UBS: Fintech Darling Robinhood’s Business Model in Serious Jeopardy

October 7, 2019 | FinTech, Investments, News
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Discount brokerages flip the script on the Fintech start-up

Robinhood has a $7.6 billion valuation thanks to its strong support from Millennials. Launched in 2013, the Fintech startup undercut discount brokers with free trades and a sleek look that attracted first-time investors.

However, the sudden decision by discount brokerages to slash commissions to zero has flipped the script on Robinhood.

UBS senior equity analyst Brennan Hawken told CNBC this week that Robinhood could start to lose its faithful customer base.

“Their business model is now in serious jeopardy,” Hawken said. “Models like Robinhood and others seem unlikely to press ahead at their current pace.”

The Battle Against Discount Brokers

Last week, Charles Schwab shook the markets with news that it was cutting commissions on stocks, ETFs, and options trades. That news turbocharged a race to the bottom among competitors. Public firms like TD Ameritrade, Interactive Brokers, and E*Trade Financial, and private ones like Tradestation and Square all made headlines with commission cuts or news of free-trading in the future.

Robinhood – which has struggled to get other services like checking and savings accounts off the ground – could face an exodus of customers. Hawken said the company’s customers are “not going to stay at Robinhood.” He went on to argue that firms like Schwab and TD Ameritrade have “trusted” brands with the same free benefits.

Hawken said “there’s not much benefit at all” to choosing Robinhood over the more established companies.

Robinhood Responds to the Pressure

Following the sudden news, Robinhood responded with a positive spin. The firm’s spokesperson Jack Randall said that the  cut in commissions “reflect a focus on the customer that’s been inherent to Robinhood since the beginning.”

Randall also told media outlets that the firm is focusing on new products that can reduce costs and barriers in the financial industry.

The company also told CNBC last week that it plans to become a major financial institution between five and ten years from now. The firm does hope to have an IPO at some point. However, executives have not publicly set a date or time for an offering.

According to CrunchBase, 44 investors have backed Robinhood. The firm just closed its Series E round in July 2019 and raised $323 million. Notable investors from this round include DST Global, Sequoia Capital, and Ribbit Capital.

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