Responding to user demand and improving the speed of transfers has been just as important to Transferwise's success as lowering fees.
High fees and bad customer experience were taken for granted in the remittance space for a long time, said Kristo Käärmann, CEO of Transferwise, who experienced the frustrations of traditional money transfers firsthand while living in London and sending money to his home country of Estonia. A lot less money arrived than expected.
According to Käärmann, banks typically charge a $25 transfer fee in addition to 3-5% of the total transaction. His remittance company, on the other hand, generally charges 0.5-1% of the total transaction value. Käärmann spoke with Rebecca Blumenstein of the New York Times at CB Insights’ Future of Fintech.
With limited competition, there was little incentive for banks to be innovative or transparent within the remittance space, says Käärmann, and consumers and businesses weren’t inclined to leave a bank due to high fees or poor customer experience either. But now, Käärmann says Transferwise, along with others, are making the remittance industry much more competitive. “We can move money from a bank in the UK to a bank in Italy in 40 seconds or less, at a fraction of the cost,” he said. “It costs them [banks] 7x what it costs us.”
But cost and speed are only part of the larger equation. Convenience is also critical, including adding new currencies based on consumer demand. Israel’s shekel is an example of a currency that was recently added by demand and has seen higher than expected transaction volume.
Transferwise, which is based in London, has now expanded their physical presence to Australia, Japan, Singapore, and the US (nearing 800 global employees) in response to user demand. Käärmann noted what the European Union got right and how it helped facilitate the industry. By altering banking requirements, the EU enabled new market entrants, like Transferwise, to offer their remittance services throughout the Single Euro Payments Area (SEPA), which is a new format for cross-border Euro bank transfers. However, while this afforded the company a unique opportunity, it also gave rise to similar services.
As for crypto-currencies, such as bitcoin, Käärmann argues that they are being used more for storage and growth of wealth, rather than payment and transactions.
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Jen: Good morning everyone. I’m Jen Wieczner, I write for Fortune, and I’m here with Vlad Tenev who’s the CEO of Robinhood, that you may have used, you definitely have heard of to trade stocks for free without commissions. So I want to start off by asking Vlad, tell me a little bit about the brief history of Robinhood. You guys started in 2015, and just this year you raised $110 million.
Jen: Which gives you now a $1.3 billion valuation. That’s pretty quick, can you talk about… how do you describe… how do you quantify your growth in that short time?
Vlad: Yeah. So you know a little bit about the history. My co-founder Baiju and I, we met at Stanford at this point over 11 years ago, and we started a couple of companies here in New York in the financial services industry. We came back to the Bay Area in late 2011. We kind of realized we could take everything that we’d learned about how the industry operates in terms of trading and investing, and build a really awesome consumer product and address some of the pain points that people had with investing in the markets. You know, especially the last couple of years, people have been super distrustful of wall street. It’s felt like a rigged system for them, and we felt it was an amazing opportunity to sort of introduce a new product in the space that addresses a lot of these issues that people have had with consumer finance.
And so, we didn’t know anything about building consumer products, we didn’t know anything about mobile applications. We were very fortunate to sort of hit upon this pain point so directly. And I think Robinhood kind of had a ton of momentum just out the gate. You know, we had about 100,000 people sign up for our waitlist within a week of announcing the product, this is all prelaunch. Almost a million sign up over the next year, while we were in beta and still before launch. And over the two years that we’ve been live, we’ve gotten over 2 million customers transacted over 50 billion in traded volume and saved customers over half a billion dollars in trading commissions. The fees that they would have paid elsewhere that would have gone to the profits of another broker, potentially. So that’s made us the fastest growing broker of all time. And, you know, we’ve just been tremendously lucky to have so much momentum, and we’d launched Robinhood Gold just this past fall, which sort of furthered that and blew away all of our expectations. We had some really really aggressive expectations for how we thought Gold was gonna do, and then it launched, and it basically tripled our expectations. So, as you mentioned that led to kind of the fundraising round earlier this year led by DST, and a lot more expansion coming in 2017 and 2018.
Jen: And the idea of free stock trades is very simple, and yet nobody else is really doing it, at least not from the get go. Can you talk about how did you hit on that idea, and when did you realize that it was a big deal?
Vlad: Yes. So in our previous company which we started in New York, we were basically building automated trading software for institutional investors. So if you think about the last 20 years, institutional has undergone a lot of changes and those changes are kind of been slow to be adopted by consumer companies. So, you think maybe 20 even 30 years ago, if you’ve seen “Trading Places” or any of those movies, you kind of have this view of trading as people sort of jumping around in this pit and kind of boxing each other out, sort of waving these paper tickets in the air and the tallest person kind of gets the trade done because everyone can sort of see them, and they get they get an automatic advantage there.
So, that was kind of what I thought trading was like when I grew up watching these movies. And it wasn’t until sort of 2009, 2010 that I realized well, the New York stock exchange is basically a museum at this point, all the trading actually happens across the river in New Jersey in these data centers. Everything’s been completely automated at this point. The entire process of placing a trade to even some of the back office settlement, it’s all completely automated. So, you know, that $10 cost that most people pay or are used to, it’s kind of a legacy cost. It’s sort of like a tax that’s unnecessary in my opinion, and it would be sort of like if you were paying $10 to send an e-mail, like, the actual infrastructure and processing is remarkably similar from that standpoint.
The reason nobody has really lowered the cost is twofold. One is there hasn’t really been a new broker in the space to apply that type of pressure to the incumbents in the past. And nobody is gonna be super gung ho about lowering their revenue. And the second piece is just that these entire businesses have grown up in sort of an area where there wasn’t that much automation, so things were being done manually. There were a lot of people involved in the processing of the transactions, and that raises the costs and makes it almost necessary to charge a commission to kind of compensate for these other costs and servicing. And that’s an area where consumer brokerage and banking hasn’t caught up to institutional. The institutional players have automated everything, they’re doing things with small groups of people that would have taken hundreds of people to do in the past. And we were sort of the first to bring that to retail consumers with Robinhood.
Jen: Yeah. And you when you launch can you talk about a little bit of the story of when you launched. I mean you haven’t done a lot of advertising, in terms of how did you spread the word, but you had the takeoff, or the pickup was pretty instantaneous, right? Can you tell me about that?
Vlad: Yeah. So I’ll preface it to say that we didn’t really know what we were doing, so we had a mobile app that we had sort of built and launched prior to being approved as a broker dealer and announcing Robinhood. And the idea was we would take this mobile app and just add trading to it. And the app was sort of like, it had every feature you could imagine using in a financial product crammed into a sort of a mobile experience. So, you could rate stocks buy sell and hold, you could upload news, you could have a profile, follow other investors, message them, and it wasn’t very successful. We had to sort of like claw tooth and nail to get a couple of hundred users here a couple of hundred users there. And it was very challenging.
So when we were sort of preparing Robinhood, when we got the approvals, we were ready to announce to the world that we were launching this service, the furthest thing from our mind was that like this would go viral on Reddit and we wouldn’t be able to keep the site up and like thousands of people would sign up. We pushed it live maybe a couple of weeks before we had our press announcement, we were testing it, we were like wiring stuff up. And then one Friday night, I still remember sort of very very clearly, we go home, I wake up the next morning I open up Google Analytics to just see what’s going on, and I see 600 people on our website. And this was a Saturday morning, and I’m trying to figure out what’s going on maybe we’re going through some kind of distributed attack or something, that was the first thing that came to my mind. But then I see well actually, there’s a lot of people coming from news.ycombinator.com. So I click on that, I see we’re number three on “Hacker news”, behind Chinese landing a spaceship on the moon and Google buying Boston Dynamics.
I still remember the top 10 of “Hacker news” that day because I had these screen shots that I that I look at. So it was like, “This is awesome, we’re number three on ‘Hacker News’ and this is some major news, we can’t possibly get to number one.” Right? But a couple of 10 minutes later we passed Boston dynamics, and about 30 minutes later we passed the Chinese moon landing. So we are actually sort of the number one story on “Hacker News.” And I’m calling my parents, I’m screen shotting my computer, and we realize holy crap this is Saturday, nothing’s working, we’re not sending e-mails. Everyone gets in on the office, and we basically launch on a Saturday. Which was the one thing people told us very early on we should never do if we’re planning any sort of press event launching on a Saturday is like the worst thing you could possibly do. But it worked out for us because I think we had something like 10,000 people sign up that day. 50,000 the first week, and then almost a million in the first year on our waitlist. So, it was the largest pre-launch demand of any financial product.
Jen: And has that influenced your marketing strategy or your need to market and how much you spend to acquire customers?
Vlad: I think it really helps to have that sort of wind at our backs from the very beginning because it kind of focused us to sort of double down on what was working. And what was working at that point was people really understood our clear value proposition. Everyone understands sort of when looking at our website, what product we’re offering and why it’s important. And I think this is really one of the benefits of growing up in this country, is that the stock market is kind of engrained in people’s consciousness and they realize from a very early age that this exists, people invest. This is like one of the unique things about being here.
So when you go to the Robinhood website or at least back when we’re launching, and you see, “Stop paying $10 a trade.” People kind of understand what that means, and we’re able to communicate and address a pain point in sort of one sentence. I think from early on we were very very conscious of the importance of messaging and communicating clearly and simply to our customers and making things as easy as possible to understand. I think that’s what led to people sharing the message organically, and that’s kind of sort of snowballed in a lot of ways, and we’ve been able to become really really big while relying predominantly on word of mouth growth. And in our industry, that’s been incredibly rare. I mean, people have never really seen a finance company grow through word of mouth, they grow entirely on the backs of paid advertising. If you look at the other brokerages and a lot of fin tech companies that have popped up in the in the past couple of years. So, yeah, when we sort of saw that we actually could have organic growth, I mean, we just worked to double down on that and make sure that whatever was working we could keep going.
Jen: Because you’re not charging commissions, you’re giving up significant revenue stream that other brokers have. Are there costs associated with the trades that you’re processing? Are there are risks in not charging commissions? Is it sustainable for you guys to keep doing free trades, zero commission trading?
Vlad: Yeah, this is sort of one of the misconceptions in our space. If you look at the consumer finance industry over the past 30 or 40 years, it’s sort of short term greedy in that the focus is not on the customer, it’s on the profits. So, if you look at kind of a typical investment transaction. Say someone wants to get started, buy their first stock. They wanna to invest $100 or $200. Well, you’re taking away 5% to 10% of the value of that transaction just in fees alone, which is entirely too much. We’d like to get to a world where starting with investing but sort of any financial transaction that you would want to do, the consumer gets 99.9 if not more of the value of that transaction. Sort of aggressively lower the margins over time and pass back the majority of the value to customers.
We look at companies that have been able to do this quite successfully, you sort of think about Amazon in the retail e-commerce space. I mean, aggressively attacking margins not just in e-commerce but also cloud computing and sort of lowering prices over time rather than raising them as they get more market share. And that’s sort of the approach that we wanna take. Over time, we want to only improve our economics and give customers more value and the costs in doing that business become sort of amortized over a larger customer base. So, as we get bigger and bigger, we should be able to accomplish, and we have been able to accomplish better and better economics.
Jen: And you have Robinhood Gold which is your main revenue stream right now. Can you talk about that and what are consumers getting or investors getting for their money?
Vlad: Yeah. So Robinhood Gold starts at $10 a month, and people get some very very valuable tools including margin, and the ability to buy and sell stock in the pre-market and in the after-hours. So, for more experienced investors and more active investors, Robinhood Gold just solves two major pain points at a very reasonable cost. So, that’s just been like I mentioned before blowing away our expectations. It’s been growing really really quickly, and people love Robinhood Gold.
Jen: Do you know how quickly it’s been growing this year?
Vlad: 17% month over month.
Jen: Wow. So, you know, talking about the growth, going back to the Snap IPO in March that was a pretty…that was a banner day for Robinhood, can you talk about what that was like from your side of things? What did you learn about your user base? And in general, just what was that day like for Robinhood?
Vlad: Yeah. I mean Snap is a good example, but basically, any time there’s sort of a big IPO, consumer IPO, or even a large economic event or a large world event, we feel it really really directly, and it’s super exciting in our office as a result. So, you look at Brexit last year, you know where we saw record volumes, I think double or triple what we’d seen before. And we’re kind of anticipating it because we were looking at the news the night before. We saw, okay this happened, we’ve got to make sure that we’re ready for it. So, on days like that everyone gets in super early, which on the west coast it’s 5:00 5:15 in the morning before the open. And we’re just kind of watching it, we see, you know, in many cases double, triple, the normal amount of traffic that we see at the open. We make sure our systems are healthy, we spin up more servers to serve the additional traffic. And, you know, every time we’ve had one of these events it’s sort of has sort of lasting repercussions it, brings more people into the market.
So, for example, the election, Brexit, the snap IPO, all of these were sort of local maxima days in terms of new accounts created, trades, transaction volume, and basically buying activity on the platform. So, these are just things that remind customers that, well, there is an event I should be looking at the markets, I should be seeing how they’re reacting, and maybe this is an opportunity to buy additional stock.
Jen: On Snap IPO day, for example, I saw a video of an Uber driver buy a single share of Snap on Robinhood while he was driving.
Vlad: I know, I think that was like… I saw that too it was like #millennials or something, like trading Snap in an Uber.
Jen: So what is the millennial factor in Robinhood, I mean how much of it is a unique gleaming millennial behavior that you’re seeing?
Vlad: It started out being largely younger people, I think it was when we first launch the average age was low to mid-20s. But over time, I think it’s expanded. Now we have over 2 million customers, the average age is 30. So as time has gone, we’re sort of approaching mainstream demographics of the country. And if you look at our user base, we have customers in all 50 states, it’s not just by coastal and New York California but lots of people in the Midwest. And it’s been tremendous. I think for new products they tend to lean a little bit younger, just because younger people tend to be early adopters of technology. But if you look at investing in stock trading, I mean this is something people have been doing for hundreds of years. So it is a useful product for people of all ages.
Jen: And are they making money? Because sometimes, you know, if you trade all the time, people say that’s actually not good for making money. Can you tell whether…
Vlad: A lot of those studies were actually done assuming trading commissions, which actually eat into the profits quite substantially. So, there actually hasn’t been a study like that run recently with Robinhood data, but customers are getting in there, they’re doing well, they’re investing. And we see that actually, people do better the longer they’re on the platform. We say this a lot. I think a lot of people don’t realize it, but investing in and trading is a skill like many other skills, you get better with practice and the longer you do it.
So if people start earlier, if they can start 10 years earlier with Robinhood than with anything else in the past, that’s a huge win for us because that’s 10 years of additional experience and 10 years of additional compounding that they have access to.
Jen: Who are your competitors right now? Who do you see as your competitors and what are they doing that Robinhood isn’t, at least not yet?
Vlad: Well the traditional retail brokerages are definitely sort of the first ones that come to mind. I’d say we’re not super competitor focused, we’re much more customer focused. So our process for designing new features and developing them and actually lauching them involves a lot of customer interaction. So, we kind of discover pain points and then think of the best solution to address them. You could kind of see that over the past year with Robinhood Instant first which was remarkably successful, and then Robinhood Gold in the fall. We’ve come up with new solutions to a lot of these pain points that kind of differ from what others have done. Nobody else has thought about charging a fixed monthly fee for something that includes margin before. So, I think the customer and research focus has really been super helpful for us.
Jen: Speaking of pain points, one complaint that I’ve heard from people who use or have used Robinhood, is that the settlement time can be a bit longer. Sort of the time it takes to get your money in and trade, and when you sell a stock, it can take longer to get your money back. Why is that?
Vlad: So that was Robinhood Instant, or that’s at least what Robinhood instant addressed in the early days. I think we launched that January of 2016. As of then, people no longer have to wait the three day settlement period in order to recycle their funds from selling stock. So that’s actually an SCC rule called T+3. And I think there’s discussion of it moving to T+2 and T+1. But there’s a period after which you sell a stock where sort of it’s unsettled, and prior to Robinhood Instant, we didn’t have a good solution for letting customers access their funds. And we heard from customers and we addressed that really quickly. So, over the past year and a half, that’s no longer an issue.
Jen: Given all the other parts of the financial system that you have to work with are there unique challenges for a small company? Do you have to fight to get good service or to get the rates that bigger brokerages are getting?
Vlad: Yeah, I think we obviously have to work with third parties and partners, we’re part of a global system, and we rely on third parties for things like banking. You know, when you want to fund your Robinhood account you have to have money in a bank, and we have to sort of streamline that process and move the funds over. And there’s a limit to how much we can streamline things like that because just everyone has a bank account and banks transfer money through ECH and a lot of people don’t really like ECH. It’s kind of a crafty standard that, there’s been tons of proposals to improve and change over the past several decades. But we kind of have to work with it, and it takes a lot of time to sort of work around issues and make sure we get that customer experience that customers expect from using products nowadays.
Jen: So in April, you raised $110 million, and you’re still a pretty small company I something like less than 100 employees.
Vlad: That’s right.
Jen: What are you investing in? Are you gonna be hiring more people? What are your priorities?
Vlad: Yes. So Robinhood is from the very beginning looked a lot different than a typical financial services company. We hire mostly software engineers and product designers and product folks. In fact, over half the company is engineering and product, and we also have a large data science team. You know, double digit percentage of our company are Ph.D.’s. We have a lot of experts in things like machine learning, which is very rare for a brokerage or a financial company. And a lot of that has resulted in automation and new processes and tools that allow us to on board accounts very quickly and also service them really efficiently. So a lot of those improvements have kind of been on the back end, and some of them have been user visible.
One example is the instant onboarding. So with Robinhood, you can go from downloading the app to buying a stock in less than five minutes, it was an experience that really wasn’t there before. People were used to kind of multiday or multi-week waits. A lot of that’s accomplished by the application of data science and automation on the back end. And sort of this year, we’ve sort of been doubling down on that, bringing in more people that are experts in machine learning. And the goal is to sort of surface a lot of these insights and a lot of that muscle to customers so that they can make better trading decisions.
So I think really this year we’re gonna go from Robinhood being the best and most economical way to transact, into it being hopefully an integral part of a customer’s decision-making process in making an investing decision. So, we’re really trying to do a lot more to help people make more informed decisions.
Jen: Given all that data, are there hedge funds algorithmic traders who are coming to really eager to get a piece of that data? And how do you work with them? What do you tell them?
Vlad: I don’t know, I mean we’re not in that business. The goal of that data is helping customers make decisions. So I think if we were to… Like we would never consider selling any of our customer information to hedge funds or financial institutions, I think that would be incredibly contrary to our mission.
Jen: Given the data though, have you learned about your core customer? I guess who is the average Robinhood user you talked about? You know they’re relatively young, and you know are they a day trader or do they trade a certain amount of times per week? Who are they?
Vlad: Average customer is 30 years old. They trade a little bit more than sort of the average customer of a typical online brokerage. I think a lot of that is because we allow people to do things that they wouldn’t be able to do otherwise. So, rather than sort of buying one stock at a time because you’re being charged 10 bucks every transaction, you can buy maybe one share of 50 different stocks. That suddenly kind of economical thing that you can do, whereas that would have cost you hundreds if not thousands of dollars in trading commissions before. So, we have people that are actually diversifying with much smaller account balances than they would have been able to do in the past, and so, that kind of leads to higher than normal trading activity. But I wouldn’t call it day trading per se. When you say day trading, people think sort of speculative buying and selling. People on Robinhood, the vast majority are actually just buying and accumulating over time.
Jen: Something that is obviously a hot topic right now that we’ve heard a lot about at this conference is cryptocurrency, Bitcoin, and Athyrium.
Vlad: Totally yeah.
Jen: Have you thought about getting into that business of trading cryptocurrencies?
Vlad: Yeah totally, we’re looking at it. You know a lot of customers have been interested in it and requesting it. And it’s definitely something that we’re taking a look at.
Jen: Would that change the way in terms of dealing with regulators, are there additional regulatory issues that you can imagine would it affect your decision in getting into that space?
Vlad: Yeah. Regulatory issues are always front and center and that’s one of the things that we’re always very, very conscious of. We wanna make sure that we’re doing things properly and correctly and be in communication with the regulators as we’re sort of expanding into additional lines of business. And I think a lot of people are kind of scared off by the prospect of regulation. But really, regulation is aligned with consumer finance in a lot of ways because the regulators are there to make sure that the customers are well taken care of. And it’s not there to be onerous or to prevent people from innovating, you actually see a lot of the regulators are really open and embracing a lot of these new innovations. I mean FINRA had or is having a conference about block chain.
So there’s a desire to understand and implement a lot of these innovations. But there’s also a primary focus to make sure that customers understand what’s going on. They’re being communicated to in a clear and sort of straightforward way. And companies aren’t taking advantage of their customers, which unfortunately has happened in the past. So they’re there for a very good reason.
Jen: We’re almost out of time, but you talked about additional lines of business. Are there particular areas that Robinhood is looking to get into soonest and what is your timeline look like for that?
Vlad: Yeah I can’t comment very specifically on sort of new product developments, but I would say that in the past couple of years as we’ve rolled out things like Robinhood Gold which have grown really quickly, we’ve sort of noticed that we have a very, very unique asset among other companies in our space and it’s that customers love our product and love our brand. And so, when we’ve released things like Robinhood Gold, people adopt it quite quickly. Not just because it sort of addresses a pain point but also because they spent a lot of time on our products and they’re very engaged.
So that’s sort of shifted our thinking in a way, away from thinking of ourselves as just an investing company, and more towards thinking of ourselves as, what if we provide sort of an awesome solution to our customers every financial need. We think about okay, what do they need when they’re 18 years old? Or perhaps even younger all the way to retirement and how can we grow with our customers and sort of provide them better products, where they capture the vast majority of the value from that financial product and service.
So, I think over the next couple of years, certainly, within the next five, 10 years Robinhood will look very very different. And the goal is for you to get any product that you can walk into your local, national bank branch office and get faster, cheaper, with a much better user experience. And again, where the customer gets the vast majority of the value from that transaction. So that’s the goal, and it’s somewhat broad but people’s financial needs are broad, and I think we’re barely scratching the surface of what people actually need.
Since we live in very unique times, people can no longer sort of count on their employer sponsored pension plan or even social security very, very questionable, what’s gonna happen? A lot of ways the social safety nets are in a weak shape, and so our approach to that is empowering the individual with better tools. Because over the next couple of decades, I think the individuals are going to bear the brunt of the onus of planning for their financial futures, building their wealth, and taking a lot more responsibility for sort of making sure that they’re well taken care of in retirement and so forth.
Jen: And on that note, I think that will do it for time but that was a great note to end on and thank you so much Vlad for being here.
Vlad: Thank you so much for having me.