Future of Investing

With its core business slumping, Robinhood is eyeing credit cards

  • Last month Robinhood announced that it will be acquiring X1, a startup that offers income-based credit cards.
  • We dive into why Robinhood is expanding into credit cards and what X1 is bringing to the table.

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With its core business slumping, Robinhood is eyeing credit cards

Last month, Robinhood announced that it was acquiring X1, a credit card start up. X1 offers a metal card that charges no annual fee with credit limits based on a consumer’s income. Robinhood acquired X1 for $95 million in cash, and the deal is expected to close this quarter.

Why is Robinhood diving into credit cards?

In its announcement about the X1 acquisition, the company said it is looking to diversify its product offerings, potentially because its core business has been slowing down. Crypto trading has seen better days and the firm’s transaction-based revenue declined for the 5th consecutive quarter from $218 million in 2022 to $207 million this year.

A snapshot of Robinhood's Q1 2023 earning calls. Transaction based revenues have sunk to $207 million from $218 million in 2022.
Source: Robinhood

To counteract these shifts in the profitability of its core business, the company has launched multiple adjacent products that can earn it some steady revenue on the side. For example, the company gets  subscription revenue from Robinhood Gold, as well as the increased flow of orders from Robinhood Retirement. Ands Robinhood’s debit cards allow it to earn revenue on interchange fees. Adding a credit card offering through X1 allows the firm to double down on its interchange revenue. Without an annual fee,  X1 derived most of its revenue from interchange fees and is likely to pass this model on to Robinhood. 

X1’s credit card

Demand for credit that does not involve a credit score has been bubbling up, sparking interest in fintechs like TomoCredit that offer credit based on cash flow data. X1 is another example of a startup catering to the same needs, with an income-based credit offering. The company’s Visa credit card is stainless steel, charges no late or foreign fees, and comes with an app in tow.

Through the app, consumers can track expenses and subscriptions, generate virtual cards, and receive notifications for refunds. Additionally, customers can shop inside the app environment at select merchants. Every time a consumer shops at one of these merchants, X1 makes some money through fees. 

A metal card with the X1 logo. With Visa written on the bottom right.
Source: CNBC

Late last year the company also announced the launch of an investment platform within its app, which allowed its customers to buy stocks from their reward points. “There is no real downside, as their investing is technically free,” said Deepak Rao, co-founder & CEO of X1. 

The story of Robinhood

Robinhood’s ethos revolves around enabling wider access to financial services. For example, the company’s retirement offering targets gig workers who don't have access to an employer-provided retirement plan and provides a 1% match on every eligible dollar invested. A credit card offering that circumvents the traditional credit system and allows access to credit to those with limited credit history slots right in.

Although there are questions about the gamified design of Robinhood’s investment product, the firm has lowered the walls around investing. And ideologically lowering the walls around credit, too, makes sense for the firm. The cherry on top is that it also serves as a way to bring more people into the company’s fold.

So far the details of what X1’s integration with Robinhood will look like are scarce, but it won't be too surprising if X1’s investment through reward points offering is part of the end credit card product. 

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