Robinhood’s Cash Management: A Story Of Why Innovation Always Wins

Back in 2013, a small and relatively unknown company called Robinhood came up with a big idea: zero-commission stock trading. At the time, brokerage account operators like E*TRADE Financial (NASDAQ:ETFC) and Scottrade were charging a whopping $7 per transaction, so this idea of saving $7 on every trade caught the eye of investors.

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Sure, some were skeptical. A lot weren’t. Less than 30 days after launch, the waiting list for Robinhood’s mobile-focused, zero-commission stock trading app had 100,000 people on it. About nine months thereafter, that list had ballooned to 500,000 people.

That was five years ago. Today, Robinhood has at least 6 million users (as of year-end 2018), is one of the most popular brokerages among young investors, and — more than anything — has disrupted the entire stock-trading game through innovation.

Evidence? Over the past two weeks, Charles Schwab (NYSE:SCHW), E*Trade, AmeriTrade (NASDAQ:AMTD) and TradeStation have all cut their commission fees to zero to match Robinhood.

The moral of the story? Innovation always wins out. You had a static stock trading industry with big fees. Along came Robinhood with an innovative idea to eliminate those big fees by doubling down on earning interest on uninvested cash in customer accounts. Robinhood’s big idea upended the whole industry. Now, Robinhood is leading the stock trading industry into a commission-free world.

But, that’s not the end of the story. Robinhood is back at it again with yet another innovation — a cash management and debit card program that allows customers to earn interest on their idle cash and also spend their trading profits. This innovation could be just as big as the zero-commission innovation.

The implication? Robinhood’s continued innovation will keep it one step ahead of peers, and provide persistent challenges for competitive brokers.

What is Robinhood Cash Management?

Robinhood Cash Management is a new program from Robinhood that has two parts, both of which represent innovative breakthroughs in the stock trading world that will ultimately result in consumers continuing to flock to the Robinhood trading app.

The first part is that investors can now earn interest on their idle cash. Specifically, Robinhood is offering investors a variable annual percentage yield (APY), based on market factors, which presently hovers at 2.05% – largely above what is offered by peer institutions that have similar APY programs. Importantly, it is all insured by a collection of large banks.

The second part is that investors can now directly spend their Robinhood trading profits using a Robinhood debit card, backed by Mastercard (NYSE:MA). Specifically, everyone who enrolls in the cash management program, will also receive a Robinhood-branded debit card. The card is linked directly to their Robinhood account, so consumers can spend money in that account directly and immediately.

Consider these two things together. Before, Robinhood was just a zero-commission, mobile-focused stock trading app that young investors love. Now, Robinhood is all that, plus a place where consumers can earn 2.05% interest and spend money. That is one attractive value prop, and much like zero-commission trading’s value prop five years ago, it’s basically unmatched in the stock trading world.

The result? Robinhood’s red-hot growth will continue. Investors, particularly young ones, will continue to flock in droves to Robinhood, and they put more and more idle money into those accounts. Naturally, that implies a exodus of customers and funds for other brokers. Big picture – Robinhood will keep growing, and other brokers will keep struggling.

Why It’s Important

In the investment world, I consistently hark back to one adage which I believe rings true across the landscape: the future waits for no one.

That’s true in the stock trading industry, as it is in all other industries. Robinhood is defining that future by consistently innovating. Peer brokers are waiting for that future — not defining it like Robinhood — and as such, are consistently playing catch-up.

Playing catch-up isn’t a winning strategy. Consistently innovating is. That’s why Robinhood will continue to win in the stock trading world. They are innovating, and innovation always wins.

Zooming out, there are important lessons to be gleaned here for investors. Buy the stocks of companies that are like Robinhood – consistently innovating, improving their operations, and gaining market share. Avoid the stocks of companies that are like Robinhood’s peers – consistently getting beat to the punch line, playing catch-up, and losing market share.

Which stocks fall into that “Buy” category? I’d recommend taking a look at this list of next-generation growth stocks to buy for the long haul, as all of them are doing exactly what Robinhood is doing — innovating and defining the future.

Bottom Line on Robinhood

Robinhood is winning. Its competitors aren’t. And, it’s all because Robinhood is innovating while competitors are playing catch-up. It’s that simple.

Let this be lesson for investors in all industries. Bet on innovation — not on incumbents — because innovation always wins.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

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