How Does Robinhood Make Money?

Robinhood Markets Inc. is a financial technology (fintech) company that operates an online discount brokerage with commission-free trading. It provides a web- and mobile-based financial services platform that investors can use to buy and sell stocks, exchange-traded funds (ETFs), options, and American depositary receipts (ADRs). Its users also can invest in certain cryptocurrencies.

How does Robinhood make money? Robinhood makes money in a number of ways, notably through a system known as payment for order flow. That is, Robinhood routes its users' orders through a market maker who 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.

In addition, the company earns money from its premium Robinhood Gold services, fees related to its debit card, and other smaller revenue streams.

Robinhood’s Financials

In its most recent quarterly report for the fourth quarter (Q4) of fiscal year (FY) 2021, ended Dec. 31, 2021, Robinhood posted a net loss of $423.3 million compared with net income of $13 million for the prior-year quarter, as well as 14.2% year-over-year (YOY) growth in net revenue. Net loss was impacted by share-based compensation expenses totaling $318 million for the quarter.

Robinhood’s net cumulative funded accounts, 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 more than 81% YOY for Q4 FY 2021 to 22.7 million. The company’s monthly active user base grew by about 48% YOY but declined by roughly 8% on a sequential basis for Q4 FY 2021.

The company also provided results for FY 2021, which ended Dec. 31, 2021. Robinhood posted a net loss of $3.7 billion for the year, compared with net income of $7.4 million for FY 2020. Share-based compensation expenses were nearly $1.6 billion for FY 2021, significantly higher than $24 million in these expenses for FY 2020. Annual revenue rose 89.3% from the previous year to $1.8 billion.

Robinhood's IPO

After announcing a confidential initial public offering (IPO) filing on March 23, 2021, Robinhood submitted an S-1 registration to the U.S. Securities and Exchange Commission (SEC) on July 1, 2021.

On July 19, 2021, it amended its S-1 to announce that it would be selling 52.4 million shares with its founders and chief financial officer (CFO) selling another 2.6 million for a total of 55 million. Robinhood went public at $38 a share, giving it a valuation of $32 billion.

The shares are listed under the ticker HOOD on the Nasdaq.

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 why Robinhood is able to offer zero-commission trading. Robinhood’s transaction-based revenue rose 12.2% to $362.7 million in Q4 FY 2021, accounting for nearly 73% of company-wide 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 0.5% to $63.4 million in Q4 FY 2021, comprising 17.5% of Robinhood’s total revenue.

Other Revenues

Robinhood’s other sources of revenue primarily consist of memberships fees for Robinhood Gold. Robinhood Gold is a paid subscription service that offers users premium features, including enhanced instant access to deposits, professional research, Nasdaq Level II market data, and access to margin investing for approved users. Other revenues also include proxy rebates and miscellaneous user fees. Revenue from these sources rose 84.0% to $35.4 million in Q4 FY 2021, accounting for about 9.8% of company-wide revenue.

Robinhood’s Recent Developments

Robinhood announced it would begin offering retirement accounts on Dec. 6, 2022, opening up a waitlist for its Robinhood Retirement IRA. The firm says it will match 1% of contributions to the account. People on the waitlist will receive access over the next few weeks with the program becoming accessible to all in January.