Robinhood needs a new business model

If you don’t know what’s been happening with WallStreetBets, $GME stock, the NSCC, and Robinhood + other e-trading platforms, listen to Chamath Palihapitiya explain starting at 2:14:

Now Robinhood has raised a shit ton of money:

They’re also going to need to change their business model and rebuild the trust they are losing from their user base.

Because their real problem isn’t the mistakes, it’s the business model.

In the video, Chamath explains that Robinhood’s real customers are the prime brokerage institutions—the “apex predators” of Wall Street, as Sacks eloquently describes them. Specifically, RH sells your data to them. What kind of data, you ask? It’s called payment for order flow. (Chamath explains in above video, 13:45)

This gives the Apex Predators the chance to buy before everyone else, if the little guys, the retail investors—us!—notice a big opportunity and start buying a stock or option. It allows them to make money of their own, which keeps them fat & happy… and is perhaps the reason they haven’t tried to squash Robinhood out of existence (yet).

If this existed just a couple years ago, it wasn’t public yet. But now it’s out, and we’re once again feeling what it’s like to be the product, as we’ve learned we are for Facebook & other “free” B2C platforms with a B2B business model.*

*See The Social Dilemma on Netflix if you’re not familiar with this.

Caught red-handed, do they… 

While it’s possible for companies like Facebook and Robinhood to maintain a strong market share, I predict that the long-term winners of consumer loyalty will be not the incumbents. They’ll be the companies that align their incentives with consumers’—in this case, retail investors.

As a budding investor, and as a user who’s felt frustrated by their slow—and sometimes radio silent—customer support, I really do hope they’re in it for the little guys.

The question is: what will the winning business model be?