Robinhood Expands Into Banking, Wealth Management in Search of Profits

By Sarah Hawkins

Robinhood, the popular stock trading app, is making a bold push into new financial services as it seeks elusive profits. The Menlo Park-based company announced Wednesday it is launching a new cash management account and expanding into retirement and custodial accounts.

The no-fee cash account, insured by the FDIC, will offer a competitive 1.5% interest rate – over 10 times the national average. Users can spend directly from the account with a Robinhood-branded debit card.

“We want to be the single place that our customers go for all things money,” said Robinhood co-CEO Vlad Tenev. The 7-year-old startup pioneered commission-free stock trading but has struggled to turn a profit, losing $1.4 billion in the first three quarters of 2022.

Retirement, Custodial Accounts Aimed at Long-Term Investors

Robinhood is also rolling out IRAs to help customers save for retirement. Both traditional and Roth IRAs will be available with no account minimums or recurring fees. The company hopes the accounts encourage long-term investing among its young user base.

“A lot of our customers are just starting their financial journeys,” noted Robinhood’s other co-CEO, Baiju Bhatt. “IRAs felt like a natural next step to grow with them over decades.”

For even younger investors, Robinhood introduced custodial accounts that allow parents to invest in stocks and ETFs for their kids. Once the child turns 18, assets transfer to their control.

Seeking Profits After Pandemic Trading Boom Fades

The new products come as Robinhood’s growth has slowed dramatically from its pandemic peak. Monthly active users fell to 12.2 million in Q3 2022, down 34% from 18.9 million in Q3 2021. Revenue dropped 43% to $361 million over the same period.

“The pandemic ushered in a new era of retail investing, but that level of activity has moderated,” acknowledged Jason Warnick, Robinhood’s Chief Financial Officer. He expressed confidence the new offerings will drive steadier, more diversified revenue streams.

Robinhood makes money primarily by routing customer orders to high-speed trading firms, a controversial practice called payment for order flow. The new cash accounts could provide an alternative income source if the company can attract sizable deposits.

Entering a Crowded Market

However, Robinhood faces stiff competition in banking and wealth management from established players like Fidelity, Vanguard and Charles Schwab. Analysts question whether Robinhood’s sleek app and crypto offerings give it a sufficient edge.

“Robinhood’s brand doesn’t necessarily translate to trust when it comes to banking,” cautioned Thomas Mason, Senior Research Analyst at S&P Global Market Intelligence. “They’ll have to convince customers they’re a safe place to park cash.”

The company’s stock has plunged over 85% since its July 2021 IPO, battered by slowing growth and a $65 million SEC fine for misleading customers. Shares rose 5% in after-hours trading following the product announcements.

Robinhood said the new offerings will roll out gradually in the coming months, starting with select customers. The upstart is betting big that broadening its financial ecosystem is the key to finally delivering profits to match its disruptive ambitions.