Robinhood Markets (HOOD 4.44%) and PayPal (PYPL 2.90%) initially seem like very different companies. Robinhood is an online brokerage which popularized commission-free trades. PayPal is one of the world's largest digital payment platforms.
But last year, Robinhood launched a virtual debit card which enabled its users to make in-store and online payments wherever Mastercard cards were accepted. It's also been testing out a new "Pay & Request" feature for peer-to-peer payments, and it recently acquired the credit card start-up X1 to expand its reach beyond debit cards.
All these moves strongly suggest Robinhood aspires to become a more diversified fintech platform like PayPal -- which also provides in-store, online, and peer-to-peer payments, along with debit and credit cards through a partnership with Mastercard. So could Robinhood continue to evolve and expand over the next few decades, and become the next PayPal?
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Robinhood is still tiny compared to PayPal
Robinhood ended the first quarter of 2023 with 23.1 million net cumulative accounts and 11.8 million monthly active users (MAUs). PayPal ended the same period with 433 million active accounts (those making at least one transaction over the past 12 months). That's why PayPal generated about 20 times as much revenue as Robinhood in 2022. However, PayPal's revenue actually rose 8% in 2022, while Robinhood's revenue declined 25%.
PayPal's growth cooled off as it grappled with inflation, slower consumer spending, and its final decoupling from eBay. But Robinhood fared worse as rising interest rates drove investors away from the growth stocks, meme stocks, cryptocurrencies, and riskier option trades which had driven most of its expansion throughout 2020 and 2021.
So even though Robinhood might aspire to become the next PayPal, it still operates a completely different business model. PayPal generates most of its revenue by charging transaction fees for customer-to-business and peer-to-peer payments, so its financial health is mainly dependent on the broader macro environment.
Robinhood makes most of its money by selling its "commission-free" orders to high-frequency trading firms, which bundle all of those orders together to squeeze out some profits from the bid-ask spread. This "payment for order flow" (PFOF) model relies heavily on its users executing a lot of trades -- which generally happens during bull markets instead of bear markets.
PayPal has also been consistently profitable for years, thanks to its economies of scale, but Robinhood will likely remain unprofitable through at least 2024. In 2025 analysts expect Robinhood to finally squeeze out a slim profit of $72 million on $2.17 billion in revenue, but we should take that long-term forecast with a grain of salt.
Can Robinhood scale up its business?
Robinhood could struggle to break out of its niche for two reasons. First, it's heavily dependent on smaller retail investors. Its average account size (dividing its assets under custody by its net cumulative accounts) was only $3,377 in the first quarter. These lower-income customers are generally less resistant to inflation and other macro headwinds than higher-income customers at traditional brokerages.
Second, most of those larger brokerages -- including Charles Schwab's TD Ameritrade and Morgan Stanley's E*Trade -- now offer commission-free trades by using the same PFOF model as Robinhood. That competitive pressure could make it even tougher for Robinhood to scale up its business, narrow its losses, and generate enough cash to expand its ecosystem.
Why Robinhood probably won't become the next PayPal
When PayPal was founded 23 years ago, it established a first mover's advantage in the digital payments space. It also flourished as a subsidiary of eBay from 2002 to 2015 without fretting too much about its profitability on a stand-alone basis.
Robinhood doesn't enjoy either of those advantages. It established a first mover's advantage in commission-free trades, but it could struggle to stay relevant as larger brokerages offer free trades. It wants to expand into a more diversified fintech platform, but that market is already saturated by larger companies like PayPal, Block, and even Apple.
While it might be acquired by a larger bank or fintech company in the future, the lack of serious suitors -- when the stock has already plunged 75% below its price at its initial public offering -- suggests that investors shouldn't get their hopes up for a takeover.
Robinhood's business could stabilize, and it could remain a top trading app for smaller retail investors. But over the long term, I doubt it will become the next PayPal -- unless it overcomes some serious challenges and gains tens of millions of new users.
