How can Robinhood afford 3% cash back on its new credit card?

https://lex.substack.com/p/fintech-how-can-robinhood-afford

by spking • 2 years ago

13 22 2 years ago

lex.substack.com

dubcanada• 2 years ago

I am a bit confused, Robinhood is not personally giving everyone 3% cashback, they are taking their profits from credit card fees and giving them to people as a form of cashback. Same as any other cashback credit card. 3% is unheard of but it is not weird for a new player in the market to shack things up by offering a deal for a bit to gain customers, and then dropping it to 2.5% -> 2% -> etc slowly once they have traction.

lxgr2• 2 years ago

Given that merchant fees are typically lower than 3%, and that there's also scheme fees, cost of capital (in a post-ZIRP environment), operational, and fraud costs to be paid from that, (much) less than 3% actually ends up with the issuer (which they can then share with Robinhood as the program manager).

In fact, interchange fees are actually public, so you could even look them up and do the math:

https://usa.visa.com/content/dam/VCOM/download/merchants/vis...

https://www.mastercard.us/content/dam/public/mastercardcom/n...

idopmstuff2• 2 years ago

My suspicion is that this is a bad bet by RH on user acquisition. Specifically, they've modeled the cost of this acquiring a customer this way against their ARPU and determined they're going to make money overall. What they're ignoring, however, is that they're going to get people self-selecting into this offer who don't match the profile of their existing users.

If right now they've got retail traders who like to trade a lot (and thus give them meaningful revenue) and they can acquire more of those with the economics of this offer, it's almost certainly a winner for them. If they instead end up acquiring frugal, credit card churning type folks who aren't going to trade on RH at all, it's going to be a loser. I bet on the latter.

lxgr2• 2 years ago

There are plenty of >3% rewards (in limited categories) credit cards out there. Some are even paying 4% or 5% (usually with a cap, and sometimes with a yearly fee).

I can only assume that there will always be a certain fraction of users that are a net loss to the issuer, i.e. those that pay their credit card bills in full on the due date and maybe even only spend in the categories where the issuer makes a net loss per purchase.

Given that these cards and their issuers are still around, it must be working out for them on average.

idopmstuff2• 2 years ago

True, but a lot of those are premium cards with high fees, ones with implementations that really minimize usage (like the rotating monthly opt-in categories that have limits on how much you can earn), or ones where the user generally has a broader relationship with the issuing bank that makes them net profitable even if the card is a loser.

RH seems to be going for the third option, but I just don't think they're going to be able to make it work in the same way someone like Chase can.

MarkSweep• 2 years ago

One revenue source the article does mention is marketing / advertising commission they likely get when a card member uses the card to redeem for products or travel. Presumable the merchants pay a commission to appear in the redemption store, as a customer acquisition cost.

Also maybe Robinhood sells your purchase data to databrokers? Or maybe that is already done by VISA and they don’t get a cut of that?

BobaFloutist3• 2 years ago

It's, per the article, not really no annual fee, you can't get the card without paying them at least $50 a year for an account with them, where the cash ends up (and then you have to figure out how to extract).

On top of that the article makes the classic mistake of saying it pays for itself if you spend $166 a month, but it only really pays for itself if the marginal value of using the card over a generic 1.5% cashback card on the things you can't get 3% for already is more than $5 a month. Things like high cashback percentages for the first $X a month in specific categories make this intentionally hard to calculate, and are part of why I never really got into optimizing my credit card benefits. It's obnoxiously hard to compare.

dkjaudyeqooe3• 2 years ago

There are plenty of 2% cards (eg SoFi) and 3% cards for groceries (Capital One Savor). I spend the most on the latter.

If you use Amazon a lot you can get 5% back on that (Chase Amazon).

There are also 5% back for certain categories such as eating out, some time limited (Discover, Chase Freedom).

dangus3• 2 years ago

I wouldn’t count the Amazon card because unless you subscribe to Amazon Prime at $140 a year you can’t get that rate.

I canceled my Prime membership and instantly the reward rate dropped to 3%, which is a pretty crummy store card. Compare to Target as an example - 5% without the pricey subscription.

You have to buy an insane amount of stuff from Amazon/Whole Foods/Fresh to make that product make sense above and beyond other rewards offerings.

dkjaudyeqooe3• 2 years ago

There's also Paypal MAstercard which gives you 3% on all purchases using the card through Paypal.

testval123• 2 years ago

There are no annual fee 2% cards without any hoops. If you don't care about the other perks for Robinhood Gold, the break even would be $50/.01 = $5000 of spend.

coolspot2• 2 years ago

Citi DoubleCash is 2% on everything, no hoops, no annual fee.

Z_I_F_F• 2 years ago

The fidelity credit card is exactly this if you use Fidelity for your checking account. 2% cashback on everything, goes directly into your bank account.

But the website and app UX for their credit card is awful. Everything is a hassle.

BobaFloutist3• 2 years ago

And again, that's $5000 of spend outside of categories you can get better in.

Apocryphon• 2 years ago

“Three percent? How can that be profitable for Tenev-Bhatt?”

https://youtu.be/bYM6tWIjr-I

dangus3• 2 years ago

First off, you should know 2% cash back no questions asked is already pretty much available on a no-fee card (Citi Double Cash).

This is effectively a $50 annual fee card.

Next, the redemptions have limitations:

The cash back has limitations as to how it can be redeemed — (1) purchases at select merchants directly through Robinhood’s shopping portal; (2) booking travel through the travel portal; or (3) redeeming as cash to be deposited in the Robinhood brokerage account, which is set up automatically

So that means that you can put cash in an account that’s going to tempt you to invest with Robinhood, which makes them money. There is at least some friction to withdrawing it and that withdrawal doesn’t happen automatically.

Plus, that account pays no interest like an online checking or savings account does.

jacobgkau• 2 years ago

I use the PayPal Cashback Mastercard (2% back on everything, 3% back on PayPal purchases, no annual fee). It deposits the cash back into my PayPal account, but I'm also able to make card payments from my PayPal account, so I typically just redeem it every month and then immediately pay it back onto the card account before I pay the rest of the balance off normally.

I wonder if the Robinhood setup will allow making card payments from the brokerage account like that?

For the PayPal card, they honestly did get me to start clicking the PayPal checkout button on websites instead of the credit card button when they added the 3% back on those in 2022 (which incidentally made dispute resolution way easier once when I ordered from a no-name website that never shipped my order or responded to inquiries, since I was able to handle it via PayPal purchase protection rather than a credit card chargeback). Aside from that, I haven't been tempted to use any of PayPal's other services-- and Robinhood doesn't have a checkout system AFAIK, so they can't pull that one off.

How can Robinhood afford 3% cash back on its new credit card?

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