Robinhood to let users lend out their shares in its attempt to diversify revenue

Trading platform Robinhood is launching a feature that will allow its users to lend out their stocks in hopes of earning passive, 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 just 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 been falling steadily since last year as trading activity has cooled. The new lending feature is an attempt by the company to diversify its revenue streams, as it will take a cut of the fees from each loan.

The company already makes money by lending out shares to customers who buy them “on margin,” and this new stock lending program is expected to bring in one-to-two times the revenue of the existing margin lending offering, its CFO Jason Warnick said on the company’s earnings call last week.

Customers won’t have to carry any minimum balance in their account in order to participate, which tends to be the norm at other exchanges that allow them to lend out their shares. As long as the shares have been fully paid for by the customer, Robinhood says it will match customers with interested borrowers to take the loans and that customers will get paid once their shares are successfully placed. Typically, the company explains, borrowers are financial institutions seeking to cover deficits, short sales or failed deliveries.

Customers will be able to track the loans they’ve made and turn the “Stock Lending” feature on and off at their discretion, according to Robinhood. They will be able to sell shares they have loaned out and realize gains or losses “like they normally would,” the company says.

The announcement came with a disclaimer saying stock lending is not appropriate for all customers and that they could face the risk of Robinhood defaulting on its obligations and failing to return the securities it has borrowed.

“Provisions of the Securities Investor Protection Act may not protect you with respect to loaned securities,” the disclaimer reads.

To reassure customers, the company says it is partnering with an unnamed third-party bank that will provide cash collateral for the loans for added customer protection, though that collateral may be the only safety measure customers have in the event of default.

The exchange also warns that lenders of stock may lose the right to vote as shareholders with respect to their loaned securities and will receive cash payments on those securities instead of dividends, which may be treated differently for tax purposes.

“We’re excited to break down yet another barrier and democratize a product that has been historically preserved for the wealthy with high barriers to entry,” Steve Quirk, chief brokerage officer at Robinhood, writes in the announcement.