“Provide everyone with access to the financial markets, not just the wealthy”
This is the mission when Robinhood, the now Millennial famous free investing platform, started five years ago with $3 million in venture capital, few thought the start-up would fundamentally change the financial services industry as we know it. But the rapid advance to date, the stock trading application, which has no account minimums or trading fees, has put three brokers in defense, totaling $ 80 billion.
Perhaps industry leaders should have seen the service debut with violent applause; more than 100,000 people registered in less than a month for the application. Users continued to arrive en masse, and by 2018, the platform was ahead of E-Trade, reaching 4 million brokerage accounts.
The app already has more than 10 million users and has amassed more than $ 1 billion in support. Its most recent round was a $ 323 million E-Series that valued the company at $ 7.6 billion. In the fall of 2019, along with E-Trade, TD Ameritrade, and Charles Schwab, they finally bit their lips and started offering free stock trading as well.
Unfortunately, users don’t go beyond e-commerce without heavyweights noticing. Robinhood, still a young fintech startup that has apparently gone out of the sky, has put the online brokerage firm on top of its head.
And while the trio of major competitors who choose to compete on price may seem like a death bell, Robinhood doesn’t look like they’re bothered.
The lesson to be learned
For nearly 200 years, businessmen have charged commissions fees. As recently as the 1970s, this was a business that could cost hundreds of dollars. The SEC was closed in 1975, and traders offering $ 70 deals became risky. Commissions continued to flow over time, with online retailers pushing the price below $ 20 in the 1990s.
As of 2014, low-cost online retailers are still paying 5 to $ 8 per transaction. Robinhood also proved that this was a real conscientiousness, and it was this year that the company pushed the trend in trading costs to a limited extent.
It was a business model, and Robinhood was married to an unusual and fun mobile app that’s easy to try and built on a common investment platform. It motivated users to invite friends and family, offer a free share, usually as cheap as Ford Motor Co. — for every guest who funded a Robinhood account.
Features that have gone further, such as cryptocurrency trading, credit card trading, and most importantly, don’t have a limited account that attracts millions of users, many millennials. The referral program helped a lot in limiting customer prices, and when customers arrived, Robinhood made everything harder, cheaper, and easier.
Five years and more than 10 million users later, the retail brokerage business finally recognized the tremendous power that Robinhood had gradually amassed in a significantly shorter time. Additionally, other fintech startups have begun to emulate the Robinhood model, and a parallel revolution was taking place in the world of exchange-traded funds, as no-expense ratio ETFs began to appear in 2018. Finally, one of these straws broke the camel’s back. It was time for the status quo to adapt.
“The big guys on the block won’t let something as small as a price cut in operations disrupt their overall business model — there are many ways to recoup that revenue,” says Jay Sharifi, Founder and Investment Advisor at Legacy. Wealth Management.
Either way, the cookie crumbles, it’s time to do or die for online brokers of all shapes and sizes. Public or private, new or old school, the industry is changing and the dominant custodians of tomorrow are being forged in the ultra-competitive furnace of modern markets. It is a turning point. And experts have doubts about how things will go from here.
At this point, where is the industry is headed?
The industry will demolish Robinhood. Five-year-old Robinhood did not have time to build the brand, trust and customer loyalty that E-Trade (founded 1982), TD Ameritrade (1971) and Charles Schwab (also 1971) have. So the theory goes. Additionally, Robinhood remains private, perhaps to the delight of insiders, given the recent string of IPO delays, so its finances cannot compare to its older school public rivals. But from the assessment alone, it is clear that Robinhood is small in size.
Robinhood and competitors valuation:
- Robinhood: $7.6 billion
- E-Trade: $9.7 billion
- TD Ameritrade: $19.5 billion
- Charles Schwab: $50.4 billion
Guessing the Robinhood recipe would be more helpful and requires some pre-estimation. Given that Robinhood is a high-growth “unicorn” backed by Silicon Valley and the last three are boring retail brokers, there is no question that Robinhood is trading at a much higher price/sell ratio than the major public brokers. A price/sale ratio of 15 can be very conservative, but assuming Robinhood would make just over $ 500 million in annual revenue. The revenue of its largest competitors ranges from $ 3 billion to $ 12 billion annually. Unfortunately, resources are important.
“Other companies that are much more established as mentors and have a name and historical recognition will win,” says Sharifi. “I think the best custodians will outlive institutions like Robinhood.”
“It will be interesting to see Robinhood change positions now that other great online brokers have started offering zero trading fees,” said Ryan Peckham, assistant professor at the University of Texas — says Permian Basin.
Robinhood is the future and supporters will be collateral damage. While the move to commission-free trading may have been, as Sharifi says, “effortless” for traditional online brokers, it has also been objectively painful for them.
On October 1, the day Charles Schwab eliminated online fees, SCHW shares fell 10%; Shares of TD Ameritrade were down 26% and E-Trade took a 16% cut. One day, the last two brokers announced that they too would offer commission-free online trading. While this levels the playing field with Robinhood from a pricing standpoint, Robinhood is the clear winner here, forcing the hand of three competitors worth a combined $ 80 billion.
Robinhood was created for this business model. Its listed competitors were not.
“Traditional brokers will be subject to layoffs and ultimately reduced customer experience, while disruptors will be able to offer more exclusive and improved services,” says Anthony Denier, CEO of Webull, a commission-free trading platform.
Denier offers Robinhood’s recently announced service called “Cash Management”, an account with a return of just over 2% with which you can use a debit card at no cost. Due to their cost structure, such features “will be nearly impossible for traditional brokers to compete with,” says Denier.
While Robinhood’s free stock trading was revolutionary just five years ago, it is becoming more of a status quo today. However, the focus on free trade overlooks the other hugely important differentiators that made Robinhood a success. The simplified five-minute registration process, no minimum of accounts, the sleek app, its social nature, cryptocurrency trading, after-hours trading, and new high-yield cash accounts. Robinhood built these features with the customer-focused while the sector was the pillars that were trying them to maintain their oligopolistic and heavy structures.
Of course, buying and selling the stock for free is no longer the fastest way to explain Robinhood’s unique value proposition. However, lower prices are simply the easiest way to mimic Robinhood’s popular investor-focused offerings. What’s in the future of big shots? How far will they go to steal some of Robinhood’s momentum and keep their market share?
“The industry needs to change now to offer better trading technology, tools, and an overall customer experience.”
— Anthoney Diener
The big boys now play by the rules of Robinhood. If the 2013 startups with now a $12 Billion dollar valuation hadn’t bravely taken the risk it took, millions of investors could still pay $ 5 to $ 8 per trade. Romans didn’t build the Colosseum in a day, right?