The Robinhood trading platform is rolling out a feature that will allow its users to lend their shares in hopes of earning passive and recurring income from borrowers, the company announced today. Robinhood says the feature is currently being rolled out and will be available to all customers by the end of the month.
The news comes soon after a tough quarter for the company during which it laid off 9% of its full-time staff. Robinhood makes nearly three-quarters of its revenue from transactions, and that revenue stream has steadily declined since last year when the business cooled. The new lending feature is an attempt by the company to diversify its revenue streams, as it will take a reduction in fees from each loan.
The company already makes money by lending stock to clients who buy them “on margin,” and this new securities lending program is expected to bring 1 to 2 times the revenue of the existing margin loan offering, its CFO Jason Warnick said on call on the company’s earnings last week.
Clients will not need to carry any minimum balance in their account in order to participate, which tends to be the norm in other markets that allow them to lend their shares. As long as the stock has been fully paid for by the client, Robinhood states that she will match clients with borrowers interested in taking out the loans and that clients will be paid once their stock is successfully placed. Typically, the company explains, borrowers are financial institutions looking to cover deficits, short sales, or failed deliveries.
Customers will be able to keep track of the loans they have made and enable and disable the “Stock Lending” feature at their discretion, according to Robinhood. They will be able to sell the stock they have lent and make gains or losses “as they normally would,” the company says.
The announcement came with a disclaimer stating that stock lending is not appropriate for all clients and that they may run the risk that Robinhood will default on its obligations and return the securities it has borrowed.
“The provisions of the Securities Investor Protection Act may not protect you with respect to the securities lent,” reads the disclaimer.
To reassure customers, the company claims to partner with an unnamed third-party bank that will provide cash collateral for loans for added customer protection, although such a guarantee may be the only security measure available to customers in the event. of default.
The exchange also warns that stock lenders may lose their voting rights as shareholders in relation to their lent securities and will receive cash payments on those securities rather than dividends, which may be treated differently for tax purposes.
“We are thrilled to break down another barrier and democratize a product that has historically been preserved for the rich with high barriers to entry,” writes Steve Quirk, Robinhood’s Chief Brokerage Officer, in the announcement.