Fintech VC & Robinhood IPO: Optimism at Consumer Trading Services

Consumer Trading Apps: Assessing Continued Growth

The recent direct listing of Coinbase and the anticipated initial public offering (IPO) of Robinhood signify a dynamic period for trading applications geared towards individual investors.

Coupled with the forthcoming SPAC merger for eToro, a generally optimistic outlook for cryptocurrencies, peak performance in certain stock markets, and recent funding rounds for platforms like Public.com, M1 Finance, and Freetrade (based in the U.K.), one might anticipate a sustained upward trajectory in consumer asset trading.

Is the Boom Sustainable?

However, the question of sustainability remains. Data presents a mixed picture. While indications suggest a potential slowdown in highly profitable trading activity at companies such as Robinhood, encouraging app download figures suggest a more positive outlook regarding the longevity of consumer engagement with savings and investing.

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This analysis focuses on gauging the confidence of companies within this sector regarding ongoing consumer interest in equities and other asset classes. We will also explore the perspectives of their investors.

Insights have been gathered from Sameer Gandhi of Accel, concerning Public.com, and Jan Hammer of Index, regarding Robinhood and its market position. Direct commentary has also been sourced from Public.com and M1 Finance, detailing their observations of future consumer trading trends.

Robert Le, a senior emerging technology analyst at PitchBook, provides concluding analysis.

Data and Perspectives

We begin with a review of relevant data to establish a baseline understanding of current consumer trading demand. Following this, we will examine the viewpoints of the companies involved and their respective investors.

Finally, we will synthesize these diverse perspectives to formulate realistic expectations for the remainder of 2021, adjusting for potential hype.

Contrasting Market Signals

Coinbase initiated its direct listing following a remarkably strong financial quarter, positioning it favorably upon entering the public market. The question arises: will similar conditions apply to Robinhood and comparable firms?

Although data from Bitcoinity indicates a decrease in overall bitcoin trading volume on Coinbase, assessing Robinhood’s performance is more challenging. This is due to the company’s pending release of its Q1 2021 payment for order flow (PFOF) reports.

However, there appears to be a noticeable reduction in consumer options trading activity compared to its recent high. While the “Robinhood effect” will likely persist at levels exceeding historical averages, the current trend and the capacity of trading platforms to sustain growth are key considerations. A 50% decline in consumer options trading from its peak by the end of Q1 could significantly impact the financial results of companies heavily reliant on PFOF revenue.

Conversely, data also suggests potential positive developments for Robinhood and its competitors. For instance, App Annie reports that Robinhood’s U.S. App Store ranking experienced a resurgence at the end of April, after a dip from its February high. M1 Finance’s download numbers, as tracked by App Annie, demonstrate a consistent, though moderate, trend.

Coinbase’s app ranking has mirrored this pattern, declining from a February peak before rebounding to the top of the charts in April.

It’s important to note that download figures do not automatically translate into growth in active users, trading volume, or revenue. Therefore, let's consider perspectives from several investors to gain insight into future trends.

Optimistic Outlooks Among Investors

Despite acknowledging that the rate of expansion may moderate, significant investors who initially supported consumer trading platforms continue to express a positive outlook. This sentiment is shared by Jan Hammer of Index, who has been an investor in Robinhood since leading its $3 million seed funding round in 2013. He stated, “I anticipate continued growth within the market. While the pace may not mirror the previous 12 months, it will nonetheless be substantial.”

Hammer bases his assessment on the enduring relevance of the opportunity Robinhood originally identified. He explained, “It’s crucial to recognize that only approximately half of the U.S. population actively participates in the stock market, with a bias towards older demographics. Moreover, market dynamics are evolving, characterized by a reduction in fees to zero. This trend fosters increased trading volume and heightened interest. This is precisely what Robinhood aimed to achieve – to broaden participation in financial markets. We are now witnessing the realization of this vision.”

Essentially, investors in this sector were anticipating this transformation long before the pandemic accelerated its progress, and their confidence remains unwavering. Sameer Gandhi of Accel echoed this perspective: “The surge in consumer investing and trading activity may appear recent due to increased media coverage during the COVID-19 pandemic. However, we have been forecasting demand for these services for the past ten years. Just as payment methods and money management have been revolutionized, a similar shift is occurring in how and where individuals invest.”

Following our observation that Accel recently participated in Public.com’s latest funding round, having previously led its Series A, B, and C rounds, Gandhi elaborated on the factors underpinning his confidence in the company’s future. These include a “diversified business model, focused on community and education,” referring to Public’s initiatives to “enhance financial literacy among its users and cultivate long-term investment habits.” Gandhi noted that these efforts appear successful: “90% of their 1 million investor community are focused on long-term investments” – distinguishing them from the speculative traders that some observers are concerned about.

Both Accel and Index are now extending this same conviction to other consumer fintech startups. Accel’s investments include companies in various international markets, such as Flink in Mexico, Acko and Scripbox in India, Melio in Israel, Monzo in the U.K., Lydia in France, Trade Republic in Germany, and Xendit in Indonesia. Hammer indicated that Index is actively seeking fintech startups “with the potential to significantly impact the financial services market, alter consumer behaviors, and broaden access to financial resources.”

Accel and Index are not the only firms seeking out the next generation of fintech innovators globally. For example, Bux, often referred to as the “European Robinhood,” recently secured $80 million in funding led by Prosus Ventures and Tencent, with participation from ABN Amro Ventures, Citius, Optiver and Endeit Capital, alongside existing investors HV Capital and Velocity Capital Fintech Ventures.

Investing Compared to Trading

Robinhood is actively seeking to redefine its image, moving beyond being solely recognized as a platform for short-term, speculative trading. However, reports from TechCrunch indicate that a substantial portion of its revenue generated from Payment for Order Flow (PFOF) originates from options trading activity.

Alternative revenue streams are emerging within the surge of savings, trading, and investing. Public, for instance, incorporates a tipping feature as one such method.

Both Public and M1 Finance are banking on the idea that a focus on long-term investing can establish a stable base for many of the companies currently being discussed. This strategy aims to foster sustained growth.

Brian Barnes, CEO of M1 Finance, shared with TechCrunch his belief that while trading volume may decrease as pandemic-related restrictions ease and alternative entertainment options become available, investing activity “should remain as strong as it is now.”

M1 Finance has consistently prioritized Assets Under Management (AUM) as a key metric, recently surpassing $4 billion after reaching $3.5 billion AUM in March. This performance supports Barnes’ optimistic outlook.

The CEO anticipates continued acceleration in the growth of M1 Finance’s AUM. He stated his expectation that “AUM at M1 to continue to accelerate” in the foreseeable future.

This projection is based on the observation that users typically build substantial accounts on M1 Finance over a period of one to two years. Furthermore, the first quarter of 2021 represented the company’s strongest quarter for new customer acquisition.

Consequently, a significant influx of new users is contributing assets to the M1 Finance platform.

Leif Abraham, co-CEO of Public, echoed this sentiment, explaining to The Exchange that while the day-trading market is subject to fluctuations based on economic cycles, his company is dedicated to “helping people build their portfolios,” which tend to remain intact even after periods of intense market activity.

Therefore, the core takeaway is that revenue models heavily reliant on PFOF and trading are particularly vulnerable to market volatility. However, diversifying income streams and prioritizing a variety of financial activities could enable continued expansion for several key players in this sector, even those initially known for catering to their most active and vocal users.

Analysis and Future Outlook

Investors and companies actively involved demonstrate optimism, but what is the perspective of industry analysts? To gain a more objective viewpoint, we consulted Robert Le, a senior emerging technology analyst at PitchBook, and his assessment is largely encouraging.

His perspective on the pandemic serving as a catalyst for increased retail investing aligns with insights from other sources. However, he broadened the discussion by highlighting that the emergence of a new, more informed, and engaged generation of retail investors is beneficial for fintech companies.

These companies are facilitating trading across diverse asset categories, encompassing public equities – such as those offered by Robinhood and Public.com – as well as cryptocurrencies and NFTs (Coinbase, Gemini), real estate (Fundrise, Roofstock), and alternative investments (Yieldstreet, Moonfare).

This suggests the trend is likely to persist, though individual company success isn't guaranteed. Le forecasts, “We anticipate continued strong growth for these platforms in the medium term, accompanied by significant consolidation over the long term.” Revenue generation will likely be a key determinant of ultimate market leadership.

Consequently, the number of monthly transacting users (MTUs) may not be the most crucial metric for identifying successful companies, as it doesn’t necessarily correlate directly with revenue. A significant portion of Robinhood’s Payment for Order Flow (PFOF) revenue originates from options trading.

For example, in Q4 2020, options trading generated $142.3 million of Robinhood’s $221.4 million in PFOF revenue. This contrasts sharply with the $6.1 million earned from trading stocks within the S&P 500, with the remaining $72.9 million coming from stocks outside the S&P 500.

This situation prompts consideration of Robinhood’s ability to balance growth with investor safety, given the inherent complexities of options trading, which may be unsuitable for novice investors.

Nevertheless, a return to traditional brokerage firms by these new mainstream users seems improbable. The elimination of trading fees, spurred by Robinhood’s commission-free model, has likely made a reversal in this area unlikely.

More broadly, it will be crucial to observe the evolution of digital transformation trends accelerated by the pandemic lockdowns. Initial indications suggest some of these trends are beginning to moderate, as evidenced by Netflix’s lower-than-expected revenue growth in Q1 2021.

We anticipate these trends will remain elevated compared to pre-pandemic levels, but we will continue to monitor and report on any significant shifts.