Balancing The Ledger: Robinhood's Crypto Trading Crystalizes Its Vision For A No-Fee Future

[MUSIC PLAYING] Welcome to Balancing the Ledger, where finance and tech intersect. I'm Jen Wieczner. And I'm Jeff Roberts. And today, we're joined by Vlad Tenev, who's the co CEO of Robinhood. Thank you so much for joining us, Vlad. Thanks for having me. It's a pleasure. You guys are known as the stock app used by millions of people, but can you tell us a little more about what your app does? Yeah, so we're an investment platform. We allow people to trade US equities, options, and cryptocurrencies commission free, so no per trade charges on all three of those. We're available on mobile and on web as of late last year in the US. You guys have said that you plan to offer banking services in the future. I think you've you said you hoped to offer everything that Bank of America offers, and you guys just raised $363 million series D round, valuing Robinhood at $5.6 billion. So you've been compared to the Amazon of financial services, but do you really want to be a bank? I mean, is that what you see yourselves becoming in the future? Well, the way we think about it is we want to solve customer problems, and the precise regulatory structure we sort of figure out around the problem. So it became pretty clear at first when we wanted to launch the stock trading product that we had to be a FINRA registered broker dealer. So we went and got those licenses. But we didn't start saying, OK, let's be a FINRA broker dealer, what can we do with now that we have that license? It started out by understanding that customers are getting ripped off in investing and trading. They're paying up to $10 a trade, sometimes even more. There's high account minimums. And the user experience, I mean, these services effectively haven't changed for 10 to 20 years when you look at discount brokerages. And then we took that approach kind of organically to options trading, where customers are getting charged even more for making options trades. You get charged twice per transaction in two different ways, and some customers came to us and said, well, we're paying thousands of dollars a day in trading fees. So they wanted that product out of us. And we figured out how to make that happen as well. And crypto trading, same story. I mean, the majority of wallets and exchanges, customers are paying exorbitant fees right now. I mean, anywhere from 1 and 1/2 percent to 5%, which is a very, very sizable fee. So our approach is, use technology and automation to put the vast majority of the value of that transaction back into customers' pockets. And we sort of find the regulatory structure around that. And I think it doesn't stop with just investing products. I mean, customers are getting ripped off across the board in financial services. So I can't really comment on the licenses or anything like that, but the philosophy is if people hear Robinhood 5, 10 years from now, and it's a very long term business, I mean, everything that we're talking about here will play out in the span of many years. We should establish a connection between oh, I'm using Robinhood, I'm getting the best deal in financial services. Vlad, speaking of good deals, I'd like to return to crypto pricing, because you're a playbook to disrupt the traditional brokerages has been kind of charge almost no trading fees. However, I mean, you're still paying your staff and your business. You're making money somewhere. So in the case of crypto, I mean, the margins out there might be 1.5, 2%, you're going to offer something lower. Explain how that pricing works exactly and how you can make money doing that. Yeah, I mean, as I've said around the time when we launched our crypto offering, we don't intend to make very much money on it at all for the foreseeable future. We intend to operate it as a break even business. And the thinking behind that is that what we're really doing is building an ecosystem. Right now, the products are investing products. So crypto slots in very nicely alongside the 10,000 plus other instruments that people can trade. And we think of monetizing a customer across a wide variety of different products in our ecosystem, including Robinhood Gold, which is sort of the most direct subscription pricing model. So you can attract a new customer through their very good prices on crypto and then upsell them on other things. Exactly. And we saw a lot of that happening. When we announced crypto, we had some of our biggest days ever, where a lot of new customers joined the product and-- You said hundreds of thousands of customers on some days. Yeah, exactly. And you know, those customers actually started investing in many other things, not always crypto. They were investing in options and equities, and a lot of them subscribe to Robinhood Gold. So we're looking at crypto as one way for customers to actually see the value prop of our broader product. I mean, we're selling them financial services, and they can find out about us, depending on what they're most interested in. For some customers, it's is crypto. Others is they want to invest in a stock for a company that they care about. It's pretty unusual for a brokerage of any sort to not charge any commission fees. I mean, that has been the bread and butter of the business for years and years. And other than you guys and Cobinhood, which is before you guys were in crypto, that crypto knock off of Robinhood, why is the no fee model so important, do you think? I definitely think it's where the industry is going. I mean, if you look at our business, and we've been able to make it work, because the cost is very, very low in offering these services. It wouldn't have been possible 10, 20 years ago for example, because markets weren't fully electronic. So there was a human at the order execution value chain. So your order, if you wanted to buy a share of stock, it would go to a specialist or market maker, who was an actual human being on the floor of all these exchanges. And a little bit over 10 years ago, that's kind of gone away completely. There's actually very, very few market makers that are on the exchange floors. You guys have been there, I'm sure. It's sort of like a media center now, where they film shows and people aren't really trading quite as much. So the cost has gone to essentially zero, and it's basically the cost of operating the infrastructure, data centers, networking. And that's all very, very small relative to a $10 commission. So if you can make money in other ways through premium services and through some of the other ways we make money, like collecting interest on assets. What exactly does that mean? Can you explain? Yeah, so for equities and cash, we basically take the assets that we have, and we lend them out. So for cash, it's sweeping them into short and medium term instruments, like money market. For the stocks, it's participating in the global securities lending marketplace, where we lend them to third parties, who might use them for short selling and things like that. And we collect an interest rate spread from these that we actually share with customers, similar to how banks make money effectively. Well, I've heard one way you keep costs down is that Robinhood only has 200 employees. Is that true? That's true. Yeah. Do you think that's sustainable, though? I know venture capitalists love that model, because you can scale and get millions of customers. But at a certain point, as we've seen with other tech companies as they grow, you need people, you need customer service. Who knows? Maybe you'll even need a branch one day. So what's the future going to look like on that front. Do you see yourself hiring more people? We've actually been hiring very quickly. So when we closed our series C round of financing a little bit over a year ago, which was at 1.3 billion, we were under 100 people. So we have slightly more than doubled in the past year, and we've done that year after year. I think when we first launched on the App Store in 2015, we were right around 20, 25 people. So we've always been very, very small, but actually growing quickly. And we've never gone through a year like some companies like Uber and Zenefits, where they've 10x the headcount and sort of screwed up the culture in the process. So we're definitely growing. We're offering more products and hiring more people, but the target is always going to be at least 10 times more efficient in terms of headcount and staffing than companies that are doing a similar amount of business. And I think when we announced the 200 employee number, we compared it to eTrade, where they have, I think, 3,000, 4,000 employees and actually less customer accounts than we do. I know what you guys currently only trade Bitcoin and Ethereum, but we got some guidance from the SEC last week about neither of those securities, but there's still some concern about these ICO or initial coin offering tokens, which I think Robinhood is actually tracking right now, but not allowing trading of. That's right. Does that affect your strategy? Is it something you're hoping to expand to more cryptocurrencies in the future? Yeah, we're definitely looking to expand the future set and add more coins in the future. We're actively working on those things. Before kind of deciding what to announce, what to list, what to trade, we'll look at a combination of factors. One of them is obviously what have the regulators said about it or what are they likely going to say about it. That's very important. Then we also look at what's the team behind this coin doing? Are they legitimate? What are their backgrounds? And then customer demand and things like the stability and resilience of the coin against protocol level attacks, like 51% attacks, for instance, which we know happened to Bitcoin Gold a couple of weeks ago, and that was very eye opening, I would say. Yeah, well, I think that's all we have time for. But thank you so much, Vlad, for joining us. Yeah, thanks for having me. I'm Jen Wieczner. I'm Jeff Roberts. For more Balancing the Ledger, please go to fortune.com. [MUSIC PLAYING]