The Trade Republic Business Model – How Does Trade Republic Make Money?

Executive Summary:

Trade Republic is a mobile trading application that allows users to buy and sell ETFs, stocks, derivatives, and cryptocurrencies.

Trade Republic makes money from payments for order flow, various trading and account fees, as well as interest on cash held within its user accounts.

Founded in 2015, Trade Republic has grown to become the leading online brokerage in Europe. The company has raised more than $995 million over its existence.  

How Trade Republic Works

Trade Republic is a FinTech company that allows its users to buy and sell stocks, ETFs, derivatives, and cryptocurrencies.

The trading platform can only be accessed via its mobile applications, which are available on Android and iOS devices.

Trade Republic offers more than 9,000 ETFs and stocks for trade. Additionally, over 40,000 derivative products and dozens of cryptocurrencies are available as well.

Just like a traditional desktop application, users on the platform can analyze their performance in a chart format. Additionally, Trade Republic sends news updates and alerts whenever one of the user’s preferred stocks is moving.

Additionally, users can opt into savings plans. Each month, the plans automatically deduct a predetermined amount of money from the user’s account.

As a registered German securities trading bank, Trade Republic is supervised by the Federal Bank of Germany and BaFin (Federal Financial Supervisory Authority).

The company, furthermore, works together with Berlin-based Solarisbank AG to offer account protection of up to €100,000.

Trade Republic Company History

Trade Republic, headquartered in Berlin, Germany, was founded in 2015 by Christian Hecker (CEO), Marco Cancellieri, and Thomas Pischke.

All three founders met each other during their university studies in Munich. While Hecker went on to work in finance at Merrill Lynch, his two co-founders held various software engineering-related positions.

Then, in 2015, the trio eventually got together to work on their very first startup. At the time, FinTech startups like N26 and Revolut were picking up steam in the banking space.

Conversely, Robinhood acted as the blueprint for what a modern-day online brokerage should look like. In an interview with Solaris Bank, one of Trade Republic’s partners, CEO Hecker recalled:

“Then, after a couple of months, we learned that in the United States a company called Robinhood was doing pretty much the same thing. Obviously, that was a great inspiration for us. Seeing their trajectory and the way that they changed brokerage in the States was exactly what was going to happen in Europe sooner or later.”

The team entered a few accelerator programs to be able to finance their idea. Initially, Trading Republic was called Neon Trading and intended to be created as a stock game. Users on the app would be able to invest virtual coins (and not real money) to test their trading prowess.

They eventually pivoted towards allowing users to trade real financial assets using actual money. There was just one problem: offering such an application required to comply with various regulations as well as a hefty amount of capital to get going.

To acquire the necessary funding, the team pitched dozens upon dozens of investors. One eventually bit. Ingo Hillen, vis-à-vis his own company Sino AG (a brokerage company listed on the Frankfurt Stock Exchange), became the startup’s first investor back in 2018. Sino AG led the company’s $8.5 million seed round, which was completed in April 2018.

Hillen even acted as Trade Republic’s CEO due to a regulatory requirement of having an experienced manager at the company’s helm. He was also responsible for connecting the founding team to HSBC, which now handles a portion of Trade Republic’s custodian duties.

During the next few years, the team continued to work on the product in stealth. Then, on January 9th, 2019, they released a waitlist (after receiving their banking license in the prior month). Interestingly enough, that is also how Robinhood started (which netted them over 800,00 sign-ups!).

A few months later, in May, Trade Republic finally launched. In the beginning, users were already able to trade over 6,500 German and international stocks as well as close to 500 ETFs.

The launch became an absolute success with tens of thousands of users signing up to the trading platform. In August, Trade Republic raised its second round of funding, netting them another $12 million. A portion of that funding was used to buy back shares from Sino AG as well as to provide the founders with greater ownership to further incentivize them (they had given up majority ownership to Sino during the seed round).

In typical German fashion, the team continued to silently work on iterating the product to its customer’s needs. 2020, in particular, became a crucially important year for the young company.

Due to the coronavirus pandemic, people were stuck at home, giving them an abundance of extra time. Many of them decided to pick up stock trading for the first time. Given how easy the registration process was set up, many of those first-time traders chose to transact on Trade Republic.

As a result, Trade Republic was able to raise another significant round of funding. In April 2020, Accel and Founders Fund (led by Peter Thiel) poured another $67 million into the company. More than 150,000 users were registered on the platform at that time. These users collectively held over one billion Euros in their Trade Republic accounts.

The majority of the funding was intended to be used to expand into other European markets. Trade Republic initially released its app for the German and Austrian markets. In January 2021, it finally expanded into France, its first non-German-speaking market.

Unfortunately, not everything was always going according to plan. During the same month, Trade Republic had to halt trading on so-called meme stocks (i.e., GameStop, AMC, or Blackberry) due to the risk of not being able to post the necessary collateral for settlement.

Many of the platform’s customers were severely angered while some even contemplated filing a class-action lawsuit against Trade Republic. Luckily for the company, its growth remained unfazed.

In April 2021, Trade Republic introduced a cryptocurrency trading product, which effectively put them in competition with the likes of Binance or Kraken. Then, a month later, Trade Republic made international news – this time on a more positive note.

In May of the same year, the company announced a gigantic $900 million funding round in which investors valued the business at $5.3 billion. The funding round, one of the largest-ever for a European startup, made Trade Republic Germany’s highest-valued FinTech company.

Today, more than 500 people are employed by Trade Republic which is set to expand into a handful of new markets (such as Italy and Spain).   

How Does Trade Republic Make Money?

Trade Republic makes money from payments for order flow, various trading and account fees, as well as interest on cash held within its user accounts.

Let’s take a closer look at each of these in the section below.

Payment For Order Flow

The bulk of the revenue that Trade Republic generates comes from a method that is called payment for order flow.

Orders on almost any modern-day trading platform are not placed on the actual exchange (such as the Nasdaq or Xetra in Germany) but will be re-routed via a market maker.

Oftentimes, market makers provide better offers in order to compete with stock exchanges (like the New York Stock Exchange, or NYSE). Trade Republic partners with LS Exchange and HSBC Trinkaus who take on that order flow.

The market maker then hopes to make a profit on the bid-ask spread (or turn), which is the difference between the quoted prices for an immediate sale (bid) and an immediate purchase (ask).

Market makers only make a fraction of a cent on these transactions. But since trades are algorithmically executed, they can facilitate thousands of them at any given moment in time. A fraction of that profit is then shared with Trade Republic.

The company refers to this form of payment as “Abwicklungskostenzuschuss”, which according to its customer agreement can be as high as 3 Euro per trade.

Therefore, Trade Republic is incentivized to maximize the number of people that sign up and trade on its platform. With traditional brokerage firms, it took people up to 15 clicks to get started trading.

Trade Republic, on the other hand, allows its users to trade securities within a matter of three clicks – a concept referred to as “Tap, Tap, Trade”. In the past, U.S.-based Robinhood has come under fire for incentivizing inexperienced people to trade and has even been fined $65 million by the SEC for not properly disclosing its payment for order flow business model.

This even prompted CEO Hecker to distance himself and his company from those practices. In an interview with Sifted, he stated: “Our business model and product are very different from Robinhood,” adding that “unlike Robinhood, or other apps, Trade Republic is a very reduced tool: we give you a simple search and a trading screen. By no means are we trying to sell you any investment products.”

Another aspect that needs to be considered is the fact that users can only trade financial assets that are made available via LS Exchange and HSBC Trinkaus. While this includes over 9,000 stocks and ETFs as per the time of writing, more advanced traders may not find all the assets they are interested in.

Trading Fees

Another major source of income for the company is the various trading fees that Trade Republic charges.

More precisely, users will have to pay one Euro whenever they buy or sell a stock. As Trade Republic states, the fee is used to cover associated costs with operating the platform.

For reference, many of the established platforms in Germany (and Europe as a whole) still charge anywhere between 5 to 20 euros to execute a trade.

Additionally, if users decide to place an order (again, buy or sell) via postage, then a trading fee of 25 Euro is applied.

Other Fees

Apart from the trading fees, Trade Republic also charges a variety of fees with regards to maintaining one’s account.

For instance, if a user wants to register for a firm’s annual shareholder meeting, then a fee of 25 Euro is applied to facilitate the registration. Or, if an account needs to be reset using video identification, then the user pays 5 Euro.

A detailed overview of the firm’s fee structure can be found here.

Interest On Cash

As a licensed bank, Trade Republic can use the cash residing on user accounts to lend it out to other financial institutions.

Those institutions then pay interest on the money they borrow. The interest rate, commonly referred to as Net Interest Margin, currently floats around 3.35 percent.

Users, however, do not need to be worried about losing their money (or at least not all of it). As previously stated, Trade Republic works together with Solarisbank AG to offer account protection of up to €100,000.

Trade Republic Funding, Revenue & Valuation

According to Crunchbase, Trade Republic has raised $995.4 million across four rounds of venture capital funding.

Notable investors include Sequoia Capital, Founders Fund, Thrive Capital, Accel, Creandum, Project A Ventures, and many more.

Trade Republic is currently being valued at over $5 billion – a valuation that was assigned to the company during its latest Series C funding round (announced in May 2021).

For the fiscal year 2019, Trade Republic has generated €956,000 while losing a total of €3.4 million. With the influx of new traders during 2020, one can expect that revenue numbers substantially increased.

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..