Robinhood CEO talks 24/5 investing, deposits, crypto, M&A, regulation, retail trading

Robinhood CEO Vladimir Tenev joins Yahoo Finance Live to discuss the growth of Robinhood shares on Q1 earnings despite the decline of monthly active users, diversifying revenue streams, new product features, cryptocurrency, banking regulations, and changes investors can expect.

Video transcript

- All right. Now to a company that experienced rocketing growth during the pandemic before going public in July 2021 at a valuation of about $32 billion. A beneficiary of low rates in the so-called meme stock craze, it saw use among younger retail investors and boom, since then shares have had a tough ride. The story last year was weaker trading activity amid economic uncertainty and restrictive central bank policy.

Since then, there has been a push to branch out and diversify revenue streams. The company beat the street with its first quarter earnings, but the big announcement, a 24 hour trading platform five days a week, it launches next week. And here to tell us more, Robinhood CEO, Vlad Tenev. Vlad, I am delighted to welcome you back to Yahoo Finance. It has been too long. And it's really a pleasure to have you with us. And indeed, this push that you guys have been doing to diversify your revenue streams, it did seem to pay off, particularly in the first quarter. So talk to us about this diversification. What the business looks like now and what investors need to know.

VLADIMIR TENEV: Yeah, absolutely. I've been incredibly proud of the work that we've done to diversify the business. Before you had mentioned Robinhood did quite well in a zero rate environment. So the question was, can we adapt to a high interest rate environment? And when rates started their rapid rise last year, we saw opportunities for our customers. We doubled down on improving the customer experience for our more active traders. And we also rolled out products like Robinhood Retirement, which is the first IRA with a built in 1% match, as well as Robinhood Gold, which gives customers 4.65% APY, and up to $2 million in FDIC insurance.

So customer behavior certainly has changed. But I think we've been doing an amazing job just giving customers the things that give them the most possible value given the current market environment. 24/5 is another example of not just giving a product that active traders really value and allows them to manage their risk better, but it's us pushing the industry forward and innovating in the same way that we did by launching zero commissions and no account minimums, the same way we did by launching fractional shares trading. And of course, with the recent gold and retirement offerings.

So trading should be around the clock. It should be untethered from US East Coast working hours. And I think this moves it a step forward and really closer to what it should be, which is technology rather than some brick and mortar legacy institution.

- Vlad, Brian here. Good to see you here back on Yahoo Finance. Do you think these initiatives will help attract the next generation of investors?

VLADIMIR TENEV: I think we've always been focused on the next generation of investors. I think for 24 hour market, in particular, there's two things that-- two groups of people that it's very useful for. One is active traders who want to be able to react to breaking news, no matter what time it arises and manage their risk. Also I think it's very useful, you may have noticed on the earnings call that we've been talking more and more about how we're expanding internationally. Big part of our mission is making our services available to people outside of the US who, in some cases, are even more under-served than American consumers. And the experience of investing is more difficult overseas where there's very little overlap with wake hours. So I think this sets us up well to serve those customers and provide them a native experience much like those in the US get.

- A product feature like this doesn't roll out unless there is a significant kind of additive or net benefit, right, Vlad? So what type of revenue additive do you foresee 24 hour trading giving Robinhood or providing to the business?

VLADIMIR TENEV: Well, I think the-- clearly, we think that this is going to lead to increased volumes. But perhaps the most important thing is just increased customer satisfaction. If you look at active trader net promoter score, that's up 30 points year over year. So our active traders are very, very happy, even in the face of the challenging macro-environment. Overall customer NPS is up 20 points year over year as well.

And we believe if we keep innovating and keep our customers happy no matter what the macro conditions then it's all a part of deepening our relationships with our customers even further. And 24 hour market is sort of, certainly a component of that.

- Vlad, in reading through your conference call and your earnings statement, I've been trying to wrap my head around the different ways that you guys make money, back to this sort of diversification idea. You're not a bank, right? When people deposit money with you guys, it's custodied elsewhere, is my understanding. But you do make interest income on those assets. How does that work? Do you pay a fee to the bank and then you can invest that money and collect interest income? Like, what's the sort of mechanism there?

VLADIMIR TENEV: So there's a couple of different products that-- that come into play here. You might be talking about the Robinhood Gold offering, where customers get 4.65% APY on their cash and $2 million in FDIC insurance. So that's actually-- it's a really interesting type of product. It's called the banks sweep product. So what happens is we sweep customer cash to a network of up to eight banks. Starting June 1st, the number will go up to eight, which gets you the $2 million of FDIC insurance per customer.

And what happens is those banks give the customer the high rate and they give us a rebate. If you look at the 4.65% APY right now, it is an incredibly competitive rate. It's hard to beat. But part of the reason for that is the Fed has raised-- the Fed funds rate to North of 5%. So there's just more interest income to be had and we're passing a very large portion of that to our gold customers.

- At some point, are you interested in getting a bank charter, or is that not in the cards or in the plan for Robinhood?

VLADIMIR TENEV: It's something we'd considered in the past. And when we looked at the kind of products that we want to offer, we actually found that not having a bank charter allows us to do the same sorts of things, offer the same value to customers and gives us much more flexibility. For example, if we had a bank charter, we would be limited in our bank account to offering $250,000 of FDIC insurance to customers, which is a large number for most people, but having $2 million of protection, especially in the current environment where we've been seeing the regional banking stress, I think-- I think is a huge differentiator and should give customers that added sense of security in the safety of their funds on Robinhood.

- Vlad, last August, you made a tough decision, I imagine, for you and the team to part ways with about 23% of the staff. But since then, you have really come out with a host of new products. The product pipeline, based on a lot of people that I have talked to, very robust. Has that move allowed the company to move faster? And are you happy with the size of the team now?

VLADIMIR TENEV: It has, actually. I think that, frankly, in 2020 and 2021 when we were dealing with just extreme growth in the face of the pandemic and low interest rates, we-- we hired a lot of people. And the focus was on just meeting kind of immediate needs and ramping up customer support. And I think there's a sacrifice when you-- when you take that on. And the transition to having a leaner operating model, to being scrappier, to doing more with less, it was a painful transition.

But you can see with the product velocity and, not only the products we're shipping, but several products that we shipped last year, adding considerable revenue to the business that the business has been much stronger as a result of some of the changes and improvements that we've made.

- Robin-- I mean, excuse me, Vlad--

[CHUCKLE]

A slip up there. But we know that you've talked about with the business, how important-- even when you were going public, how important crypto was to the growth of Robinhood here. And even as we think about the banking turbulence that took place that you talked about on the conference call, I wonder if there was kind of a quantifiable view or volume of how many users on the platform did decide to tap into crypto knowing that we saw the correlation, at least the time correlation and the price action of crypto with some of the regional banking failures that took place?

VLADIMIR TENEV: You're asking whether during the regional banking failure, there was a spike in crypto activity?

- Certainly. And if there's any way that you could quantify it and how long those users typically stay engaged with crypto products on the platform?

VLADIMIR TENEV: Yeah, I mean, crypto activity has been overall, moderating from the highs in 2021 and kind of early 2022. And, you know, the market did see a little bit of an increase in the past couple of months. And some people do view Bitcoin as an inflation hedge, much like gold. And I think that thesis hasn't really had the opportunity to be proved out because Bitcoin was created in the late 2000s and it's mainly operated in a high interest rate, low inflation environment.

So I think-- I think it's a little bit early to actually definitively say that thesis holds. But I think it makes a lot of sense. And you see a lot of customers turning to it as a long-term investment and not just a speculative short term trade.

- Vlad, one of the things that your CFO talked about on the call, even as you guys have been, like many companies, retrenching, right, cutting back, you're not ruling out deploying capital in various ways. One of those ways may be M&A. What would be the kinds of opportunities you were-- you would be looking to add on to the business?

VLADIMIR TENEV: Yeah. As Jason mentioned and as we talked about, we have a strong balance sheet. And that gives us the opportunity to-- to be strategic and to take advantage of opportunities that arise. And it's both investing heavily in new product development as we have been. And lots of companies right now are really focused on not launching new products, as we have been, but kind of maintaining and not losing too much. We've been able to be aggressive on that front.

And on the M&A front, look, we're always on the lookout for opportunities. We want to be extremely prudent. And I think historically, Robinhood has been a company that relied on internal folks for our innovation engine and for rolling out new products and we've built a large portion of the infrastructure that powers these innovative products in-house. But that said, if we see opportunities out in the market to buttress that and to bring in capabilities that could accelerate what we're doing, we're always on the lookout for that.

- I want to ask you about the firm's relationship, and really the industry's relationship with regulators because there was a report this week-- or actually wasn't a report, you guys said regulators are looking into record keeping at Robinhood. And this is something they had looked at with the banks as well. And of course, I think it's safe to say Robinhood, some of your peers as well have been under a lot of scrutiny from regulators since-- really since inception.

Do you think that what they're doing is indeed helping investors? Do you think you've been unfairly targeted? Talk to me about that give and take.

VLADIMIR TENEV: I think as a company that's innovating and taking a leadership position in our space, we're subject to scrutiny, as any big company should be. And our focus has always been on putting regulatory compliance front and center, maintaining great relationships with our regulators and sort of keeping them along-- along the journey. So I don't think that it's anything new. And of course, we're continuing to push hard to innovate in-- in the environment and keep our regulators along and informed as we do so.

- Following the retail trading frenzy that ensued during 2021, early 2021 that led to some halts in specific symbols during that time, you also called on the regulators to make specific changes ranging, but one of them was on settlement times and clearance. Have the changes that have been put forth by the SEC to this point, have they been adequate enough for how your platform operates and what the end users expect of the experience?

VLADIMIR TENEV: Yeah. It's traditionally been a slow moving industry with a lot of legacy infrastructure, right? As we were talking about earlier, 24/5 trading is an example of that, as is the settlement system. I mean, in the past 30 years, the trading hours haven't changed or been updated once. And in that time, period markets went completely electronic. And I think we have a large part to play in pushing that forward. With settlement, as you-- as you mentioned, I did call for real time settlement. And the industry is moving forward with T Plus 1, which is not quite real time, but it kind of shaves the settlement time in half.

And I think you know, some of these things for us might seem like not enough, but you've got to remember, most of these companies are operating on mainframes and legacy infrastructure still. So making these types of changes does take time. And I think that's why things like 24/5, to go from me talking about it to us announcing and shipping something to customers within a year, it's actually-- we're very proud of the team for the work that they've done in making that happen.

- Certainly. There have been a lot of trading platforms that have done very well as a standalone company and some of them, for decades. Some of them have, later on, had to consolidate into some larger banks. For Robinhood, is it a future that you foresee, that you want the company to march forward as a standalone company or does the next leg of growth, from your perspective, look stronger or look more attainable, if there is a combination with another entity out there?

VLADIMIR TENEV: Well, if you look at what drove some of the consolidation that you're talking about, it was really the sort of entrance of Robinhood in the market that caused commissions to go to 0. So when we came in and started offering 0 commissions. For a while, kind of the legacy brokers were ignoring that as a threat. And then in 2019, all of them simultaneously saw that materializing source taking more and more market share that led to them dropping commissions, and they had to consolidate to make the business model work at that point.

I think for Robinhood, starting from the ground up from kind of the founding of the company as a technology company, rather than brick and mortar, has allowed us to stay lean and continue to innovate and drive the industry forward. And with the financial results that we announced, you saw adjusted EBITDA increasing sequentially, revenue increasing significantly year over year. And that gives us a lot of confidence that, not just in a great market environment, but also in kind of the difficult market environment that we're in, Robinhood is continuing to thrive.

- Vlad, awesome conversation. Thank you so much for spending so much time with us. Really appreciate it. Robinhood CEO, Vlad Tenev, and our executive editor, Brian Sozzi. Thanks.

VLADIMIR TENEV: Thanks guys.