Robinhood rose to fame with its hyper-gamified user interface optimized for its PFOF (Payment For Order Flow) business model. The app made it extremely easy and appealing for young investors to get into trading, among market surges such as the meme stock trend.
However, earlier this year, Robinhood reported $423 million in net losses in the last quarter of 2021, causing a 15% dip in its shares in after-hours trading. The new year hasn’t gone any better, either – with the company reporting a 43% dip in revenue in the first quarter.
The recent downward trend suggests that although Robinhood’s strategy worked well during the peak of the pandemic, now that the market is contracting, young investors are starting to realize the true cost of “commission-free trades”.
PFOF brokers make money not from commissions earned on execution but through rebates earned by routing orders through market makers. In 2021, Robinhood’s PFOF grew by 42%.
Even though commission-free trading sounds appealing, PFOF has the potential to become a conflict of interest when brokers choose market makers based on rebates rather than price improvements. In 2020, the SEC found that Robinhood executed customers’ orders at prices that were “inferior to other brokers’ prices”. Since Robinhood gets paid for the frequency of orders it routes rather than the quality of its orders, it needs an application that can guarantee engagement regardless of the user’s expertise or knowledge. Secretary of Commonwealth William Galvin echoed this when he called Robinhood’s ethics in question, stating that it was “luring young and inexperienced investors to make more and more trades”.
Carrot, stick and Pavlov: luring with gamification
How does a company “lure” young investors? According to critics, the answer is in the hyper-gamified Robinhood user experience. The app has been accused of failing to adequately communicate risk by downplaying the importance of risky investments, as well as allowing novice investors to make unlimited trades. With Robinhood’s addition of crypto trading to its services, many of these problems have been exacerbated, as those compulsively day trading cryptocurrency join those trading stocks, inspired by ephemeral trends like meme stocks.
To find out more about how Robinhood entices the “plug and play” generation Z to invest, I went through the last three years of Robinhood’s user interface.
The following features jump out:
Confetti feature: This feature showered an endless stream of confetti on users every time they made an investment or achieved any other milestone like upgrading to Robinhood Gold (see below). Confetti came under the scrutiny of Massachusetts security regulators that deemed it to be one of the several behavioral prompts that Robinhood uses to encourage repeated use.
Due to growing criticism around the feature, the company decided to discontinue it altogether in 2021, replacing it with more sober animations.
Scratch to view your free share: This feature shows an animation that asks aspiring investors to select one of three gold facedown cards on the screen. Each card represents a free share that the company offers to all those who join. According to Robinhood, those who sign up can win anywhere from $2.50 to $200 worth of fractional shares. Once users confirm their choice, they are presented with a slick scratch interaction that reveals their prize.
What this fun game conceals is that the lure of “nothing to lose” thinking combined with a colorful gamified interface effectively guarantees interaction and onboarding – especially when that interaction results in what is perceived as “free money”.
Emojis, illustrations and frictionless UI: One thing that is palpable throughout Robinhood’s evolving user experience is that the firm has a shrewd understanding of what types of media and interactions appeal to young investors. This is evident in how the interface is designed to complement the use of illustrations that the application utilizes to brighten up what are otherwise mundane screens.
While the use of graphics on confirmation screens is common, investing time into creating a design style that fits your goal and your target market is not common in stock trading. This investment is exactly what sets the app apart:
i) Green shoots: Green is abundant in Robinhood’s app as its accent color of choice. The color is reminiscent of superheroes, high finance, and growth. Moreover, the company’s illustration style and graphics often oscillate from comic books to old arcade games. They’ve leveraged everything from old Serif typefaces to emojis like the mine and thunderbolt popular on social media. What makes these choices effective is their consistency throughout the application.
ii) Frictionless UI: It’s impossible to overstate the role a frictionless UI plays in ensuring efficient user interaction. Strategies like the use of games and illustrations fail if transitions and switching menus are unpleasant or buggy. By integrating a smooth and easy navigation structure, Robinhood ensures that the user journey is intuitive, engaging, and will encourage repeated use. This can also directly impact how easy it is to make a risky investment. Considering that many of their customers are novices, too little friction can spell disaster.
Tapping into people’s networks: Robinhood also offers free stocks as part of a customer referral program. These rewards can be claimed for 60 days and up to a limit of $500 per year. This business strategy gives the company access to people’s personal and social networks, which could be particularly influential among meme stock traders or those that receive their advice from Reddit. The “nothing to lose and everything to gain” mentality applies here as well, although it is inflated to encompass not just individuals, but communities and subcultures as well.
Since this kind of gamification removes friction from bad investments and makes it easier and more enjoyable to make them often, the strategy has escalated concerns around addiction to crypto and day trading. Gambling expert Lia Nower from Rutgers University told The Washington Post that gamification is used specifically because companies like Robinhood know “what it is to get people more engrossed in something — that high action, that quick turnover with that positive reward”.
On the other hand, people who find themselves trading stocks or cryptocurrency may not identify it as a pressing problem until they’ve lost hefty sums. Unfortunately, even if they do realize they need help, the addiction is too new to be easily diagnosable or treatable in many parts of the world. In the absence of academic research and consensus, some healthcare providers treat it as a gambling addiction.
Even though the discussion so far has painted a dark picture of the consequences of gamification, this rising technology finds its popularity not from trading applications like Robinhood but from sectors like health, education, and corporate training, where it can be extremely effective. That is why over the years, it has trickled into many other forms of digital finance activities such as buying ETFs, building up savings, and paying off debts.
Gamification and the world of finance
This year, Fidelity launched its immersive gamified environment in the metaverse, called Fidelity Stack. It is supposed to help younger audiences learn about the basics of investing in ETFs as they traverse the multi-level Fidelity Stack building, collecting orbs and interacting with virtual environments such as a lobby, dance floor, and rooftop sky garden. This foray into Decentraland comes at the helm of Fidelity’s new ETF launch and is implicitly supposed to serve as an “educational introduction” to the company’s products.
Critics point out that even though Fidelity Stack’s goals for gamification seem to work on paper, they are likely to fail in practice. This is largely because despite gamification, Fidelity Stack’s environment does not adequately achieve its primary purpose: proper delivery and absorption of information. While Robinhood gamified its processes well, the choice of its use case (retail investing through PFOF) has destabilized trust as well as the long-term sustainability of the business model.
Unlike Robinhood’s success at gamification, Fidelity Stack has the opposite problem. Here, companies like Acorns can serve as a counter-example. For years now, the micro-investing app has implemented gamified elements such as rewards, tokens, and milestones to invest people’s rounded up spare change. Similarly, CommonWealth’s SavingsQuest, launched in 2015, focused on financially vulnerable people and helped them build savings over time. The app functioned primarily by setting saving challenges for people, which earned them badges as rewards. These examples point out that when the context of gamification is appropriately chosen, it can serve as an efficient tool to encourage wealth-building activities among novice users or previously estranged communities.
Building on these examples, one can ask whether Robinhood’s interface could instead encourage young investors to invest better rather than more often through gamification? And should the interface even be gamified? Answers to these questions may lie within companies like Acorns or even Robinhood’s competitors like Charles Schwab, an old school online broker that hasn’t followed suit with gamification, despite adopting PFOF, while maintaining its monotonous design and strategy, common to financial apps (and that has worked reliably for years).