Why Robinhood is launching a social network

Robinhood is bringing investing under the social finance umbrella.

The company behind the popular trading app is launching a web platform to help to deliver the second part of its mission to make stock trading accessible to everyday people: help them make more informed decisions. It’s adding tools, features and information on other users’ activity that makes the experience feel more like a social network.

Robinhood, which launched in 2013, says it has crossed 3 million users as of Wednesday and more than $100 billion in transaction volume with about 100 employees, according to co-CEO Baiju Bhatt. By comparison, the 42-year-old TD Ameritrade has 11 million funded accounts and more than 10,000 employees as of this September; E-Trade, 35 years old, reported 3.5 million accounts by the end of last year with some 3,600 employees. Robinhood users have saved more than $1 billion in commission fees (typically $7 per transaction) using the fee-free app, Bhatt said.

Robinhood will show users on each stock detail page how many other people own shares of that same company, the average price paid by other users for those shares, the distribution of all the different prices people have paid for shares in that company in the past year. The point is to start giving people more reference prices, Bhatt explained. Humans fundamentally aren’t very good at thinking of numbers in terms of absolute value and it can be hard for early or first-time investors to understand that Apple shares, for example, have reached the $160 mark.

“They’d say, ‘Sure? I don’t know if that’s high or low.’ We’re starting to think about reference prices people will immediately be familiar with and be able to dissect,” Bhatt said.

robinhood price paid expert review

Robinhood wants to juxtapose data generated by its own users with opinion from Wall Street analysts so users can see what “experts” are saying about a particular stock. So it’s going to begin pulling those reviews and opinions from Morningstar into a new Analyst Reviews section.

“It’s a riff on theme of comparison shopping,” Bhatt said. “Really well-worn routes for buying stuff online is doing e-commerce. You can see the expert rating on a stock — [which could say that] 77 percent say ‘buy’ based on 10 analyst reviews from Morningstar — and the number of people that own it.”

It will also show other stocks purchased by people that bought shares of a particular company and display a For You section that will suggest stocks to investors by using their buying and browsing data, as well as “playlists,” as Bhatt likes to call them (for now; others in the company call them collections, engineers just call them tags): collections of stocks based on common themes, like Virtual Reality Companies, 2017 IPOs or 100 Most Popular.

robinhood people also bought

“From a discovery standpoint the playlists are pretty similar to music. There are tens of thousands of stocks; there are tens of thousands of songs or albums you wanna listen to and there’s always this problem where you can’t quite think of the one that you want but it’s kind of on the tip of your tongue and you just need to do some bookmarking to remember it. It’s the really large inventory problem.”

Beyond buying and selling, the mobile app currently lets users browse different stocks, track the price movement and features a news feed, which will also be incorporated to the web platform. The website will launch in early 2018. Later in the year the company plans to bring the same features to the mobile app.

robinhood 100 most popular

Bhatt said the company has no plans to introduce advertising to its platforms. With each user averaging 10 to 15 sessions each day, Robinhood has greater engagement than all of its direct competitors added up, he said, touting “the best organic growth of any financial product since Venmo.”

Robinhood’s premium product, Robinhood Gold, starts at $10 a month and allows users to trade after hours. It also has a well-performing referral program in which users get a free stock for each new user they refer, who also gets a free stock upon joining.

Bhatt said he and co-CEO Vlad Tenev have always been curious to get people connected with each other Robnihood because most people have found their way to investing through social conversations.

“The stock market is inherently social,” he said. “From the days of open outcry in the pit it’s always been about humans interacting and transacting. What we’ve got in our product right now is the beginning of a much longer product focused on social.”

Venmo has shown legacy financial firms the value of making financial transactions between friends and peers as easy as having a conversation with them. Through an agreement with PayPal, Facebook is also trying to make payments activity a natural extension of the conversation its users are already having in an app where they already spend most of their time. SoFi has been trying to prove people, millennials specifically, want to do business with financial companies based on community and the likemindedness of people with similar financial goals and plans.

Offline, there are at least three behaviors or conversations taking place that the founders want to amplify on the screen, Bhatt explained. First, most young people have at least one person friend or family figure who’s a generation older that they talk to about stocks and finance; second, many young people have an informal social network among colleagues or friends where they’re kind of competitive about their investing conversations; and there’s usually someone in people’s social networks that isn’t a close friend but probably could be based on continued conversations around investing.

Opting to connect with Facebook friends and you can post to all of them is probably not effective, Bhatt asserted. Neither is a broadcast-based system where users publish their trades to followers.

“That kind of product is going to be one that has very high engagement with a certain kind of active user that wants to show off that they know what they’re doing and is not going to be interesting at all for other people,” Bhatt said. “Trying to thread the needle between these different conversations that are actually happening is where my head is right now.”

Hi 5! The five fintech stories we’re following this week

top fintech stories

Partnerships pave the way for fintech adoption

If last year’s story was all about disruption, this year continues to be about how large financial institutions, especially banks, are partnering with upstart fintechs. UBS and SigFig are doing just that for the firm’s asset management clients. “We realized that we wanted to partner with a player who was leading in the industry in the space, who had the ability to adapt rapidly, to prototype rapidly and to launch incremental capabilities in really short timeframes,” said Rich Steinmeier, head of emerging affluent and the Wealth Advice Center for UBS.

There’s another trend going on, as well. Banks are appointing fintech czars to help spearhead such activities at their institutions. JPM just brought on Alex Sion, the cofounder of challenger bank, Moven.

I also contend that, instead of looking like he got caught with his hand in his customers’ cookie jars, Wells Fargo CEO John Stumpf could have countered the grilling by Senator Warren at a congressional committee by describing all his firm’s investments and activity in fintech. He didn’t do that and he’s now $41m lighter.

Maybe highlighting investments in consumer technology wouldn’t have helped anyway. ‘Good guy’ payday lender, LendUp, just got slapped for price gouging its customers. Et tu, Brute? Yep.

Financial technology is growing

The global fintech landscape now includes over 1000 companies. These firms, which include startups and incumbents, have collectively raised over $105 billion in total funding and are worth nearly $870 billion in current value, according to an upcoming report.

Many of the startups, like those in asset management and banking, still need to prove their models. The only fintech sector that appears to be working right now is payments. The numbers are there to back it up, too. According to a report by consultancy Boston Consulting Group, bank payment revenues hit $1.1 trillion in 2015, accounting for nearly 30% of banking revenues. By 2025, they are projected to reach nearly $2 trillion, a compound annual growth rate of 6.0%. The growth engines will be transaction-related revenues (an estimated 40% of the total) and account revenues (34%).

Blockchain as an opportunity and a disaster

Another week goes by and another massive blockchain hack happens. These exploits are happening so frequently that we’ve come to expect them. The most recent hack of the Ethereum network has gone pretty much unnoticed by mainstream media.

Of course, blockchain heralds massive change in the financial markets, introducing, what some pundits call, the Internet of Value. But, how to put this, we’re really, really far away from that. Banks are still just kind of testing things out. Until we’re able to make it cheaper and less cumbersome to use Bitcoin and its associated technologies, it’s still a heck of a lot easier to just plain ol’ wire money, for example.

The struggle over the retail client

Sure, as this year’s contestants and winners at Finovate demonstrate, few fintechs are focused on B2C anymore. Even if they started out targeting end customers, most have since pivoted to become B2B players, choosing instead to partner with banks or investment firms who already own the customer relationship.

Indeed, marketplace lending used to champion the end investor when it was known in a former incarnation as peer to peer lending. But now, some are lamenting the death of the individual investor in the space.

One company still making a go at the retail space is Robinhood, a free trading app that’s seen a lot of excitement around its product and model. One of the questions looming over the firm was exactly how it intended to monetize its userbase. The company used to talk nebulously about float and margin interest but it never really rang true. Well, the startup launched a subscription model, which will give Robinhood Premium subscribers the ability to trade on margin, among other things.

Personally, I don’t think this ends well for users. Free trading is like giving addicts free drugs. At least the friction in the usual transaction is somewhat limiting. Give an addict free drugs and the ability to keep a running tab and, well, that’s just a disaster waiting to happen.

What we’re reading

The Startups: Who’s shaking things up (Week ending January 31, 2016)

fintech startups shaking things up

[alert type=yellow ]Every week, Tradestreaming highlights startups in the news, making things happen. The following is just part of this week’s news roundup. You can get these updates delivered direct to your inbox by signing up for the Tradestreaming newsletter.[/alert]

Startups raising/Investors investing

Is VC the right money for fintech? (TechCrunch)

Citi Ventures invests in working capital marketplace, C2FO (Finextra)

College Ave Student Loans scores $20m (PE Hub)

Blockchain Capital raises $13m for second fund (CoinDesk)

Leftover currency converter TravelersBox raises $10m (Reuters)

Social investing startup SprinkleBit raises $10m (TechCrunch)

Dopay, payroll company for the unbanked, raises $2.5m (PE Hub)

MIT spinout Insurify raises $2m to replace insurance agents with robots (TechCrunch)

The Startups: Who’s shaking things up

NYT: How roboadvisers stack up against each other (NY Times)

How Robinhood became the first financial app to receive an Apple Design Award (Let’s Talk Payments)

Robo-advisor Betterment launches business platform (Finextra)
Betterment, the largest automated investing service, is launching Betterment for Business. This comes the same week as President Obama is expected to introduce a budget plan making it easier for small businesses to form retirement plans for their workers.

Broken TransferWise all “smoke and mirrors”? (The Memo)

Moven partners with loan refinancers, Payoff and CommonBond (Bank Innovation)

Spare change investment platform, Acorns launches education site (Bank Innovation)

Tencent’s WeChat Wallet lands in Hong Kong, beating Apple Pay to market for mobile payments (South China Morning Post)

Robinhood ramping its free trading app via integrations, global expansion in 2016

fintech top bond trading startups

Robinhood, still the posterboy for helping out the little guy, has traded in his quiver of arrows for some new thinking about how stocks should be bought and sold.  For this current incarnation, the vision isn’t spreading the wealth by stealing riches from the rich, but by enabling everyman to trade stocks and ETFs online with no commissions.  According to Robinhood’s Head of Communications, Jack Randall, “Robinhood launched at the perfect time: distrust in Wall Street had never been higher, mobile usage was rising rapidly, and the brokerage market was ripe for disruption.”

Bringing investment transactions into the age of the Internet

The story of commissions is tied to the history of stock investing: if you had a funded account at a brick and mortar brokerage, you could call your stockbroker who would then place an order through their representative on the trading floor of the appropriate exchange.  In 1988, Ameritrade offered the first touch-tone entry system to place trading orders, and WealthWeb offered the first online trade orders in 1994. Flash forward to 2015: brokerage services like Capital One Investing and Firstrade offer trades with no initial funding requirement and charge $6.95 per trade. “Decades ago, there were large costs associated with executing trades. Tech wasn’t there, it was largely a manual process with people passing order tickets on the floor of the NYSE,” says Randall.  Today, “paying to trade is like paying to send an email. It’s an electronic transaction, and one that consumers should not be paying for.”  

The stated mission of taking “a complex system of regulation, financial institutions, and assets” and making the trading platform “simple, focused, and immediately understandable” seems to be paying off.  Randall says, “The median age of a Robinhood customer is 28 years old. While we’re a wonderful tool for first time investors, 75% of our customers are not first-time investors. Robinhood is simple enough for first-time investors and sophisticated enough for more seasoned investors.  Since we launched publicly in March, we have transacted over $2 billion through our platform. Also, our growth rate makes us the fastest growing brokerage in the world. (This is unique given we launched recently and were only available one one platform – iOS – until August when we launched our Android app.)” 

Integrations key part of Robinhood’s expansion strategy

And it seems like Robinhood’s mission has only just begun.  Since November, the educational investing platform Rubicoin and the crowdsourced hedge fund Quantopian both link with Robinhood accounts.  The popular social trading networks StockTwits and Openfolio now integrate usage of Robinhood directly into their platforms.  Apple just named Robinhood as one of ten apps on their Apple Design Awards for 2015 list.  According to Apple, geolocation, Apple Watch integration and “thoughtful notifications” are key parts of the Robinhood app.  Designed to be the best mobile stock-tracking tool on iOS, Robinhood distinguishes itself with a clean, content-centric design and beautiful typography that nicely balances app branding and iOS design conventions,wrote Apple about the award-winning app.   

“Next year, we will continue to release additional features and explore international expansion,” says Randall. New features in the offing include margin accounts, support for Mint, broker-to-broker transfers, and more expansion of Android support within other apps.  Global expansion plans have kicked off with a $50 million round of funding and an announcement that Australia will be their first overseas market.  

So, even with breakneck speed, cutting edge technology and global plans, how do free transactions equal making money?  According to Randall, “Robinhood generates revenue by accruing interest off of cash balances and collecting interest on margin (margin accounts will be offered next year). It’s worth noting our cost structure is dramatically lower than our peers — no brick-and-mortar branch locations, no legacy technology, no Super Bowl ads. We’re built from the ground-up using the latest technology which allows us to automate where others can’t.” There is also talk of revenue share with apps that integrate their service.

Photo credit: PinkPersimon via VisualHunt / CC BY