There haven’t been any new fintech unicorns for a while, but on Wednesday, the US-based stock trading app Robinhood ended this drought with a $110 million Series C, led by DST Global, putting the startup at a $1.3 billion valuation.
Robinhood offers a free stock trading service and a Robinhood Gold account, which provides users with the ability to make leveraged trades, i.e. borrow part of the capital used to buy shares, as well as other advantages, like being able to trade after hours.
The Gold subscription costs between $6 and $200 a month — the more expensive the option, the more the user is allowed to borrow, up to $50,000. Gold subscribers are also allowed to make trades instantly, rather than waiting a standard three days after making their deposit. Leveraged trades are risky for the consumer as they’re borrowing capital on the assumption that their investment will make a profit. If the market acts against them, and they take a loss, they’re then indebted to the lender. Despite this risk, leveraged trading is popular given the possibility to make a large profit quickly. As such, offering this service will likely prove an effective monetization strategy for Robinhood — and it has likely played a major part in its valuation.
However, consumer education will be paramount to ensuring this strategy is sustainable. Robinhood should be mindful that its product will be used by many who have not previously invested, and as such, might not be familiar with the risks of taking out a loan to buy stocks. This is particularly important as regulators have been getting tougher on tax consumer education. In order to protect itself from ethical charges and regulatory crackdowns down the line, Robinhood will have to ensure and demonstrate that it is making the utmost effort to make consumers aware of the risks of leveraged trading. This will be key as it looks to generate the business needed to justify its valuation.
We’ve entered the most profound era of change for financial services companies since the 1970s brought us index mutual funds, discount brokers and ATMs.
No firm is immune from the coming disruption and every company must have a strategy to harness the powerful advantages of the new fintech revolution.
The battle, already underway, will create surprising winners and stunned losers among some of the most powerful names in the financial world: The most contentious conflicts (and partnerships) will be between startups that are completely re-engineering decades-old practices, traditional power players who are furiously trying to adapt with their own innovations, and total disruption of established technology & processes:
- Traditional Retail Banks vs. Online-Only Banks: Traditional retail banks provide a valuable service, but online-only banks can offer many of the same services with higher rates and lower fees
- Traditional Lenders vs. Peer-to-Peer Marketplaces: P2P lending marketplaces are growing much faster than traditional lenders—only time will tell if the banks’ strategy of creating their own small loan networks will be successful.
- Traditional Asset Managers vs. Robo Advisors: Robo-advisors like Betterment, offer lower fees, lower minimums and solid returns to investors, but the much larger traditional asset managers are creating their own robo-products while providing the kind of handholding that high net worth clients are willing to pay handsomely for.
As you can see, this very fluid environment is creating winners and losers before your eyes and it’s also creating the potential for new cost savings or growth opportunities for both you and your company.
After months of researching and reporting this important trend, Sarah Kocianski, senior research analyst for BI Intelligence, Business Insider’s premium research service, has put together an essential report on the fintech ecosystem that explains the new landscape, identifies the ripest areas for disruption, and highlights the some of the most exciting new companies. These new players have the potential to become the next Visa, Paypal or Charles Schwab because they have the potential to transform important areas of the financial services industry like:
- Retail banking
- Lending and Financing
- Payments and Transfers
- Wealth and Asset Management
- Markets and Exchanges
- Insurance
- Blockchain Transactions
If you work in any of these sectors, it’s important for you to understand how the fintech revolution will change your business and possibly even your career. And if you’re employed in any part of the digital economy, you’ll want to know how you can exploit these new technologies to make your employer more efficient, flexible and profitable.
Courtesy: Business Insider
