Financial services upstarts are gunning for established financial services firms, and the fintech world just welcomed its newest unicorn: Robinhood. Here’s how the upstart brokerage firm did it.

Target young investors with a mobile-first (and still mobile-only) offering

Robinhood launched with an iOS app. It has since added an Android app, but does not offer a web-based trading platform. And compared to the apps offered by other brokerage firms, the interfaces of the Robinhood apps are very, very simple.

Some early critics of the company questioned this, as older and more sophisticated investors are more likely to demand that their brokerage firms provide them with advanced trading tools across desktop and mobile devices.

But Robinhood isn’t targeting these investors, at least not yet. Instead, the company bet on a market that many brokerages have shunned: young investors.

Lower the price of trading…to $0

While discount brokerages have been around for years and large brokerages have significantly reduced their fees for trading, Robinhood has lured customers with trading fees that are hard to beat: the upstart brokerage firm doesn’t charge its customers fees to buy stock, and only passes on to them nominal fees levied by the Securities and Exchange Commission and Financial Industry Regulatory Authority when they sell shares.

Instead of charging customers for their trades, Robinhood earns revenue from broker-dealers, who offer it rebates for directing trades to them. Broker-dealers offer these rebates to other brokerages, but Robinhood decided that instead of treating this revenue as icing on the cake of trading fees, it would treat this revenue as its cake.

This is the origin of the name Robinhood. As the company explains on its website, “electronic trading firms pay effectively nothing to place trades on the market. On the other hand, everyday investors were taxed up to $10 per trade. [Robinhood founders Vlad Tenev and Baiju Bhatt] realized it was time to bring this advantage to everyone.”

Offer additional features through a subscription

Cleverly, Robinhood now also makes money by selling a Gold subscription, which allows customers to borrow up to double the dollar value of their account to trade on margin, access pre and after-hours trading, avoid the company’s three-day deposit waiting period, and access proceeds from a stock sale immediately.

The subscription fee for Robinhood Gold is based on the value of a customer’s account, and ranges from $6/month to $200/month.

Other brokerages commonly offer all their customers access to features only available to Robinhood customers who purchase a Gold subscription at no additional cost, but given that many young investors just starting out won’t need these features, and those that do are probably comfortable with the idea of paying for additional features through a subscription service, launching a brokerage subscription service made perfect sense for Robinhood.

Is it built to last?

Despite Robinhood’s ability to grow an upstart financial services firm like an internet company, questions remain about its long-term prospects. Stock markets in the US have experienced one of the longest bull market runs ever after rebounding from steep losses in the Great Recession of 2008. They currently sit at near all-time highs. That has brought retail investors, including the young retail investors Robinhood is targeting, into the market. But there’s an old saying, “everybody’s a genius in a bull market.”

A comment from Robinhood co-founder Bhatt is certainly eye opening. “What we’re saying is if you just start investing in stocks you’ve heard of, you’ll be outperforming cash, or what you’d be doing with that money, like spending it on Amazon, on Netflix, on cat socks,” he told TechCrunch.

But the notion that “investing in stocks you’ve heard of” is a sure-fire money-maker is only bound to support critics’ arguments that the stock markets are in a bubble and unsustainable. If and when a significant downturn occurs, Robinhood’s fortunes could change drastically, especially since it targets younger users who likely have less experience and lower account balances. To boot, those investors appear to be heavily concentrated in tech stocks.

A glimpse of what could happen came on Tuesday when shares of chipmaker AMD, the most popular stock among millennial investors on Robinhood, fell nearly 25% after the company revealed that it expects its second-quarter gross margins to decrease, spooking the market.

There are also questions about Robinhood’s Gold subscription. One of its biggest features – margin trading – is risky and critics suggest that by encouraging young investors who are more likely to be using Robinhood to learn the ropes to trade on margin, Robinhood is inviting disaster because, for example, those investors might not understand the implications of margin calls, which could quickly wipe out their accounts.

For now, however, Robinhood is proving that even in competitive, commoditized markets like brokerage services, fintech upstarts are capable of taking business away from incumbents and expanding the pie by bringing new customers into financial services markets that they haven’t exactly been welcomed into previously. And in Robinhood’s case, investors believe the value of that exceeds $1bn.

For more on this topic, see Econsultancy’s 2017 Digital Trends in Financial Services and Insurance Report.