How Robinhood Democratized Finance For The 99%

Advances in market structure and technology made it possible for investors to interact with financial markets in ways dreamt of decades ago.

At the same time, disparities in social and economic justice, amongst different classes and demographics, worsened given dynamics like the COVID-19 coronavirus pandemic.

Despite coming under scrutiny for decisions like limiting trade alongside other brokers amid single stock volatility early this year, Robinhood is one institution to thank for its role in redefining retail market access and breaking down traditional barriers to financial wellness.

Let's unpack Robinhood’s role in democratizing access to finance.

About: Founded in 2013 by two Stanford University roommates — Vlad Tenev and Baiju Bhatt — Robinhood HOOD came out of a desire to provide more people access to the tools to build and manage their financial wealth.

At the outset, Robinhood started out as a bare-bones stock brokerage allowing its users to buy and sell stocks, options and ETFs. The firm’s differentiator was cost and technology.

“It became clear to us that the smartphone would be your primary tool for accessing the markets and doing financial transactions in general,” Tenev said on a Business Insider podcast in reference to his firm’s business model.

Presently, the company earns most of its money and passes on savings — in the form of zero commissions — via the process of payment for order flow (PFOF), or receiving payment for routing users’ orders to market makers.

These off-exchange counterparties are obligated to offer prices at least as good as the national best bid and offer. Simply put, you get a fill at the best price available.

“When we looked at the space and we compared what we saw with the institutional world, where maybe firms were placing millions of trades per day at effectively no cost, we realized that from a technology standpoint … we could offer that at low cost by leveraging that same automation,” Tenev added.

See Also: How Robinhood Ushered In Stock Trading For The New Generation

Evolution: Financial sustainability is a major threat; society has been trained to borrow and spend, rather than save and invest.

In reversing this trend, Robinhood rolled over its successes into the development and build-out of an education and news library, trading, as well as FDIC-insured cash management capability.

As a result, today’s Robinhood customers have access to all the tools they need to learn and stay informed, as well as trade fractionally stocks, options, ETFs, cryptocurrencies, and IPOs.

Additionally, users can earn interest and spend their uninvested funds through a Mastercard-backed debit card accessible at more ATMs than the top three banks combined.

Given the holistic, all-in-one nature of the Robinhood platform, Tenev says the statistics show its users are more inclined to save and invest, rather than spend.

“[W]e had this idea that Robinhood would function as a savings vehicle, and that seems to be bearing out,” Tenev explained. “Another thing that we noticed is that that money, rather than being diverted, as we might have thought, through checking and savings, really looks like it's coming out of spending money. So this is money that would have been spent on coffee or on Amazon or just discretionary stuff.”

Looking Forward: The company made its public debut on July 29, 2021.

Ahead of the event, Robinhood sold IPO shares, on its platform, to more than 301,500 customers, nearly 10% higher than the typical IPO allocation to individual investors.

Moreover, in line with its commitment to provide superior and transparent execution, under the highest safety standards and protections, Robinhood will likely justify its beefy valuation by using newly raised funds to diversify its business.

This comes alongside trends that suggest investors more so trust themselves and their embedded networks like TikTok, YouTube and Twitter. Robinhood is likely to support this movement with education initiatives that bolster investor confidence and knowledge, as well as add joy to investing.

Ultimately, as Tenev alluded to during his Congressional testimony earlier this year, Robinhood will add to the almost $40 billion of asset growth on its platform, a clear indication of wealth creation for those investors outside of the wealthiest 1%.

“Over time, we want to be the single money app, the most trusted and most culturally relevant money app worldwide,” Tenev notes. “[E]verything that you use your money for, you should be able to do through Robinhood.”