In the dark ages, before the first dot-com bubble of the 1990s, making a stock trade was an arcane process. You needed a broker — a physical human being with an office and a license and access to the infrastructure that powered securities transactions. You also needed a large amount of money because reputable brokers didn’t have time to waste on people making $100 trades on their lunch hour.

Trading meant calling your broker, letting them know what you wanted to buy or sell, having them verify your account status and funding, and then finally starting the complicated process of entering your transaction into their terminal. The process could take hours or if something went wrong, days.  

Then the World Wide Web happened. America Online was sending everyone floppy disks with the promise of a connected world, Amazon was losing millions selling books (just books), and Pets.com was spending a staggering amount of money on a sock puppet. It was a crazy time, full of companies pitching fantastic ideas that most of the world simply wasn’t ready for.

america online connecting
Image: E! Online

But it was also the time of E*Trade and Scottrade — companies that for the first time, put the ability to trade securities directly in the hands of customers. No more phone calls, no more brokers, no more waiting hours or days for your trade to execute and tracking your gains and losses on the back of an envelope as you paged through The Wall Street Journal. While many of those early tech companies ended up failing for being ahead of their time, unable to attract enough users in a barely connected world to offset their high costs, trading platforms were an unmitigated success. People, it turned out, really hated the old way of doing things.

These trading platforms revolutionized the way people invested. They opened stock trading to people who were previously priced out, allowing accounts with deposits as low as a few thousand dollars. They gave rise to the amateur day trader, something that was largely impossible in the broker days. They ignited the popular imagination — you, too, could be fabulously wealthy and take control of your financial destiny. But they were far from perfect.

Pennies for Your Thoughts, Dollars for Your Trades

Between 1992 and 1994, E*Trade’s revenues soared from $850,000 to $11 million. After launching its electronic trading platform, Scottrade’s trade volume increased by 15% per month for more than three years straight. Even the dot-com crash in the early 2000s barely slowed things down, with most e-trading platforms making a full recovery by 2004. Revenues kept growing, as people switched from brokers to self-service, and profits kept growing with them. As profits grew, more and more traditional competitors jumped in — banks, old school brokerages, and other legacy financial institutions.

Electronic trading platforms (ETPs) make money in a number of ways. These range from the complex and poorly understood, like payment for order flow (in which dealers and exchanges pay smaller brokers a commission to route orders through their systems), to the simple: interest and fees. Interest is collected on deposits that users store with an ETP, just like you would earn if you kept your money in a bank. Interest is also charged on loans the ETP makes to traders, called margin. Fees are the most straightforward and traditionally have been charged on a per-transaction basis — if you buy or sell anything on an ETP, you pay them a flat fee for the privilege.

The original ETPs made the majority of their profit on these transaction fees, typically ranging from $5 to $15 for every buy and sell order placed. Consumers were thrilled — legacy brokers used to charge far more, often a percentage of the trade-in commission and even discount offerings often exceeded $30 per trade to access the broker’s specialized knowledge and access to trading platforms. Compared to paying 2% or $30, $8 seemed like a steal. Except that while legacy brokers charged these fees for their time and exclusive access, ETPs charged them just because they could. Actual transaction fees for platforms like E*Trade and TD Ameriprise were fractions of a penny per order, leaving almost 100% of the fees as pure profit.

This is where our story really begins. In April 2013, two young Stanford grads were working in the financial industry in New York, building high-frequency trading platforms for hedge funds and large financial institutions. The lingering energy of the Occupy Wall Street protests was still hanging thick around the Financial District.

A Murder on Wall Street

Millennials are famous for a lot of things: avocado toast, memes, selfies, and the gruesome murders of legacy industries. In the early 2010s, the latest victim of the digital generation was stock trading.

The 2008 market crash had a profound and lasting impact on Gen Y. Confidence in financial institutions was at an all-time low, and many millennials blamed large banks and the excess of the investing class for the ensuing chaos. That very same chaos caused a steep rise in unemployment and a devastating decline in wages for young workers. 

2008 stock market crash
Image: Advisor News

20-somethings didn’t want to day trade because they were angry at the banks, and even if they did want to, they couldn’t afford the several thousand dollars for an initial deposit or the hundreds of dollars that active investors paid out in fees every day. Even a decade after the crash, the St. Louis Fed found that three out of five millennials didn’t have any exposure to the stock market. The conventional wisdom was that millennials killed trading — they didn’t like it, they didn’t want any part of it, and it was an industry destined for extinction.

Robinhood had a different answer — offer millennials a better brokerage, starting with eliminating all trading fees. Vlad Tenev and Baiju Bhatt, friends who met while studying at Stanford, had a radical idea after working in finance and witnessing the anger of Occupy Wall Street firsthand. What if, their thinking went, millennials actually wanted to be part of the market, but were prevented from entering it by financial and institutional barriers? What if a company eliminated the most egregious practices of the financial industry and created an ETP that put users first? What if millennials would trust a brokerage that made trading affordable for them and didn’t act like a legacy brokerage? Robinhood took this idea and developed the first zero-fee trading app, opening it up to signups in December of 2013. By September 2014, they had a waitlist of 500,000 users long. By May of 2018, the app was valued at almost $6 billion and continues growing at a mind-warping speed.

What Drives Robinhood?

The stock market in 2019 is going gangbusters, with the Dow hitting one record high after another. Consumer confidence is right up there, setting 18-year records. Electronic trading as a whole is up, increasing volume by 87% between 2017 and 2018. It’s all too easy to point to these numbers and say Robinhood was just in the right place at the right time. That would also be a gross oversimplification of how the platform has managed to capture an almost untapped market and catapult to being one of the largest brokerages in only six years. Robinhood forced giant established players to radically rethink their entire strategy, even going so far as to ‘force’ a merger between two giants in the industry.

robinhood brand
Image: Pexels

The Millennial Market

The Robinhood app was born out of a lack of access to financial markets by millennials — that generation of people born in the ‘80s and ‘90s whose coming of age is bookended by the dot-com bubble crash and 9/11 on one end and the Great Recession on the other. Remember the stat from earlier: Even in 2018, three out of five millennials weren’t investing in the stock market. A survey from July of 2018 found that only 23% of millennials think the stock market is a good place to invest money. 30% of millennials in that survey preferred keeping their cash as…well, cash.

That’s a massive problem for the financial industry. This year is the tipping point when millennials will outnumber Boomers. The millennial market has a current combined spending of $600 billion annually, and that’s expected to rise to $1.4 trillion by 2020. Legacy financial companies have largely been locked out of this market. Robinhood, on the other hand, claims that 80% of its customers were millennials in 2015. In 2018, it had over 3,000,000 customers, rivaling E*Trade, with many of those customers being millennials. Being able to penetrate one of the most sought-after market segments, and then using that penetration to rival household names is no accident.

Market Maturity

While ETP volume is up tremendously over the last few years, the actual number of people switching from traditional brokerages to digital ones is starting to stagnate.  It turns out that, at least for the time being, everyone who wanted to switch from a traditional brokerage to a digital one already has. Except for millennials (see above). So while the large industry giants were fighting among themselves for market share and a dwindling customer pool, Robinhood broke ground on a mostly untapped customer base.

A large part of their success here was a relentless focus on product-market fit and ideal customer. Robinhood never tried to capture share away from established players, and had no trouble “Ok, boomer”-ing advice that they needed to reach the affluent, older generations. Every action the app has taken, from fee structure to advertising, has been aimed at escaping the trap of a mature market.

Crypt … oh?

Robinhood made waves in 2018 when it became the first mainstream ETP to offer cryptocurrency trading. Before that, anyone who wanted to invest in Bitcoin or Ethereum would need to download one or more separate apps, most of which were far from user-friendly, and none of which had market dominance or strong name recognition. Yet the demand for cryptocurrency trading was there. Ever since Bitcoin’s run-up to over $20,000 each, cryptocurrencies have caught the popular imagination. Especially among younger investors, who see them as a way to escape the hegemony of legacy financial institutions.

Being first to market can be a major advantage. For Robinhood, being first to the cryptocurrency market (among mainstream platforms) gave it the public attention and profile that allowed it to raise a much higher round of funding, which in turn is giving it a substantial boost in growth.

The Community Economy

One of the fundamental drivers behind Robinhood’s success was its fostering of diverse communities across the web. Millennials are social creatures at heart and rely on the recommendations of their peers far more than on ad campaigns or PR. Robinhood quickly marked itself as widely different from aggressive day-trading communities on Reddit and the Mister Money Moustache forums. Fostering a diverse set of communities allowed Robinhood to penetrate its target market in multiple places, reinforcing its appeal as “the platform for millennials.”

The Roll-Up

At a valuation of $5.6 billion, a similar customer count as legacy favorite E*Trade, and an increasing portfolio of services, it’s clear that Robinhood is doing a lot of things right. From its core mission of bringing investing to the masses to its willingness to cut profits to fuel growth and succeed, Robinhood is indicative of exactly what it takes to grow a digital startup brand. More so than the Ubers and Airbnbs of the world, Robinhood forged a path that relied on providing a broad service to a particular group of people, instead of indiscriminately disrupting a general consumer market. There are a lot of valuable lessons in their success:

  • Know who to sell to. Would Robinhood have been successful if it had simply started offering fee-free trades to the same customers locked up by E*Trade, Scottrade, Schwab, and others? Maybe. But it’s doubtful that it would have caught on as fast as it has. The reality is that fees aren’t an issue for most investors — very few people actively manage their portfolios or conduct enough trades to make the hassle of switching platforms worth it. And for most typical investors, fees are a minor pain point because they are investing at a high enough level that they rarely feel the cost of a missing $10.

    Only by focusing on the price-sensitive millennial market was it able to build up enough of an installed base to grow. Brands need to know their audience and focus on it to the exclusion of everything else if they want hyperspeed growth.
  • Go beyond the technical solution. Many entrepreneurs and brands think of their industry as existing in a vacuum. Increasingly, though, that’s becoming an untenable position to take. Startups can’t just address a technical problem and expect that all of the external causes for that technical problem won’t still be there later. Robinhood addressed both issues — understanding what was technically needed (an easy to use app with no or low fees) and what the context around those needs was (stagnating incomes and distrust of the financial system). A modern brand needs to be able to address the technical and the non-technical problems of its users if it wants to catch on and grow.
  • Get the basics right first. These days, besides offering cryptocurrency trading, market research access, and advanced trading futures, Robinhood is also introducing  “cash management.” But before it did all that, it was a simple-to-use, painstakingly designed, no-frills trading app that made investing “as simple as taking a selfie.” Everything about the functionality was built to make executing trades as seamless as possible for people who weren’t savvy investors and were used to apps making everything easy. Only after Robinhood got that right was it able to expand its service offerings. Take the time to make your initial product perfect before moving to the latest and greatest.
  • Be bold. No-fee trading was unheard of when Robinhood first started pitching. So much so that most VCs didn’t want to touch it with a 10-foot pole. After all, fees were basically free profit for trading platforms, and who gives up free profit? Robinhood had a vision, and that vision proved correct. Not only did it prove correct, but its willingness to take bold action ended up completely remaking the industry. By the end of 2019, all of the significant ETPs will offer zero-fee trading, and Schwab and Ameritrade were so worried about competing with the startup that they engineered a merger to prepare for the fight ahead. Not every bold move pays off, but there’s no payoff possible without making one.
  • Community is the key to growth. Millennials and Gen Z after them, are creatures of community. The digital generation is used to sharing their stories and opinions freely, online, and off. As Gen Y and Z grow to become the dominant markets, being able to foster a sense of community — as well as being able to penetrate existing communities — will be critical to growth. Even more so will be understanding how these existing online tribes interlink with each other, and where the best audiences may be found.
  • Growth hacking is alive and well. It would be remiss to talk about Robinhood without mentioning some of the most inspired growth hacking yet in an app. For referring new customers, users got free stock. Not coupons for 10% off their next purchase, not credits towards services, not points or accolades or badges. Actual, tangible stock. Something that users could (virtually) see and touch and feel. For all the talk of growth hacking being dead in marketing circles, these tactics are not only alive and well, but are responsible for supercharging the growth of some of the most popular brands today.
Jaime Lee
Author