That’s “good morning” in Krio
In Nigeria, there’s a saying that goes:
“There’s no free lunch, not even in Freetown.”
It’s a combination of a popular English phrase and an assumption about the capital of Sierra Leone that was made only because, well, it sounds good to say.
Whenever a for-profit internet company claims to provide their products for free, I’m immediately reminded of that saying. And having read the S-1 paper for Robinhood’s IPO recently, I was reminded of the saying once again.
When the user is the product
Robinhood is a US-based stock trading app. It popularized commission-free trading, making its money from other avenues instead.
According to the report, 60% of Robinhood’s revenues came from payment for order flow (PFOF) from high-frequency traders (HFT).
In simple terms, say, you’re a Robinhood user and you place an order for Amazon stock at $100. (Psych! It can never be that low again). Anyway, the company goes to an intermediary to actually get the stock. And, courtesy of Robinhood, that intermediary knows what price you want to get it at. Armed with your data, they can sell the Amazon stock to you for $99.99 and make a profit of $.01.
In this example, the intermediary is an HFT, and your data is made available to them via PFOF, which they pay for access to. Robinhood currently has 18 million user accounts, if a number of them trade Amazon stock, the HFT can make $.01 x the number of users.
Robinhood has caught a lot of flack for this practice, but PFOF isn’t a new concept in stock trading.
The reason why critics are hard on Robinhood is that, firstly, the company wasn’t initially transparent
about it. And secondly, its business model relies mostly on newbie traders to make frequent trades, whether they have an idea of what they’re doing or not.
When the product is the product
Responding to demands from their users to lower their fees, Nigerian trading apps Bamboo and Chaka recently made some changes to their fee structure.
a 1% transaction charge for users with net deposits of $10,000 and above, and retained 1.5% for others, while Chaka introduced
dynamic fees ranging from 1.5% for trades between 0% - $200 to 0.69% for $50,000 and above.
These are significant reductions, but some users are still not impressed. Constant comparisons to Robinhood plays a part in their high, or should I say low expectation. But even though on the front end, all trading apps democratize access
to retail investors, on the back end, they operate vastly different business models.
For Nigerian trading apps yet to scale to millions of users, there is limited access to PFOF to subsidize trading fees.
In a recent episode of the Wharton Fintech podcast, Chaka co-founder Tosin Osibodu explains
how his company makes money:
“Our typical product is our widget SDK for business and then just the apps for customers [retail investors]. And depending on whether you’re a direct customer with us or you’re a partner to us, we have relevant products for each.”