Robinhood offers commission-free trading services, and since the company does not charge users for trading with them, you might be wondering how does Robinhood make money without fees. That's what we'll be seeing today.
Robinhood Markets Inc. is a financial technology (fintech) company that operates an online discount brokerage offering commission-free trading.
It offers a financial services platform that is web- and mobile-based and allows users to buy and sell stocks, exchange-traded funds (ETFs), options, and American depositary receipts (ADRs). Additionally, based on their location, users can invest in particular cryptocurrencies.
Payment for order flow, premium membership fees, stock loans, interest on uninvested cash, interchange fees associated with its debit card, and other smaller revenue streams are some of the ways Robinhood makes money.
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A net loss of $423.3 million was reported by Robinhood in its most recent quarterly report for the fourth quarter (Q4) of the fiscal year (FY) 2021, which ended on December 31, 2021, as opposed to a net income of $13 million in the corresponding quarter last year.
Net revenue also increased by 14.2% year over year (YOY). Share-based compensation costs totaling $318 million for the quarter had an impact on net loss.
The number of accounts into which users made an initial deposit or money transfer during a given period is measured by Robinhood's net cumulative funded accounts, which increased by more than 81 percent YOY for Q4 FY 2021 to 22.7 million.
In Q4 of FY 2021, the company's monthly active user base increased by about 48% YOY but decreased by about 8% sequentially.
Results for the company's FY 2021, which ended on December 31, 2021, were also provided. In contrast to its net income of $7.4 million in FY 2020, Robinhood reported a $3.7 billion annual loss.
Compared to $24 million in expenses for FY 2020, share-based compensation costs were nearly $1.6 billion for FY 2021. Annual revenue increased 89.3% from the previous year to $1.8 billion.
Also Read: How to Use Robinhood for Beginners
How Does Robinhood Make Money Without Fees?
Robinhood runs as a single business segment and aggregates its financial results.
but does, nonetheless, give a breakdown of revenue into the three groups of transaction-based, net interest, and other revenues.
Below are the different ways Robinhood make money without fees.
1. Transaction-based Revenues
Payment for order flow, a method used by Robinhood to generate transaction-based revenues, involves routing users' orders for options, equities, and cryptocurrencies to market makers (PFOF).
Brokerage companies that use PFOF are compensated for sending their clients' orders to a specific market maker.
Even though the payment, which is typically just pennies per share, can be a sizable source of income for businesses that handle lots of orders.
PFOF plays a significant role in Robinhood's ability to provide zero-commission trading.
In Q4 FY 2021, Robinhood's transaction-based revenue increased 12.2 percent to $362.7 million, or nearly 73 percent of the total revenue for the quarter.
Also Read: How to Transfer Stocks from Robinhood to Fidelity
2. Net Interest Revenues
On transactions involving the lending of securities, Robinhood makes net interest income (interest income less interest expenses).
Additionally, interest is paid on the company's revolving credit facilities as well as on margin loans given to users.
In the fourth quarter of fiscal year 2021, net interest income increased 0.5 percent to $63.4 million, or 17.5 percent, of Robinhood's overall revenue.
Also Read: How to Transfer Stocks from Robinhood to TD Ameritrade
3. Subscriptions Revenue
The majority of Robinhood's additional revenue comes from membership fees for Robinhood Gold.
A paid subscription service called Robinhood Gold gives users access to premium features like improved instant deposit access, expert research, Nasdaq Level II market data, and access to margin investing for authorized users. Proxy rebates and various user fees are additional sources of income.
In Q4 FY 2021, revenue from these sources increased by 84.0% to $35.4 million, or about 9.8 percent of total company revenue.
Also Read: How to Transfer Stocks from Robinhood to Webull
Robinhood is a commission-free trading platform that is well-known among U.S. traders.
The platform does not charges fees for trades but earns its money from other activities you do on the platform.
To enlighten you, we have shared the different ways Robinhood makes money without fees in this article.
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