SAN FRANCISCO, CALIF. (TheStreet) -- Robinhood makes its official debut on Apple's (AAPL) App Store Thursday and is ready to give the E-Trade (ETFC) baby something new to cry about -- millennial investors.
The world's first mobile-first stock brokerage is, a year after announcing its existence, finally opening its doors to the more than half a million people who have signed their name to a waitlist and have been anxiously awaiting their turn for commission-free trading. If early demand for the one-year-old Palo Alto-based startup is a sign of things to come, then incumbent brokerages such as Charles Schwab (SCHW) , TD Ameritrade (AMTD) , E-Trade, and Fidelity should watch their back.
Robinhood has a real shot at stealing their customers and future profits, especially given that tomorrow's trader is already today's Robinhood user: the average beta user is just 27 years of age and checks the app habitually, around 20 times per week.
For those who have yet to hear the Robinhood name -- it's not exactly a secret in financial circles -- the young Silicon Valley company aims to shake up the status quo when it comes to stock brokerages, which typically require account minimums of a few thousand dollars, and tack on between $7 and $10 commission fees per trade.
Robinhood is just the opposite. A typical Robinhood user can sign up on a Monday and start trading U.S. stocks and exchange-traded-funds by Tuesday. All he or she needs is a linked bank account. There are no account minimums and the company vows to never charge fees for trades, accounts, or money transfers. In fact, Robinhood doesn't expect the vast majority of customers to ever pay anything to use the service, co-founders Vladimir Tenev and Baiju Bhatt told TheStreet.
"When we say 'free,' we mean that we actually don't expect a customer to pay for the service," Bhatt said. "There is no point along the way where we're going to charge you."
The duo, both in their late twenties, met as undergrads at Stanford University in 2005 and have since gone on to start three finance companies together, with the latest idea inspired by the Occupy Wall Street movement. The pair, begged by friends and family to do something other than make the rich, richer, set out to pass the advantages of institutional investors on to the average person.
So, despite the name, the Robinhood philosophy isn't about stealing from rich, but rather taking perks often reserved for top-tier investors and giving them to the everyman trader, which most certainly includes penny-pinching 20-somethings with little in savings who just want to own a few shares of a company they like.
"We realized that there was a lot of distrust on Wall Street, especially among younger folks, and we wanted to build a company that treats its entry-level, first-time customers on equal footing with the wealthy," Teney said. "If you look at other brokerages ... the wealthy customers actually get the better deals. They pay lower commissions. They have more favorable margin rates. The customers that aren't very wealthy and have lower account balances get the worst deals. We just felt that was quite wrong. The customers that need to pay less actually end up paying the most."
This philosophy of giving everyone access to the same tools, and on the device most readily available at all time, has already resonated with hundreds of thousands of young folks who want in on the action. So far, around 80% of people who have signed up to use the service are between the ages of 18 and 29, Bhatt and Teney said.
Thursday, the company will be giving them exactly what they want: the public release of the Robinhood for iPhone application. Robinhood will start going through its waitlist of 500,000 folks at a rapid clip to give them access, with most gaining access to the application in less than two months. Everyone, however, can download and use the app's other features to build their own stock watch list, follow market data in real-time, view historical data and graphs, and check their position on the waitlist.
Of course, the application won't serve all traders' needs. You can't yet, for instance, trade over-the-counter equities, though that is on the roadmap; and just a small percentage of vetted Robinhood users will be able to trade on margin to start.
But that doesn't necessarily mean other brokerages will be sleeping easy. If it's too soon to sound the alarm, you wouldn't know by Fidelity's latest print campaign, which more than hints at the company's fear that commission-free trades will be too sexy a proposition for traders to pass up. Fidelity's latest ad, appearing in Fortune and Wired magazines, reads like a direct assault on Robinhood and says in bold, all-caps type, as pictured above, that "free trades won't make you a better investor." The brokerage is also pitching one year of commission-free trades, though with fine print.
Still, the burden will be on Robinhood, at least at some future date, to turn its heroic proposition into a profit-generating business. For now, the startup has $16 million in cash to play with, provided by a variety of top-notch venture capitalists and celebrities including Index Ventures, Andreessen Horowitz, Google Ventures, musician Snoop Dogg, Nasir Jones, and actor Jared Leto. Robinhood does, unlike most hyper-growth companies at its stage, have a few revenue streams in mind, and will start by generating revenue from margins and pocketing interest-based referral incentives for customers who have cash balances, which are placed in money-market funds hosted by a third-party.
The key to Robinhood's success, however, will be in convincing a generation of Wall Street-averse youngsters to take up trading on its app.
"This is a product that has the potential to expose an entirely new generation of investors to the market," Teney said. "Even though we have half a million people who have signed up already, there are 90 million left in our age group who haven't really started investing ... our big goal is to expose all of those people in the U.S. to the best possible investing tools. Once we accomplish that, [Robinhood] will be a very big company."
--Written by Jennifer Van Grove in San Diego, Calif.
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