Public.com vs. Robinhood ($HOOD)
Public’s business model and the future of this platform
Public.com is pushing a big promo — $500 reward for a $50,000 account balance transfer from another brokerage platform. A 1% kick back for increasing the size of your account on Public.com.
Even if a million members upped their balance, that’s only a $10k customer acquisition cost (CAC) to Public, in an industry where switching costs are low but headaches to do so are high. Essentially, switching from brokerages doesn’t happen too frequently even though its pretty easy.
Why does Public want you to increase your account size? Take a look at their business model. Public makes money from these key areas:
- Securities Lending — They lend out the stocks in your portfolio (typically 1–3 days) and charge interest to the borrower. All banks do this, usually for short selling purposes.
- Overnight Deposits — Any cash balance left on your account, Public will deposit it at a bank and earn interest at the overnight bank lending rate. It’s not much, but across 1 million + accounts, that number adds up.
- Tipping — user donations to the company to facilitate trades (optional & discretionary)
- Crypto — slight markups/downs from other platforms, make money on the spread
Contrast that model to their biggest competitor’s model — Robinhood. $HOOD generates 80–90% of its revenue from Payment for Order Flow (PFOF). While they have their own Securities Lending platform, the company still relies on the frequency of transactions or “order flow” as the primary revenue source. Therefore, user account balances are less important.
And it’s for good reason — average Robinhood account balances are around $3,500.
Public publicly (I know it’s a weird back-to-back word use) did away from PFOF after the GameStop ($GME) short squeeze in early 2021. Thus, they need to rely on the other revenue levers more as growth engines. Upping account sizes can help them get there.
$50k is over 14x the size of the average Robinhood user account, and will allow for major growth in their Securities Lending business. Incentivizing the move will also crush some of the competition as money moves away from their platforms and onto Public’s.
Where does Public go from here:
Making the move to boost their already profitable business is good. But is it enough? How many people will actually move, especially given the fact that $50k is a lot (14x bigger than $HOOD), and some trading functionality doesn’t yet exist on Public’s platform that competitors have (i.e. options trading).
Public — can look at their future in a few ways. The main KPI to achieve is average revenue per user (ARPU), commonly used in the industry. How can they do that?
Option 1 — Go Vertical
Instead of outsourcing the clearing, settlement, and securities lending functions to Apex, Public can build their own clearing firm. I mean, that’s what Robinhood did — they were using Apex but took this operation in house. At the moment, Public (probably) pays Apex fees for using their technology and most likely a percentage of each lending transaction that Apex conducts on their behalf.
If Public builds their own clearing platform, they can keep the added fees and expand margins on the security lending business. However, this endeavor could be very costly. You will need to hire engineers, compliance experts, and build a tool that can support fractional security transactions as seamlessly as Apex currently does. Furthermore, Public will have to deal with regulators on an ongoing basis to ensure they are compliant as a clearing and settlements firm. While, I am sure the company already has a banking compliance team this effort could be difficult, lengthy, and costly.
Option 2 — New Revenue Streams
Public continually roles out new functions. They just launched Crypto in part to create a new revenue stream and in part to maintain pace with competitors. Where can they go to next?
Advertisements — In it’s heart, Public is a social first platform. As we know from $FB, $GOOG, $TWTR, and $SNAP, advertisers will pay up to be on the platforms their customers are on. There is a lot of potential for finance ads to promote on the platform and a potentially huge opportunity. So long as it does not take away from the user experience.
Premium Users — Public just launched for web and there are opportunities to have premium features to monetize its 1M+ users. Features could include access to premium content, capability to create content (e.g. premium graphs & charts), or access to exclusive live sessions. Public consistently promotes their stable of famous investors, CEOs, etc. that engage on their platform — some users may pay up for that info. To come up with the best options, they will have to do customer surveys to see what users want most.
Public TV — This is kind of a blend of the two previous options but I feel it should be called out. CNBC and Youtube dominate financial media — I think there is a huge opportunity to acquire content creators and sell ads OR charge for access to the content.
At this stage in the company’s life, Public is still private (say that out loud 🙃). They are in full growth mode and will pay premiums to acquire customers. I imagine their current investors want to see continual top line growth in order to raise more capital at a higher valuation.
My recommendation would be to explore ways to monetize the user base. Look to charge premium subscribers $2.99 — $4.99 per month for access to special features. In February 2021, Public had over a million users. Assuming that number is now 2 million, and 10% become premium subscribers, that would be an added $600K — $1M per month or $6M-$12M per year to the top line.
Grow Public Grow.
Jonathan Hershman is the Founder of Hershman Advisory providing operations, strategy, and finance support to high growth tech startups. He previously worked in management consulting and conducted projects for Financial Services Firms including Operating Model Design, and Trade & Order Management Strategies. He has his MBA from University of Southern California and a B.S. in Finance from Penn State University.
