How a Brokerage App Got Millennials To Invest

Know your customer. Millennial investors arent thinking about retirement; they want to identify with brands they like. And research showed their pain point was not student loan obligations, but brokerage fees. JL

Ainsley Harris reports in Fast Company:

While older generations may invest for the sake of retirement, (younger investors), 78% of whom are under age 35, want to both build their savings and develop relationships with brands—just as they have on Instagram and Twitter. (And) By eliminating commissions, the company gave users license to experiment without being penalized for their mistakes; (it) has executed $75 billion in transactions and amassed more than 2 million users, just short of Charles Schwab’s 10.4 million brokerage accounts and E-Trade’s 3.5 million.

Dallas resident Steven Card has a thing for Costco hot dogs. “Every time I go, I Snapchat the sign, [telling friends,] ‘I’m here again!’ ” he says.

So when the 26-year-old started trading stocks through Robinhood—an online brokerage that launched in 2014—it made sense to him to buy shares of both Costco and Snap, Snapchat’s newly public parent company. Card’s other stock holdings follow a similar pattern: Ford (there’s one in his garage), AMD (maker of the graphics card in his computer), and Anheuser-Busch InBev (cheers to that).
“If I’ve never heard of the company, I don’t usually feel comfortable buying it,” says Card, who further vets his trades by reading financial statements and texting with a group of childhood friends who have also become Robinhood fans. When a popular company like Tesla posts earnings, they discuss the news: “I’ve known these people for years, but we never talked about this stuff before Robinhood.”
While older generations may invest for the sake of retirement, Robinhood’s users, 78% of whom are under age 35, want to both build their savings and develop relationships with brands—just as they have on Instagram and Twitter. “People care about these companies,” says Robinhood cofounder Baiju Bhatt. It’s the millennial version of the baby boomer mantra “Buy what you know.”
Bhatt and cofounder Vladimir Tenev, best friends who met at Stanford, developed Robinhood with a pared-down, intuitive design that makes competing platforms look like relics. On Robinhood company pages, there are just four components: the ticker symbol, the price, a chart showing price changes over time, and a “Buy” button that beckons at the bottom of the screen. (Users can scroll down for news and more detailed stats.) With no fees and no commissions, the app is engineered to help wary would-be investors make a first purchase—and build experience with the markets.
In just three years, Robinhood has executed $75 billion in transactions and amassed more than 2 million users. That’s still short of Charles Schwab’s 10.4 million active brokerage accounts and E-Trade’s 3.5 million, but remarkable considering these institutions’ decades-long head starts. What’s more, the median age of Robinhood users is just 28. Last September, the company launched its first subscription product, Robinhood Gold, which allows users to trade on margin (i.e., borrow money to buy stocks) and during extended market hours. (The product’s success helped the company raise $110 million at a $1.3 billion valuation this past April.)
The next phase could be an entire ecosystem of Robinhood financial products. By divorcing the idea of investing from the aging financial institutions that some millennials have come to distrust, Robinhood is ushering a new generation into the stock market, and beyond.

Even when Robinhood was in beta, there were signs that its mobile app had connected with young, first-time investors like Card. For one thing, Bhatt and Tenev, who now serve as co-CEOs, had expected the app’s waiting list to top out around 10,000 names. It surpassed 1 million.
“The human brain is really bad at thinking about exponential things,” Bhatt says with the casual shrug of a former math prodigy (he and Tenev both majored in the subject). He slides off his Adidas sneakers and sits cross-legged on a sofa in the middle of Robinhood’s Palo Alto headquarters, where Sherwood Forest–themed murals in green and silver decorate the walls.
Bhatt and Tenev’s earlier startup had a very different purpose: to make banks and hedge funds faster and smarter than their rivals. Based in New York, they spent their days writing software that facilitated algorithmic trading, which rose to prominence on Wall Street in the lean years that followed the financial crisis.
Bhatt and Tenev (and their half-dozen employees) were in the right place at the right time with their trading software, but they began to question their purpose. “We were making the top 1% of people wealthier,” says Tenev, who sports a surfer-shag of dark hair. Looking for a change, the friends moved back to California, shut down their company (it has since been erased from their LinkedIn profiles), and embraced a more egalitarian goal: building a modern retail brokerage, accessible to all, from scratch.
Their early success with Robinhood has come both because and despite the fact that they rejected one of the brokerage industry’s primary revenue streams. While most online brokers charge commissions of $5 to $7 per trade, Bhatt and Tenev are betting on a freemium model. And it seems to be working: Subscriptions for $10-per-month Robinhood Gold have been growing by 20% every month. They also make money on what finance types call “the float”—interest on cash in users’ accounts.
Bhatt and Tenev, however, have an even loftier vision. As they see it, Robinhood’s current iteration as a “Buy Stocks” button on users’ home screens is just phase one. “Anything that you would be able to get walking into your local Bank of America branch office, you should be able to get faster, better, cheaper, with a much better user experience, from Robinhood,” says Tenev.

Many fintech founders dream of building a next-gen full-service banking institution. Each starts with a millennial pain point, whether paying back student loans or learning to save, and branches into adjacent products over time. For Bhatt and Tenev, that friction was brokerage fees. “Robinhood did a great job building a trusted relationship with the millennial demographic,” says investor Jan Hammer, a partner at Index Ventures who led Robinhood’s 2013 seed round and has participated in every round since. By eliminating commissions, the company gave users license to experiment without being penalized for their mistakes. Going forward, Hammer believes that the company will be able to layer in financial products that would help a user save, invest, or borrow: “It’s a place [people] go to on their home screen several times a day. Over time it’s not hard to imagine that you could do other things with their assets.”
Easy to imagine, harder to execute. Bhatt and Tenev will have to expand strategically, as they did when creating their premium Gold product. Bhatt, who spends most of his time on product and design (Tenev focuses on engineering), had been hearing from customers that they wanted to have more money to trade—in other words, to be able to buy on margin. His team began running a survey, asking users if they’d be interested in borrowing $2,000 and paying interest on it. “The answer was kind of fascinating: ‘Oh, that’s expensive,’ ” he says.

Bhatt decided to keep probing. His team operates in weekly sprints, reviewing user testing results each Monday. One Monday, after having watched users struggle with mental math on interest rates, Bhatt spotted a question a colleague had scrawled at the bottom of Friday’s notes: “Subscription?” This led to a breakthrough. They created a higher-tier service where customers can spend $10 per month for $2,000 in investable capital—equivalent to 6% interest, which is on par with competitors’ rates, but easier to calculate. Structuring Gold as a subscription service “speaks to people in a way that they’re much more used to,” Bhatt says. “Financial products are the last thing in the world that should be confusing.”Robinhood’s detractors wonder if the company is, in a way, too good at communicating with users. Active customers check the Robinhood app 10 times per day, on average, often in response to push notifications. “Is it ethical to get people addicted to these bottomless wells?” says Lex Sokolin, global director of fintech strategy at the consultancy Autonomous Research, who likens Robinhood to apps like Instagram and YouTube, where the stream of content never ends. “Here you’re not only using people’s time, you’re also putting their money at risk.” Other experts caution that individual investors would be better off taking a passive approach to wealth management and parking their money in diversified index funds. After all, academic research suggests that less than 5% of people have the skill to beat the market.
For Bhatt and Tenev, that criticism misses the point. “The bigger problem is that people don’t have savings,” says Bhatt. Robinhood inspires people to save money that they would otherwise have spent—and that, in the cofounders’ view, is more important than the particulars of any investment strategy.
So far, such hand-wringing has been a small hurdle for Robinhood, especially as stocks continue to rise. The public markets have long been intertwined with the American Dream, and Robinhood offers a new generation the promise of owning a piece of it. Or, as Costco fan Steven Card puts it: “It makes us feel like we’re part of the action even though we’re not Mark Cuban.”

The real question is whether young investors like Card will look to Robinhood for more than the occasional IPO thrill. Card, for example, sold his shares of Snap for a loss. He now feels more confident in his ability to analyze company fundamentals and trades less frequently. “Even though a company is cool to use,” he says, “that doesn’t mean it makes money.” But he is still determined to understand the markets—by checking Robinhood, multiple times each day.