There’s so many younger people in this country that think the financial system is a piece of shit,” said Baiju Bhatt, co-founder of the commission-free trading app, Robinhood. Bhatt is, as so many in Silicon Valley are, out to disrupt an industry steeped in tradition — and tradition that typically favors a small group of people. “There’s this idea in traditional financial services that there are different tiers of financial citizens — like there’s first-class financial citizen, second-class financial citizen. And that’s just a thing that I disagree with, I think that’s not what financial services should be about. I mean, to think about what this industry is called, it’s called financial services; it exists to serve.”
To Bhatt, investing is not simply about dollars and cents; it’s an imperative movement to closing the equality gap (which, by all measures, is only growing). The higher purpose of the Robinhood app, which launched in March 2015, is to lower the barrier to entry for prospective investors. At base, it’s a totally commission-free trading platform. In the past year, this semi-social experiment appears to be working. Robinhood has accrued one million users, and the average age is 28. To learn more about how the app has changed the stock-trading landscape, and to find out how those new to Robinhood can best leverage the app, I talked with Bhatt over the phone, from his office in Silicon Valley.
Q: What’s happened in the last year or more? Have people come flooding to you? Have companies come with cease-and-desist orders?
A: So, people have come flooding to us, which has been amazing. Robinhood is better than the other online brokers because it’s cheaper, it’s faster, it’s easier to use — unless you’re doing butterfly option trades, suspended upside down, on the Brazilian Stock Exchange or something like that. If you’re just buying some stocks, it’s the best thing that’s out there. So what we’ve seen is pretty amazing. In just one year, we’ve grown to over a million users, we’ve processed over $6 billion in investments. So, people have invested over $6 billion, bought and sold on Robinhood and we’ve saved over $100 million in commissions.
And in between just trying to keep our servers up and to keep our company running so that we’re able to keep up this astronomic growth, we’ve rolled out some pretty awesome features. I think one of the biggest two that we’ve rolled out is Robinhood Instant, which basically speeds up money transfer on all things brokerage.
Q: What does that mean? Can you explain that further?
A: So, basically, money moves slowly in the US and it moves particularly slowly when it pertains to the stock market. So there’s two things that are really slow that we sped up. The first one is that whenever you transfer money in and out of a brokerage account, it takes three days to settle. We basically engineered a way to do it instantaneously.
“It shares some of the mechanics with gambling activities, but the reason it’s different is because on average, you will make money through investment in the stock market.”
And the other thing is, when you buy stocks and you sell them, the way the stock market is setup it technically takes three days for those transactions to settle. So we basically also engineered a way to get people the proceeds of their sale immediately so they can go out and buy more stocks.
Q: And what has the reaction been like from other existing financial institutions? If I’m Fidelity and charging people $8 dollars per trade, I might not like you, you know.
A: Yeah, I’m sure they don’t. But they don’t call us up and say, “Hey guys, we don’t like you.” We operate within the lines. The US is a free market, so there’s not much they can do to shut us down or to cry foul in any way. That said, they’re probably not very happy.
Q: Have people been lowering their rate to remain competitive? Or have they dug their feet in the sand?
A: They’re digging their feet in the sand. Here is my reason why, and I think there’s actually a pretty good reason why… We don’t take that many customers away from the big online brokerages because the people that use Robinhood are using online brokerages by and large for the first time. So either people are much younger, or these are people that have not previously had a taste with the stock market. And as a result, even though we’re getting big, we’re not stealing a bunch of users from the other brokers.
Q: So what are your demographic numbers then?
A: I think the most startling and cool thing is that the people who use Robinhood tend to be pretty young. They’re in their 20s and 30s and the average is about 30 years old. And that’s pretty amazing because those are the people that, previously, investing in the stock market was a little too expensive. And the whole point of Robinhood was to help an underserved demographic.
“By and large, the millennials, the next generation of Americans, just didn’t really care about the stock market.”
There is a pretty burning problem, which is that before Robinhood there was a disturbingly small level of engagement in our economy from the next generation of consumers. Like, by and large, the millennials, the next generation of Americans, just didn’t really care about the stock market. And if you think about what that means long term, it’s a pretty bad situation, because what it means is that this new generation of Americans is not going to be generating wealth from their capital. They’re not going to be generating returns from their money. Which means that for this new generation of Americans to make money, they’re basically going to have to get it through labor.
And there’s a whole economic conversation here, but there’s some pretty interesting research that indicates that over the next 100 years or so, the return from labor is going to be dominated by the return from capital. This is an idea from Thomas Piketty’s book Capital in the Twenty-First Century. Basically, he states that the next 100 years are in the wake of the Industrial Revolution, where the Industrial Revolution was this big economic leveling factor, which created a lot of new wealth — it was an opportunity for a lot of poor people to become wealthy.
But as we enter the 2000s, the Industrial Revolution is over, and those economic circumstances that allowed a new generation of people to gain upward economic mobility, they’re gone. And the people that have a lot of money over the next 100 years, they are going to become wealthier and wealthier, and the people that don’t have money are going to become proportionally poorer and poorer. And so that’s a real problem, right? Giving people that don’t have a lot of money the ability to start making some money from savings is the most material thing that, as a society, we can do to prevent income inequality on the hope of growing.
Q: So there’s the belief that the stock market is similar to gambling, and Robinhood theoretically makes this “gambling” easier. Do you feel this is true? And do you feel the need to educate your audience?
A: I disagree with that and I’ll tell you why. The stock market is not the same as gambling because when you gamble, the expectation value is negative. Like, if you gamble, on average, you’re going to lose money. The difference is that if you invest in stock market, on average, you’re going to make money. Like, on average, if you invest in the stock market, your returns are going to be the returns of the S&P 500 and the S&P 500 over many years has returned 10 percent year over year.
And it shares some of the mechanics with gambling activities, but the reason it’s different is because on average, you will make money through investment in the stock market. While if you go to the casino, on average, you lose money. So that’s one really important point here that’s worth pausing on for a second. Because if it were gambling, frankly, that would be a shitty situation. That’s not something that we feel comfortable doing.
The second thing is from the education perspective. So, we do a lot of surveys regularly, where we ask our user base different things. And a week ago, I was sitting and reading the survey results. And there were 30 to 40 percent of people who reported that the way they use Robinhood was to teach themselves about investing in the stock market. And that’s cool, because while Robinhood up until now hasn’t exclusively said like, “These are the things you need to learn to invest in stock market,” it is such a critical part of the learning process. It lets people that don’t know what they’re doing actually practice with very low stakes. That has become a central learning tool for people.
Q: What’s an average balance of someone using Robinhood?
A: We see when people get started, the first week that somebody enters Robinhood they put in between a few hundred and a thousand dollars in their Robinhood account, on average… The cool thing that we see as we look back at some of our older cohorts — people that signed up a year ago — is that their accounts are now thousands of dollars on average. So what happens is people start using it, and they’re like, “Oh cool, this works. This is real. It’s pretty easy to use. Now, I’m going and educate myself about what it means to invest in the stock market by just reading other stuff. And maybe I want to invest a little more.” So that’s the behavior we see.
Q: And what steps would your recommend for people just starting out?
A: Have fun. Enjoy what it feels like to own some stock. Take pride in the companies that you buy. And realize this is something you have to do for the rest of your life. If you want to have a good life where you’re not broke when you’re old, get in the habit of it. It’s like exercising or eating broccoli; it’s really fun sometimes, and not so much fun other times, but something you have to do if you want a good life.
Here are Baiju Bhatt’s tips for getting started.
1. Download the app. Open an account.
2. Put in however much money you feel comfortable with. Invest however much you feel comfortable investing.
3. Think about the companies you believe in, the companies that you think have real potential, long term. Then buy those companies. Start out making some small investments, and get a sense of what it feels like to own some stock.
4. When the stock market gets bumpy, don’t sell your stock. Use that as a learning experience, because if you’re going to be comfortable investing, you’re going to need to hold stock for a long time. So don’t panic when there’s a little bump up or down.
5. As you get more comfortable, think about the other companies that you believe in, and try to invest in a few that are different from the first few that you invested in. In other words, diversify.
6. Have fun. Enjoy what it feels like to own some stock.