How Robinhood Makes Money

Robinhood Markets Inc. (HOOD) is a California-based financial technology (fintech) company that operates an online discount brokerage with commission-free trading. Using its web- and mobile- based platforms, investors can buy and sell stocks, exchange-traded funds (ETFs), options, and American depositary receipts (ADRs). They can also invest in certain cryptocurrencies. In June 2024 Robinhood announced plans to purchase Bitstamp, a European crypotocurrency exchange.

Robinhood makes money in many ways, notably through a system known as payment for order flow. That is, Robinhood routes its users' orders through a market maker that actually makes the trades and compensates Robinhood for the business at a rate of a fraction of a cent per share.

Robinhood also makes money by investing users' cash deposits at a higher interest rate, margin lending, stock lending, its Gold subscription suite of services, and through a crypto business. The company also launched its first credit card in 2024, which will also bring in revenue.

Robinhood's Financials

In its most recent filing for the fiscal year ending Dec. 31, 2023, Robinhood posted a net loss of $541 million compared with a net loss of over $1 billion for the prior-year end, as well as a 37.3% year-over-year (YOY) growth in net revenue. Net loss was impacted by share-based compensation expenses totaling $871 million.

Robinhood's Funded Customers, 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 2% to 23.4 million YOY. The company's monthly active user base decreased by 4% YOY to 10.9 million.

Robinhood's Competitors

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 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 are paid to direct customers' 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 that Robinhood can offer zero-commission trading. Robinhood's transaction-based revenue decreased by 3.56% to $785 million in 2023. Decreases were seen in cryptocurrencies and equities while options and other assets saw increases. The segment accounts for 42.1% of total 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 with the company's revolving credit facilities.

Net interest revenues rose 119% to $929 million in the year ending Dec. 31, 2023, making up 49.8% of Robinhood's total revenue. The bulk of the growth came from interest on corporate cash and investments, all due to the increased rate environment driven by the Fed.

Other Revenues

Robinhood's other sources of revenue primarily consist of membership fees for Robinhood Gold, proxy revenues, and ACATS fees.

Revenue from this segment rose 25.8% to $151 million in the year ending Dec. 31, 2023, accounting for about 8.10% of company-wide revenue. The bulk of the growth came from an increase in proxy revenues.

Robinhood's Recent Developments

Robinhood announced in March 2024 that it will offer a credit card, known as the Gold Card. The card will provide 3% cash back on all categories and 5% cash back on travel. The card is a Visa Signature card and has no annual fee or foreign transaction fees.

Three months later, in June 2024, the company announced its intention to buy the European cryptocurrency exchange Bitstamp in a $200 million deal, signaling its desire to grow that part of its business as well as its footprint outside the U.S. At the time of the announcement, Robinhood said it expected the acquisition to be finalized in the first half of 2025, "subject to customary closing conditions, including regulatory approvals."

The Bottom Line

Robinhood is a brokerage firm that facilitates the buying and selling of investments through online and mobile platforms. The company competes with other brokerages, such as Charles Schwab and E*Trade, but is a relatively new player in the field. It typically generates the bulk of its revenue from payments for order flows, but due to the favorable rate environment in 2023, it generated the bulk of its revenue from interest.