The App That Wants to Bring Financial Markets to Millennials

Millennials! They’re the future. Every company out there wants to get in on the millennial thing. Secure the loyalty of the 18-to-34 demographic, the thinking goes, and you will own its business for life.

Institutional finance, for the most part, has done a pretty poor job of catering to millennials. Investment, especially via the public markets, is still seen as the province of “old people,” something to think about at retirement, according to Baiju Bhatt. But Bhatt, 29, thinks he can change that. With Vlad Tenev, 27, he’s launched a brokerage app targeted at a species now rare but potentially vast in number, the millennial investor.

“Young people don’t get involved in finance because they don’t trust the system,” says Bhatt. But his generation has cash on hand that it wants to grow and “is more DIY than the generation that came before. If we give people the tools, they’ll figure it out.”

He and Tenev reject the thesis of the “unsophisticated” retail investor, which holds that individuals shouldn’t get involved in stock-picking. “We think that’s bullshit,” says Tenev. “Otherwise it’s just institutions, and that’s not good for the market.”

Bhatt and Tenev met as math classmates at Stanford. They have no specialized training in finance and have spent the last two years tinkering with various finance-focused businesses, most of which, by Bhatt’s admission, failed to gain much traction. But Robinhood, the name they’ve given to their app, which launched today, has hit a chord — first, with investors: The firm, which is a registered broker-dealer, has raised $16 million to date from corners as disparate as Index Ventures, Andreessen Horowitz, Google Ventures, Stocktwits founder Howard Lindzon, Snoop Dogg and Jared Leto.

The app has proved popular with users, too. It has been in the works for more than a year, but almost half-a-million people have signed up for it during that time, a standard Silicon Valley trope to build excitement. Most of the people on the wait list are in their 20s, Bhatt says, with an average age of 27. Robinhood, in other words, is the retail brokerage world’s first breakout viral hit. But can it last?

Online brokerage firms still charge a commission for each trade they execute on behalf of customers — the biggest brokerages, Charles Schwab, E*Trade and TD Ameritrade, charge around $10, although some of their smaller rivals charge less. At the same time, however, they spend thousands of dollars each year on each customer, mostly as a result of advertising and the steep overheads associated with their fleet of brick-and-mortar shopfronts.

Robinhood wants to do away with that business model: It’s charging no commission at all, with no account minimum to start trading. “Why is it so cheap for institutions to trade but still so expensive for retail investors to trade?” asks Bhatt. “Young people believe online apps should be free.”

Other brokerages have tried to go down the zero commission route, but none has succeeded: Zecco, for instance, started off as a zero-commission brokerage in 2006 but eventually, amid slim post-crisis trading volumes and persistently low interest rates, had to start charging to execute trades. In 2012, Zecco was acquired by TradeKing, another online brokerage. Today TradeKing charges $4.95 a trade.

What about Robinhood means it will avoid this fate? For a start, it’s mobile-only, so it avoids the costs of running a brick-and-mortar business. And because it’s a product driven by word of mouth, Bhatt says the company has no plans to spend on advertising: “It doesn’t cost us anything to facilitate the trades, so it’s easier for us to stay commission-free.”

By lowering the barriers (of cost and convenience) for people to get online and start trading, Robinhood’s founders hope they will unlock a vast demographic of previously untapped investors. But not every millennial will be able to trade: There’s a days-long approval process before people can start putting their money to work, and Bhatt concedes that many young people, especially those with no credit history, may fail to clear some of the regulatory hurdles to trading. Nobody really knows how small — or large — the subset of millennials ready to play the markets will be.

The retail brokerage industry has been caught in the crosshairs of the fallout from Flash Boys, Michael Lewis’s recent assassination attempt on high frequency trading — especially over the practice, which some see as unscrupulous, of receiving payment from dealers and other market-makers for order flow. Robinhood hopes to avoid much of the kerfuffle by routing its order flow through Apex Clearing, a Dallas, Texas-based clearing firm. Payment for order flow is “currently a negligible part of our business model,” the founders say.

Bhatt and Tenev are determined to remain “good guys” and avoid what they see as the ickiness associated with many actors in the financial industry. But whether their high-mindedness can survive the test of experience remains to be seen.

With no commissions on the horizon, it’s also unclear how much money Robinhood will be able to make. In classic Silicon Valley style, Tenev and Bhatt say they’re unconcerned with revenue for now. The plan is to make money through margin lending, which is available on the app today, and eventually to boost revenue through what Bhatt calls “premium services.” This will involve, among other things, opening up Robinhood’s software for other developers — content companies, registered investment advisers — to come in and build apps on top of the core offering.

Clearly, there is a lot to figure out. But Bhatt and Tenev see themselves as part of a movement to “democratize” access to the markets — a term much abused in the tech sector today, but one that in this case seems genuinely relevant. With companies delaying going public and most ordinary people, despite the advent of the JOBS Act, still locked out of participation in the burgeoning equity funding landscape, it’s arguably retail investors who have lost access to markets most acutely in recent years.

“It’s healthier for markets to have more individual investors involved,” argues Bhatt, and Robinhood wants to offer a way for that to happen. That, the app’s young founders hope, will be useful for everyone.