Flush in valuation and millions of users, Robinhood is intent on transforming itself from a zero-fee stock trading app to a platform offering every financial product and service within a decade.
The move to create its own clearing system, industry observers says, signals Robinhood’s bigger goals and puts them in a role to potentially disrupt wealth management and banking in a way that robo advisors could not.
“What they are doing is providing financial services to a population that wouldn’t go to a JPMorgan Chase — they’re actually expanding the market for trading and investing and that’s what makes them really dangerous in my view,” says Will Trout, Celent's global wealth management practice lead.
Only adding emphasis to the decision to end its partnership with Apex Clearing was Robinhood’s announcement the same day that it reached the 6 million customer milestone.
“Now we don’t have to rely on third-party legacy vendors,” says Vlad Tenev, co-founder and co-CEO of Robinhood. “We’re in control of our payment systems, our accounting systems, and anytime we roll out a product that touches that, it should be much smoother to get that in front of customers.”
What’s worth watching is how Robinhood pressures other incumbents to lower costs through technology and how it grows after going public, Trout says. (In May, Robinhood was valued at $5.6 billion).
“This is not some minor league fintech pumping up their value,” Trout says. “I think they’ve got a real plan, and their investors and their advisors are working closely to maximize the pop when they do go public.”
Tenev touts the technical benefits of its two-year-effort to engineer its own system to account for changes in the security positions and payments for buying and selling of securities.
“We can ship new features and products faster without depending on external parties for our timelines, we can expand into more verticals and have the flexibility since we own the core of the system to adapt our system to new products,” he says.
The most complex part of building Robinhood Clearing was in getting approval from three different regulators. The app had to get approval from FINRA to be a clearing broker-dealer, approval from the Depository Trust and Clearing Corporation to do settlement clearing and the Options Clearing Corporation to be allowed to do option settlement and clearing.
“We also had an engineering team that was building this system from scratch,” says Christine Hall, product lead for Clearing by Robinhood. “There’s no blueprint for that right now, industry experts, TED Talks or engineering conferences around it. It’s an unknown that our team dove headfirst into.”
In conjunction with the clearing system, Robinhood also developed an internal dashboard for brokerage and support agents to pull account information in real-time.
“Because we have an end-to-end view of a users’ trading activity, not only do we have insight into the actions they are taking on our platform, but we can see streetside and at the markets what’s happening with their individual trades to provide better customer support,” Hall adds.
Robinhood was able to reduce or remove seven fees for its customers. One of those fees, the overdraft fee, dropped from $30 to $9 when the company finished its clearing system. Robinhood also reports that customers will see a better overall experience with the new system. Tax documents, monthly account statements and proxy voting notices have been simplified and will be ready in advance of important dates like tax day.
Acknowledging the end of the relationship, Apex Clearing Chief Technology Officer Chris Fesler called Robinhood “an amazing partner,” at the recent T3 Enterprise Conference in Las Vegas.
It was only five years ago that Apex claimed it was the only company that had the technology to make Robinhood possible.
“I think that they’re doing the right thing for them,” Fesler said. “They’ve gotten huge, and they need to own their whole ecosystem.”
Trout predicts that Robinhood developing its own system will result in some sort of response from incumbents — just like JPMorgan Chase’s announcement of 100 free trades for customers.
“Traditionally the investor has been nickeled and dimed along the process,” Trout says. “These new players signal far greater transparency that poses a real threat to incumbent institutions that make their money off of charging fees that the end investor doesn’t ever really see.”
Robinhood belongs to a class of fintech startups taking stodgy financial products and services and giving them a playful spin, says Lex Sokolin, partner and global director of Strategy Autonomous Research in London. In a very low margin business, Robinhood and others like it make it easier for consumers new to investing to engage without worrying about large life decisions about retirement.
Robinhood’s desire to get into banking shows that as financial services becomes more complex, there are an increasing amount of entry points into banking, Sokolin adds. “Every product line is already out of the box, so you have to figure out how to package it and how to make it very low friction,” Sokolin says.
Despite an increasing amount of startups in mobile investing and robo advice, incumbents remain confident that their marketshare is safe.
“It’s just maturing,” says Jim Lewis, solutions director at SEI, a provider of technology solutions to banks, wealth managers, institutional investors and investment management firms. “We haven’t hit that next inflection point where something changes everything. It’s all just a derivative at this point with either lower fees or a targeted market.”
Lewis believes that the next inflection point in wealth management will be new artificial intelligence platforms that deliver valuable insights to everyday users. While startups can attract millennial customers, industry conventional wisdom suggests they don’t have the ability to serve more complex customers or help customers in a down market.
“Robinhood as an approach to reaching a particular segment in the marketplace is creative,” says Russ Kliman, head of strategic programs and innovation of SEI. “When you step back and look at the robo market as a whole, there is been a transition within the marketplace where going direct-to-consumer is not as profitable. It’s challenging to create profitable experience when cost of acquisition is high, especially when you’re charging nothing.”
Many startups now will either have to be acquired by incumbents or partner with them, Kliman predicts. The complexity of wealth management, however, hasn’t stopped tech players like Square from entering, as it may allow customers to purchase stock through its app. Or Acorns, which hired a UCLA professor of human behavior to chair its behavioral economics committee.
“Robinhood will need to find a way to shift focus from the commoditized investments, trading, and execution and remarketing customer demographic and analytics, and find ways to generate advice alpha,” says Trout.
He cautions that Robinhood could get caught in the same trap that ensnared early retail robo advisor startups: incumbents’ ability to reinvent or copy business models without losing on margins.
“From a business model standpoint, what is the extent to which incumbents are moving into Robinhood's space?” Trout says. “I believe JPMorgan, for example, has the scale and reach to transform the trading and investing marketplace.”
