Weekend thoughts: $HOOD's (fools?) gold (and potential matching shenanigans!)

I had a lot of people buzz me on Robinhood’s new gold program this month (if you don’t have a Robinhood account / membership, here’s a referral code that gets you (and me!) a free share with sign up). The basics are that their new gold membership costs ~$5/month and comes with a ton of benefits, including a reward card (releasing soon) with unreal cash back terms, a 3% match for rolling over an IRA, and improved cash sweep.

There were a few different interesting angles that I wanted to share on each of those:

3% IRA match and the potential for shenanigans

• For gold members, HOOD is offering a 3% match for any retirement contributions or retirement accounts that are brought in. While pausing to note that nothing on this blog is financial advice, I’ll just say that a 3% match for bringing money over is a really good deal and is probably worth considering.

• But that match also got me wondering: Robinhood notes that there’s no cap on the 3% they’ll match if you bring new money offer. There are some big IRAs out their; Peter Theil’s is $5B, and Ted Weschler’s is >$250m. How funny would it be if a whale signed up for a $5/month gold program, transferred in >$300m, and got a $10m match? HOOD did ~$80m in EBITDA in Q4’23; if they had to pay out a $10m match (much less a >$100m match if Theil did it), it’d be material enough that they’d probably have to call out in their earnings (or at least a footnote) that they had a large customer come in and they needed to make a huge payout (obviously the payout would be amortized over the customer’s projected account life, but I think a $10m check would still warrant a call out!)

  • It is funny to think about some type of activist short here. There’s only a handful of people who could pull it off because there are only a handful of people with IRA accounts big enough, but imagine you have a $1B IRA. A pretty wild activist trade would be transferring it in to HOOD, getting a $30m check, and then using it to buy OOM puts on HOOD and waiting for them to disclose a $30m hit from a huge customer match. Again, not recommending any of that, but it is funny / I could see it as a plot point in a Billions episode or something!

HOOD credit card

• The HOOD gold card seems really attractive; yes, you need to be a member of Gold, but 3% cash back is pretty wild. I don’t know of anything that comes close to that level of reward.

• The card seems somewhat modeled after the Fidelity Rewards card; both are Visa Cards and the fine print is that to get the rewards you need to deposit the rewards in to your brokerage account (or at least that’s my read of the terms). But the Fidelity card is 2% cash back, while the Robinhood card is 3% back. That’s a huge swing; sure, the fidelity card has no fees attached to it while you need a $5/month gold membership to get the Robinhood gold card, but it only takes ~$500/month in spend to break even on that membership just through the rewards spend (plus you get all of the other gold benefits as well as added rewards on any spend over that).

• Heck, the 3% cash back on everything matches what Apple gives you when you use the Apple card with Apple Pay at Apple (and select partners) and beats the Apple Cash back when you use Apple Pay normally.

How is this going to be profitable?

• That “Gold card rewards are way more generous than competitors” brings me nicely to my last point: the gold program seems like a very expensive tool to acquire customers for HOOD. I’d be really interested in how they’re modeling customer lifetime value, because it seems to me like they’re blowing everyone out of the water. I’m just not sure how a $5/month charge could justify any of this. Consider:

  • It’s not like trying to get customers to transfer retirement accounts (or brokerage accounts) is a new thing. As far as I can tell, Robinhood is the only broker that’s offering a match bonus for rolling assets (ok, that’s not quite true; WeBull is offering a 3.5% match, but I know nothing about them so I’m going to ignore them). I’m sure eTrade, Fidelity, etc. would all love to custody your IRA assets….. but as far as I can tell none of them offer any match money to encourage you to bring money over. What is Robinhood seeing in their stats that suggests a pretty hefty amount of matching money is worth it when none of their peers appear to believe that?

    

  • The Gold card is offering 3% cash back on any purchase. Again, that’s not just more than any other credit card I’m aware of; it’s leaps and bounds above any credit card I’m aware of. I’m not a credit card expert, but banks basically fund credit card rewards programs with their interchange fees. I believe that average credit card swipe fee is just over 2%, so HOOD’s 3% cash back already exceeds the credit card fees they’ll get as revenue (and that assumes no money is going to Mastercard for running the rails or anyone else here). Again, Apple will give you 3% cash back if you use Apple Pay with an Apple Card at an Apple Store; that’s a trifecta of margin / spend for Apple. It seems insane to me that HOOD could match that level of cash back on every dollar spent.

    • PS- this article (Anatomy of a credit card rewards program) is one of the most interesting things I’ve read if you want to dive deeper into credit card rewards.

  • Perhaps the whole play here is for HOOD to use Gold to get large customer cash balances, and then make a fortune off those (i.e. customer cash balances pay $0, and HOOD can lend that money risk free in T-Bills and clip the interest for themselves). That would make sense…. except another perk of Gold is that HOOD is going to boost the interest rate on cash balances to effectively money market levels, so there’s not going to be any massive interest income earned here.

• I am no expert (and, again, I’m certainly not a financial advisor). But, on the whole, the terms of Robinhood’s gold program just seem insanely generous. It kind of reminds me of the 2021 boom, when there was so much VC / growth money sloshing around that it ended up subsidizing huge pieces of consumer lifestyles (it would be cheaper to order groceries and have them delivered to your apartment than to actually go grocery shopping on your own), or the uber/lyft wars in the mid-2010s when it would often be cheaper to take an uber than to use public transit.

  • I’d love to see / learn more about how HOOD is thinking about the gold program and how they see a path to profitably with it. It seems to me like the terms are just way too generous, and in a year or three HOOD will need to roll back the benefits while also raising the annual fees….. and that’s generally a bad combo for a business / a recipe for a lot of angry and lost customers.

Again, I’m not an expert, and none of this is a financial rec of any type…. but the gold program and all of the (seemingly juicy) perks are interesting, and any time there’s one company that’s offering perks / rewards that are way out of line with the rest of the industry it makes me wonder if they’ve discovered some profitable revenue stream that everyone else is missing or if they’re about to spend their way to oblivion…..