Robinhood Primes Itself for More Consumer Finance with Self-Clearing

October 10, 2018

By Tanaya Macheel

The stock-trading start-up Robinhood has built its own clearing system that will let it clear and settle transactions and custody assets for its now six million customers without using any third parties.

The company expects Clearing by Robinhood, a two-year-old regulatory and engineering project, to provide a faster and cheaper service than third-party solutions. Co-CEO Vlad Tenev likened it to Apple ($AAPL) building its own chips in-house or Amazon ($AMZN) running and investing in its own fulfillment centers. Clearing, he said, is a foundational layer, but it impacts the user experience.

“We’re getting rid of all of our third parties and vertically integrating the entire core system,” Tenev told Cheddar. “This is going to lower cost to us in addition to our customers and help us defend our low margins and excellent customer proposition. In the future it allows us to move a lot faster. We won’t have to depend on other third parties to modify their systems to handle the type of experience we want to offer.”

Robinhood is reportedly talking to the Office of the Comptroller of the Currency, which supervises national banks, about offering banking products like savings accounts. The company has declined to respond to questions about those reports, though its other CEO Baiju Bhatt told CNBC earlier this year that he expects Robinhood to look “like a full-service consumer finance company” within “the next couple of years.”

Earlier this year, Robinhood introduced options and crypto trading. That’s been one of the biggest challenges for the Clearing team, Tenev said, since those weren’t part of its offerings when the project began two years ago, and the team has had to work on integrating them anyway. That will be an ongoing challenge as Robinhood unveils more financial products in the future.

“Clearing by Robinhood will have to support everything we currently offer,” he said. “If you use Robinhood a customer can sell their crypto and use the proceeds to buy stock, and that experience is very smooth. That’s made possible by a very tight integration that Clearing will further."

In May, the company reported four million users, compared to six million today, and $150 billion in transactions. Tenev and Christine Hall, the product lead for Clearing, declined to disclose any details about its transaction volume growth since then.

The company began notifying users Wednesday that their accounts would transfer to its own clearing system over the next few months. Hall said it’s too early to tell the aggregate financial impact.

The largest brokerages – including Charles Schwab ($SCHW), E*Trade ($ETFC), Fidelity Go and Fidelity Investments, Interactive Brokers, Merrill Edge, TD Ameritrade, Tradestation, and Vanguard – are also self-clearing, though it's most likely they rent their systems rather than use one built in-house.

“Most brokers don’t build clearing systems themselves because it takes a lot of time, capital, and interfacing with regulators,” Tenev told Cheddar. "Because we pride ourselves on being a tech company first and have been solving problems with software and engineers rather than humans, we decided to build our own system from scratch.”

For full interview click here.