Public trading platform relies on tipping for revenue vs. payment for order flow

Public.com Co-CEO, Leif Abraham, joins Yahoo Finance to discuss Public's success as the company has hit over 1 million customers and a $1.2 billion valuation after creating an innovative new business model for fintech that focuses on active investing over active trading.

Video transcript

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MYLES UDLAND: Well, back in the beginning of the meme trade, we all learned a lot about a lot of things. And the one thing that we all learned more than we ever expected to in our lifetimes was payment for order flow or how free online brokers actually make those trades, in many cases, free for their customers. But one company came out during that period and said that they are no longer going to be involved in payment for order flow and shifting their model towards tipping. And that company is Public.

And Leif Abraham, the company's CEO joins us now to talk a little bit about that decision and also, Leif, just what you've seen in trends in your business. So let's start just with the payment for order flow issue, how you guys thought about it, and what's happened in the few months since you decided to no longer make that one of your revenue streams.

LEIF ABRAHAM: Hey. Thanks for having me. First off, some context, right? So Public is obviously a retail stock brokerage. And I think the specific thing about around Public is that we are,on the one side, a stock brokerage, and on the other side, we're also a social network.

So people can actually experience the stock market together with others. They can see what people invest in. They can post about certain topics, discuss companies, et cetera.

And so for that, we have built Public that way because we are truly on the mission of bringing more people into the stock market. And so on Public, actually, 90% of people make their first investment on Public. And so when we looked at and kind of reflected ourselves on just our business model in general, again, we are an early company. We have been less than two years in the market. And so we still have some flexibility to kind of rethink how we do business.

And so when we looked at the payment for order flow model, we saw for ourselves that if you're a stock brokerage that puts a lot of emphasis on that, takes most of their revenue from that model, you also have a little bit of a conflict of interest with your users because it pretty much incentivizes you to try to push your customers for more trades, to have larger trades, et cetera.

And so with that, we just thought that our incentives would be better aligned if we truly tried to align our business model and therefore the most fundamental incentives that we can have as a company with the interests of our users as well. And that's why we also introduced one new revenue channel, which is tipping, which is basically the optionality for people to pay us for the execution of the trades.

And for us, being very open about it that there is no such thing as free trade. Somewhere, someone pays for that. And we just believe that's a way more transparent model that just aligns much better with our users.

JULIE HYMAN: So Leif, how many people are doing that? How has that worked out for you? How many people are offering tips? And I'm also curious, while we're talking about how many people are tipping, I'm curious how many people are on the platform. I know you guys saw a surge in January, right, when people got annoyed with Robinhood for various reasons. Has that surge kept up? And are people tipping you?

LEIF ABRAHAM: Yeah. So we are open the end users on the app. And that has been steadily growing, even since February and so on from the amount. Generally, orders kept up. We're not showing much more numbers on that right now. But obviously, there was a big surge throughout January and February. But the baseline after that is drastically higher than anything it was before that. And I believe that's similar enough for most traders in the market as well.

Then the other side this is obviously, for us, we are not sharing any numbers around tipping specifically yet in terms of the revenue numbers on that and so on. But it is a model that, so far from our users have very much appreciated because it is so transparent. And so even when you tip in the app and you put a tip on your trades, the trade itself gets a little marker that shows other people that you have tipped as well.

And so it really also has become this kind of sense for like, hey, if you are someone in the market who believes in a more transparent model, it's also a way for you to show off that belief within the community as well.

BRIAN SOZZI: You had a recent capital raise earlier this year, valuing the company at $1.2 billion. Where are you spending that money?

LEIF ABRAHAM: So number one, obviously, we are growing very, very quickly. And so a lot of the money is obviously going just into product health and making sure that we're staying the one stock brokerage that hasn't been down all year or any time this year, I should say. And so we want to keep it that way.

So number one is really making sure that we can scale with our customers and we can scale with the growth. And that falls into systems as well as also just getting the team in general, right? We have hired a lot of new brokers. We have hired a lot of new customer service to just keep up with the rising demand.

And the other piece is obviously growth. So as we are also a social network, the product becomes better the more people are on it because again, we always look at the stock market as something that is very deep and very wide. And if we think of who has the best capability to truly cover that vastness of the stock market, it's a community.

And so the more people that are on Public, the better the product also becomes. And so we have not just a business interest in building the community. But we also have an interest in just making the product that by adding more people to it and therefore having more diverse voices join the community.

JULIE HYMAN: And Leif, I know that you guys on the platform sort of emphasize investing over trading. You don't want people day trading. But at the same time, you do have, as you talked about, the model where you allow people to follow people and what other people are doing. Are those things incongruous? Because typically, when you have sort of people on YouTube or wherever it may be on social media encouraging others to follow them, they are day trading, not all of them, but certainly a lot of them. So how do you mesh those?

LEIF ABRAHAM: So first off, I think it comes down to the culture around the stock market. And I think what you're describing there comes from that historically, the culture in terms of active trading, picking your own stocks, has been more driven from short-term thinking, more driven from speculative thinking and so on. And that's where you see the kind of day trading culture come from.

And we always, from the very beginning, have said, to truly democratize the stock market, you have to change its culture. And so very early on, what we've done is we've focused very heavily into building a community on the app that is not the typical type of setup that you would expect a stock trading community to look like.

And so on Public, it's 40% women, 25% people of color, it's 90% first-time investors, and it's 90% long-term investors. And so with that, the culture itself already is very different than what you would normally expect. And that culture kind of then also has, obviously, effects on people's behavior, on how they are maybe exposed to the stock market, and what kind of investing principles people are exposed to when they join the stock market for the first time.

And we think that's a very important thing. And so we look at social really more as a way to make the stock market approachable by seeing that you're surrounded by people like yourself. And the other piece, also to use it as a way to really scale education about the stock market.

And so on Public, it's much more collaborative versus competitive. It's not about showing off your largest gains. It's much more about sharing experiences and sharing knowledge around investing principles, companies, certain trends, and so on.

MYLES UDLAND: All right, Leif Abraham, co-CEO of Public.com, a company certainly at the nexus of a lot of major market trends right now. Leif, thanks for joining us today. I hope we'll stay in touch.

LEIF ABRAHAM: Awesome. Thanks for having me.