Robinhood, which is the commission-free trading mobile app for stocks, exchange-traded funds (ETF), options, and, recently, cryptocurrencies, is establishing itself as one of the more successful startups in Silicon Valley. The company has sparked more interest lately since announcing a crypto-trading product in February that has proved successful.
A New Banking Service Product to Be Launched Soon
Interviewed by Fortune’s Balancing the Ledger on June 22, Vlad Tenev, Robinhood co-founder, explained that the company is planning to expand its set of products and services with a new online banking service.
In fact, Robinhood is reportedly planning to offer a full-service online banking product, a concept in the rise lately. Other companies like Revolut, N26 Bank, Chime and VARO Bank are all spearheading this type of initiatives that proved challenging the status quo of big incumbent financial institutions.
The latter consists of offering an all-mobile bank account, similar to any checking account one would open in a physical bank. Besides, it would only allow deposits and withdrawals using a mobile app.
The concept provides attractive advantages ranging from fee-free banking services, no foreign transaction fees, no ATM withdrawal fees, to personal loans that may offer interesting alternatives to credit cards.
Tenev explained that Robinhood initiative emerged from solving old-fashioned brokerage firms’ customer problems of high fees and commissions on trades. In fact, the Palo Alto-based financial services startup started off by developing a mobile trading app that allows customers to trade stocks and ETFs listed on U.S. stock exchanges without charging commission on its services.
Tenev explained that the need for the stock product came from the fact that customers were “getting ripped off” in investing in trading. He added that the average customer was paying up to $10 a trade or more, and should keep a high account minimum balance at all times, only to have access to an outdated service that hasn’t been changed for almost 20 years.
“Crypto trading? Same story. The majority of wallets and exchanges, customers are paying exorbitant fees right now, anywhere from 1.5% to 5%. Which is a very very sizable fee.”
Robinhood Strategy to Crypto Trading
Asked about the company’s business model and the crypto-trading service pricing structure, Tenev explained that Robinhood does not plan to get much direct profit out of it in the short term. He added that the company envisions its strategy to play out in the span of ten years and what the company is focused on is establishing a brand-name as the “best financial services” provider rather than short-term profit.
“We intend to operate it as a breakeven business. The thinking behind that is what we are really doing is building an ecosystem. Right now the products are investing products. Crypto slots in very nicely alongside the 10,000+ other instruments that people can trade.”
It looks like, when the company announced the crypto offering back in February, the move has attracted over 1 million new customers in just the first four days following the launch, as reported by TechCrunch. Some of them started using other products like investing in ETFs and stocks while others subscribed to the Premium paid service, Robinhood Gold. The latter offers a broader set of financial services like extended trading hours and additional buying power.
Moreover, even without charging commissions, Robinhood options and stock products are still lucrative, through lending stocks to short sellers in the global securities lending marketplace, collecting interest rates on cash deposits, and the premium service monthly subscriptions.
On the other hand, integrating I.T. and automation in brokerage firms’ value chain, substantially lowered the operational cost related to manual work.
“The cost has gone to essentially zero. It’s basically the cost of operating the infrastructure, data centers, networking. That’s very very small compared to a 10 dollars commission.”
However, he explained that his company takes into account several factors like what regulators think of the assets, how legitimate is the team behind, whether customers are asking for it or not, and the security layer and how resilient is the asset against hacks and 51% attacks.