Protocol | Fintech

Here’s how GameStop turned Public into the anti-Robinhood

Dropping payment for order flow "was a big decision for us, but a very sensible one," said co-CEO Jannick Malling. co-founders Jannick Malling and Leif Abraham. co-founders Jannick Malling (left) and Leif Abraham decided to abandon payment for order flow.


The GameStop trading frenzy in January gave a huge lift.

Leif Abraham, the social investing site's co-founder and co-CEO, described it as "a moment of big growth." The startup saw a big spike in users, including refugees from rival Robinhood, which was sharply criticized for its handling of the controversial trades.

But at the height of the GameStop craze, Public made a stunning announcement: It would no longer make money from rebates earned for sending trades to market makers, a system called payment for order flow.

It's a highly lucrative revenue stream, underscored by Robinhood's recent disclosures related to its upcoming initial public offering. Payment for order flow made up three-quarters of Robinhood's total revenue in 2020. That figure jumped to 81% in the first quarter of this year during the GameStop frenzy.

But Abraham and his co-founder Jannick Malling said payment for order flow — which generates more revenue the more users trade — simply didn't fit Public's mission. Founded in 2019, Public, which had a million users as of February, hopes to build a social network and online brokerage for investors with long-term financial goals.

"It was a big decision for us, but it was a very sensible one," Malling, who is also co-CEO, said.

In an interview with Protocol, Abraham and Malling discussed their reactions to the Robinhood IPO disclosures, revisited their decision to abandon payment for order flow and explained their vision for the social investing startup.

This interview was edited for brevity and clarity.

What stood out for you when you read Robinhood's IPO filing?

Leif Abraham: What is very clear is that we are on different paths. You see similarities in terms of, you can buy stocks on both [sites]. We believe that we have a chance to build a new model that has a different dynamic than some of the old players, and therefore does not rely on things like payment for order flow, which we believe can have pretty negative impacts on how you run your company and what products you can offer to your customers.

Jannick Malling: The most distinct difference is at the mission level. We're on a mission to make the public markets work for all people. There are different solutions out there for folks that want to get involved with the stock market. There are the active traders and that's sort of the high engagement model where you are maybe speculating more. Then you have the passive investors, with robo-advisors and a very low engagement model, but it is longer-term investing.

We've sort of found this spot in the middle.

With Public, the engagement doesn't come from day trading. It comes from being engaged around your portfolio. It's predominantly long-term investors that are actively building their financial literacy in a community. That's a very new category.

Was there anything that surprised you in Robinhood's S-1 filing?

Malling: I don't think there were very many surprising things for us. We had a pretty good read on who they are, who they cater to, where they made their money. It wasn't a big moment when we found a bunch of new stuff.

Robinhood disclosed that 70% of its revenue comes from payment for order flow which you decided to abandon in February. And that figure went up to 80% early this year during the GameStop trading frenzy. What was your reaction to those numbers?

Malling: I expected it. [Laughs.] I could have told you that a month ago. If you sort of know the ins and outs of how the industry works, have a detailed understanding of the payment for order flow mechanism, it won't come as a surprise to anybody.

You decided to drop payment for order flow as a revenue model in February at the height of the GameStop trading frenzy. Can you revisit why you made that decision?

Abraham: Obviously, it was also a moment of big growth for us, the whole GameStop scenario. It was just a time for us to be reflective about the future of the industry as well as our business. We always thought we should get rid of payment for order flow, but we just didn't really pull the trigger until then. The GameStop scenario was just like a trigger moment for us [to say], "Yeah, let's just make a decision now."

Malling: If you made a lot of money on payment for order flow, you're catering to day traders who trade a lot. Our community is very different. It's mainly long-term investors. It's not speculation. It's much more diversified portfolios. So even just from a business perspective, payment for order flow as a revenue stream didn't actually make sense. It's not aligned with the mission that we have, the product that we're building, the community that we're serving. It was a big decision for us, but it was a very sensible one.

If you are relying on payment for order flow to be your No. 1 revenue stream, and that's where we're going to make a lot of money, you have to offer options trading. You want as many people as possible to go do that margin trading, etc. And we just never wanted to do that. That should not be a core revenue stream for us. And we never thought that it would be. At that moment, we decided it shouldn't be a revenue stream for us, period.

Abraham: If your business model is structured a certain way, you will end up having a meeting one day where you will look at each other and say, "When are we gonna launch an options trading desk?" And we don't want to be put in the position because it's not the company we set ourselves up to build.

How did investors react? Did anyone say, "Wait, this was how you pitched this business to us -- and now you're going to change it?"

Malling: I can tell you we never built the business where we said from the outset that payment for order flow was going to be our No. 1 revenue stream. So for that reason they were mostly short conversations.

Abraham: One of our investors was immediately supportive and said that from their experience when founders do the right thing, it is rarely the wrong thing. That was just like a very striking little sentence.

You adopted tipping as a revenue model. Some would question its viability long-term. How did you reach that decision?

Abraham: There's no such thing as free trades. If that's the reality, let's be loud and clear about it. Understanding there's no such thing as free trades, let's give people the option to pay for their trades, and therefore create a model where users feel that it's very transparent. They feel that if this company provides a good service for me, I would be willing to pay for it. Most people are completely willing to pay for something if there is value there. This aligns our business model completely with the interest of our customers. If we do well, people will tip us. If we don't do well, people will not tip us.

Malling: If you look broadly at tech, it is sort of the modern way to align with your users and your customers. You're seeing it sort of across the board. I think it's tough to do if you have a commoditized product. But Public has a very unique value proposition in the community that we offer, which is something that no one else in fintech or elsewhere frankly really has.

Do you have users who don't tip?

Abraham: Of course. Not everyone tips. That is the reality of the game.

So the thinking is to build a user base based on the tipping model, and then introduce new products later on.

Abraham: A hundred percent. Crypto is coming soon, for example. We will launch new products which will unlock new revenue streams for us in the future. We're building a business model that is more balanced. It doesn't strike heavily in one or two directions. We're looking to build something that has way more benefits.

Malling: We don't want to be a company that concentrates our revenue into one mechanism. We want to build a company so that when we have an S-1 filing maybe one day, it's got to be a lot more diversified, a bunch more revenue streams, which is much less risky. We think it sets the business up to be more healthy in the long term.

Let me pick up on that point: So when will your S-1 come out?

Malling: Despite the name, we're still [a private company]. [Laughs.] We don't really have an answer to that, obviously.

When will you start accepting crypto?

Abraham: We're not sharing the details yet. We are obviously looking at it. You will see it when it comes up.

Are there things that you have learned from other crypto platforms and marketplaces that you're using in this rollout?

Malling: We try very hard to build a brand and a company that stands for a few things. Always striving to have users be as educated as possible is one of them. Having a very diverse community where it's 40% of women on the app, it's 45% of people of color, and it's less homogenous than financial services historically have been — that's what Public has come to stand for. You can expect us to take those same approaches when we launch crypto investing.

The community is one of the greatest value propositions Public offers. Many communities become very homogenous over time. You do not want that, especially within the world of finance.

Are there conversations on the platform that become problematic given the different voices you must deal with?

Abraham: So far, no. What's interesting is that Public is one of the most verified social networks in the history of social networks because everyone goes through identity verification. So the baseline just puts people on their best behavior. You know 2020 was a very divisive year, right. Tensions were high. On Public, you saw conversations with people who seemed to be clearly on different sides of the aisle in terms of their ideologies having respectful, normal conversations. It was beautiful to watch. You can have constructive, fact-based discussions. There's actual data that people can discuss and whatnot and have opinions on. It's way more factual. It's way more educated discussions that are not purely emotionally driven at all times.

Malling: It just lifts the bar dramatically and puts people on their best behavior. That's a little bit counterintuitive. The internet has always been about anonymity. It's always been about just having a username, a password. What we've seen is there's a downside to running a community with anonymity. There's an upside to running a community where everybody goes through identity verification. That led to an incredibly high quality community which we're obviously been very pleased with.

What are the chances of a group conspiring to shape a conversation on your platform? We have seen this happen on Facebook and other social networks. How do you prepare for something like that?

Malling: You probably don't want to do that in a community where you verify your identity and we know your Social Security number. Again, that's just the best safeguard you can have.

Abraham: The other piece is you need an audience to have an impact, and on Public you probably won't be able to build an audience if you're a bad actor. And so you will have to be a good actor for a long time to build an audience. You can see the health of a community, when the community itself cares about its own health. If someone is acting in a bad way, other people in the community go in to defend the health of the community. That is like the holy grail of a community where people care about its health.

Facebook wasn't able to do that, and that's not what has happened on other social networks.

Abraham: We don't make money on ads. It's not that we are building an algorithm that is optimizing for eyeballs so we can place more ads in the feed. Incentives drive everything. That's why we went off payment for order flow, to prevent us from one day becoming something we didn't want to become. The quality of our product is highly correlated with the health of the community. So we have a business interest in keeping the health of the community high.

Can you recall the exact moment that you decided that you were going to start Public?

Malling: I don't think we can pin it down to the exact beer, or coffee or bottle of wine or whatnot. The truth that we learned is that the reason most people haven't invested has less to do with ease and commissions, and more to do with the psychological barrier that the stock market is not for you.

That's actually what set us on the path to take a community-based approach in the first place where you can engage with the community, you can see yourself represented in the community, regardless of your background, and you can learn from other people.

The one thing that we're really hitting home is that as much as people want to invest for the sake of having more money in the future, they want to learn just as badly. It's an incredibly exciting thing to discover. That's the thing we are reminded of every day.

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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