How Does Robinhood Make Money? An Overview

Robinhood Markets Inc. is a financial technology (fintech) company that operates an online discount brokerage offering commission-free trading. It provides a web- and mobile-based financial services platform that allows users to invest in and trade stocks, exchange-traded funds (ETFs), options, and American depositary receipts (ADRs). It also allows users to invest in certain cryptocurrencies based on their geographic location. The company makes money through payment for order flow, premium membership fees, stock loans, interest on uninvested cash, interchange fees related to its debit card, and other smaller revenue streams.

After announcing a confidential IPO filing on March 23, 2021, Robinhood submitted an S-1 registration to the U.S. Securities and Exchange Commission on July 1, 2021. On July 19, 2021, it amended its S-1 to announce that it would be selling 52.4 million shares with its founders and CFO selling another 2.6 million for a total of 55 million. Robinhood went public at $38 a share, giving it a valuation of $32 billion. The shares are listed under the ticker HOOD on the Nasdaq.

Robinhood faces significant competition from other discount brokerages, new and established fintech companies, banks, cryptocurrency exchanges, asset management firms, and technology platforms. Some of its major competitors include Charles Schwab Corp. (SCHW), Morgan Stanley’s (MS) E*TRADE Financial Holdings LLC, Coinbase Global Inc. (COIN), Square Inc. (SQ), and River Financial Corp. (RVRF).

Robinhood’s Financials

In its most recent quarterly report for Q4 FY 2021, ended Dec. 31, 2021, Robinhood posted a net loss of $423.3 million as compared with net income of $13.0 million for the prior-year quarter, as well as 14.2% year-over-year (YOY) growth in total net revenues. Net loss was impacted by share-based compensation expenses totaling $318 million for the quarter. The company has rapidly grown its team in 2021, more than doubling its total number of employees.

Robinhood’s net cumulative funded accounts, a key metric that gauges the number of accounts into which users made an initial deposit or money transfer during a specified period, rose by over 81% YOY for Q4 FY 2021 to 22.7 million. The company’s monthly active user base grew by about 48% YOY but declined by roughly 8% on a sequential basis for Q4 FY 2021.

The company also provided results for FY 2021, which ended Dec. 31, 2021. Robinhood posted a net loss of $3.7 billion for the year, compared with net income of $7.4 million for FY 2020. Share-based compensation expenses were nearly $1.6 billion for FY 2021, significantly higher than $24 million in these expenses for FY 2020. Annual revenue rose 89.3% from the previous year to $1.8 billion.

Robinhood’s Business Segments

Robinhood operates and reports its financial results as one business segment. However, it does provide a breakdown of revenue into the following categories: transaction-based revenues; net interest revenues; and other revenues. We take a closer look at these revenue categories below.

Transaction-based revenues

Robinhood generates transaction-based revenues by routing its users’ orders for options, equities, and cryptocurrencies to market makers, which is a process known as payment for order flow (PFOF). Brokerage firms that use PFOF receive a small payment as compensation for directing orders to a particular market maker. The payment is usually only fractions of a penny per share but can be a significant source of revenue for companies dealing with a large number of orders. PFOF is a major reason Robinhood is able to offer zero-commission trading. Robinhood’s transaction-based revenue rose 12.2% to $362.7 million in Q4 FY 2021, accounting for nearly 73% of companywide revenue.

Net interest revenues

Robinhood generates net interest revenue (interest revenue minus interest expenses) on securities lending transactions. Interest is also earned on margin loans to users, and interest expenses are incurred in connection to the company’s revolving credit facilities. Net interest revenues rose 0.5% to $63.4 million in Q4 FY 2021, comprising 17.5% of Robinhood’s total revenue.

Other revenues

Robinhood’s other sources of revenue primarily consist of memberships fees for Robinhood Gold. Robinhood Gold is a paid subscription service that offers users premium features, including enhanced instant access to deposits, professional research, Nasdaq Level II market data, and access to margin investing for approved users. Other revenues also include proxy rebates and miscellaneous user fees. Revenue from these sources rose 84.0% to $35.4 million in Q4 FY 2021, accounting for about 9.8% of companywide revenue.

Robinhood’s Recent Developments

For Q4 2021, Robinhood’s fastest-growing area within transaction-based revenues was cryptocurrencies. Cryptocurrencies more than quadrupled for that period, as the company launched Crypto Gifts, a platform enabling customers to send crypto to family and friends. Robinhood’s crypto presence is likely to continue to expand in 2022, as the company anticipates a full launch of cryptocurrency wallets and related services in Q1 2022. It also expects to open its crypto platform to customers internationally in 2022.

In early June 2021, the SEC announced that it was conducting a broad examination of market structure after the meme-stock trading frenzy that drove the share prices of companies like GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC) up to astronomical levels earlier this year. The SEC will be paying specific attention to the PFOF process whereby trade orders from individual investors are routed by brokerage firms to off-exchange, high-speed traders known as wholesalers, such as Citadel Securities LLC and Virtu Financial Inc. (VIRT). These off-exchange traders must offer prices that are at least as good as the national best offer, which is what is offered by the official exchanges. But with an increasing number of trades happening outside of the official exchanges, the SEC is concerned about a lack of transparency over the prices that off-exchange traders offer to their customers.

SEC Chairman Gary Gensler has been a critic of PFOF, believing the practice creates a conflict of interest for brokerages because it incentivizes them to send customer orders to the highest bidder as opposed to the market maker that offers the best prices or fastest execution. The SEC is reportedly considering a variety of other issues that may impact Robinhood as well, including so-called “digital trading prompts” which gamify the trading process to encourage excessive trading, issues of market concentration and pricing, and settlement times. Retail brokerages were prompted to pay extra collateral following the meme-stock trading volatility, in case of default by either party, due to the two-day settlement process. The SEC may shorten the settlement cycle to one day.