To The Moon

Robinhood Is Too Good To Be True

I don’t say this lightly. $Robinhood(HOOD)$ changed the way I look at brokerages forever and since this is an investing newsletter I want to share what I’ve learned. I promise I will get to the investing takeaway in a moment, but first I need to explain my excitement behind a brokerage app.

When Robinhood announced the Robinhood Gold Credit Card with 3% cash back, I thought it was a brilliant customer acquisition tool and was a big reason I highlighted the stock with a spotlight article last week.

I have now set up and funded an account on Robinhood and this might be the best brokerage I’ve ever used.

It took less than 3 minutes to set up my accounts and Robinhood gave me money to join the platform. It sounds crazy, but it may just upend the financial services industry as we know it.

Robinhood Makes It Easy To Invest More

I find it useful to find little ways to trick myself into investing more. And Robinhood makes that simple.

• Reward cash back can be sent straight to the Robinhood brokerage account

• A 1% deposit match on ALL DEPOSITS gives a boost to any money invested.

It’s like investing 4% of my money before adding any of my own money to the account.

Benefits You Can’t Get Elsewhere

The theme of the spotlight article was that Robinhood is playing a different game than other brokers. While most banks and brokerages have branches and staff that are expensive overhead, Robinhood is a digital platform. Saving on overhead can go into customer benefits that draw more money to the platform. Those benefits include:

• 5% APY on cash in the account

• 3% IRA Match

• Lending shares

• Ability to invest in IPOs

• 24-hour trading on some stocks

These sound like crazy benefits, but they make sense when you think about how Robinhood makes money differently than most brokers. And they could be a draw for millions of people to join the platform.

How Robinhood Makes Money By Giving You More

Robinhood can benefit customers because it’s making money by simply having more assets on the platform.

High-Interest Rates

The 5% APY on cash for Gold customers is a relatively low-cost form of capital given the 12% rate Robinhood charges for margin.

Robinhood Financial charges a standard margin interest rate of 12% and a margin interest rate of 8% for customers who subscribe to Gold.

Robinhood

12% minus 5% is a nice 7% spread for a financial institution.

Lending Shares

Most brokerages don’t allow retail investors to lend shares to short sellers because they don’t have to. But Robinhood does at a $5,000 account limit and investors can make money depending on the market rate for the stock.

When we borrow shares of a particular stock from your account on a given day, you’ll earn whichever of the following earns you more money: A rebate that is 15% of the weighted average rebate rate we earned by lending that stock to borrowers on that day. Or $.01 for your total position in that stock that was borrowed during that month. This would be your share of the rebates Robinhood earned for that stock on that day (across Robinhood's introducing broker and clearing broker).

Robinhood

Robinhood takes no risk by lending shares and gets to take a cut just to facilitate the transaction. Not a bad business.

3% Cash Back on Credit Cards

Credit card issuers usually make a little over 2% on credit card transactions, so Robinhood’s 3% cash back is subsidized.

Management has said they can make up for the cost by charging high-interest rates for customers who keep balances and with other products like brokerage margin, payment for order flow, and share lending fees for those who don’t carry a balance.

3% IRA Match

Users earn the IRA match over 5 years, so the match is incentivizing a long-term relationship with Robinhood.

3% match requires Robinhood Gold (subscription fee applies). Keep Gold for 1 year and the IRA for 5 years.

Robinhood

Once assets are on the platform, Robinhood can make money from lending shares, payment for order flow, margin, and more.

Subscription Fees

Most of the benefits on Robinhood require a Gold subscription, which is $6.99 per month. That’s $84 in annual revenue to offset the benefits paid. If we assume Robinhood’s benefits are 1% higher than the competition, Gold customers need to spend/add $8,400 to the platform for the fee to make sense. That incentivizes a lot of assets and activity on the platform.

Robinhood is leveraging the fact that it doesn’t have high fixed costs for physical buildings, brokers, bank tellers, loan officers, and all of the other overhead that goes into running a traditional bank.

As a result, Robinhood can use a completely different playbook that other brokers can’t compete with. This is how disruption happens. It sounds crazy at first. But over time it becomes obvious — like free stock trades are now — and when the disruptor is offering a product incumbents can’t compete with you get a stock with 10x potential.

https://asymmetric-investing.beehiiv.com/p/company-changing-investing-forever