2 million users. It’s funny to see that Revolut is announcing this new milestone just days after N26 announced a million users. Interestingly, Revolut has 900,000 users in the U.K., where N26 has yet to launch.

Source: Mobile – Techcruch

Free stock trading app Robinhood rockets to a $5.6B valuation with new funding round

Free stock trading app Robinhood rockets to a .6B valuation with new funding round

Robinhood started off as a dead-simple stock trading application that had no transaction fees — but since it’s continued to grow, and especially as it starts to dive into cryptocurrency, investors are getting pretty excited about its prospects and are pouring a ton of new funding into it.

And it’s that tantalizing prospect of creating a next generation way of trading assets and cryptocurrency that is now sending Robinhood to a $5.6 billion valuation in a new financing round that the company is announcing today. Robinhood says it’s closed a $363 million Series D financing round; DST Global led this new round and Iconiq, Kleiner Perkins, Sequoia and Capital G participated. Robinhood had a $1.3 billion valuation last year when it had around 2 million users, and the company says it now has 4 million users and has passed $150 billion in transaction volume.

“It’s the only place right now where you can trade crypto, stocks, and options all in one place,” CEO Vlad Tenev said. “For us to construct an experience that feels seamless and natural for customers, that for example want to sell an equity and use the proceeds to buy crypto, seamlessly, that’s been challenging not just from a product and design standpoint, but also infrastructure standpoint. There’s complexity under the hood, and our goal is to make it as seamless as possible in the process and make that complexity go away.”

Those 4 million users — and that valuation — indicates that Robinhood has clearly exposed a lot of demand for an easier way for users to dip their toes into financial services without having to work with firms that have trading fees like Scottrade or E*Trade. And while there are a lot of services that offer robo-advisory services like Betterment and Wealthront, which make it easier to start investing small amounts of money, Robinhood offers users the opportunity to do these things at a more granular level.

And, of course, there’s the cryptocurrency aspect that is clearly spurring a lot of interest in the company. At the time, 1 million users waitlisted for access in just the five days after Robinhood Crypto was announced. Robinhood has premium services like Robinhood Gold, where the company can find additional ways to generate revenue that offset the requirements of running a system that allows users to trade stocks for free. Robinhood has raised $539 million to date, as diving into financial services can be an expensive prospect, as well as getting enough users on board to the point that it can scale to a level that the business starts to increasingly make sense.

Robinhood’s crypto trading service came out in February and by today, the company says it’s available in 10 states. The company also rolled out a web version and stock option trading, trying to become a more robust financial services company that’s still tuned to a younger generation that wants an easier way to get into investing without needing a big balance to invest. Most of Robinhood’s users, too, aren’t so-called “day traders” and are instead holding stocks for a while after they buy them.

“If you look at the data and the statistics, people that are active day traders are actually a very small percentage of our space,” Tenev said. “People that are actually transacting on that cadence are the minority of our customers. Most of our customers engage in more of these buy and hold accumulation strategies. We really see a lot of unique things because we don’t charge trading commissions. There are customers that deposit money regularly twice or once a month and then buy stocks as soon as those deposits come in. We don’t see a lot of customers that are doing rapid buying and selling.”

Still, as it tries to further expand — especially into products like crypto and new regions — it’s going to increasingly find itself trying to jump hurdles that financial services companies find when going abroad. And there’s always a chance that the trading platforms will try to become a little more competitive (and companies like Square are even getting into Bitcoin trading). That’s going to require a robust amount of funding to try to outmaneuver well-capitalized companies that might already have those relationships in place to more easily expand.

“The political climate is uncertain, it sort of affects everyone, it doesn’t affect us uniquely,” Tenev said. “We’re a crypto business now. Not a lot of people have a ton of clarity on what that’s gonna look like in the future, it’s a new space that’s evolving really rapidly. I think that we’re confident we can adapt and evolve, and we’re operating the business in a responsible way. There’s only so much you can do, but I feel like we’ve done a lot to address any concerns.”

Source: Mobile – Techcruch