How Does M1 Finance Make Money? The M1 Finance Business Model In A Nutshell

M1 Finance is a North American online trading platform for common and preferred stocks and exchange-traded funds (ETFs). The company also offers margin lending, cash management, and a checking or debit account service. M1 Finance has a standard assortment of revenue streams for an investment platform. As a market maker earns money on the bid-ask spread, M1 Finance also offers a single premium subscription dubbed M1 Plus, and through interest and interchange fees.

Aspect	Description
M1 Plus Subscription	M1 Finance offers a premium subscription service called M1 Plus. Subscribers pay a monthly fee for access to enhanced features, such as a higher interest rate on cash balances, a second trading window each day, and reduced borrowing rates on M1 Borrow (a lending product offered by M1 Finance). M1 Plus subscription fees provide a recurring source of revenue for the company.
Interest Income	M1 Finance generates interest income from the cash balances held in users’ investment accounts. Users may leave uninvested cash in their M1 Finance accounts, and the company can invest this cash in short-term interest-bearing instruments. The interest earned on these investments contributes to M1 Finance’s revenue.
M1 Borrow	M1 Finance offers a feature called M1 Borrow, allowing users to borrow against the value of their investment portfolios at a competitive interest rate. M1 Finance earns revenue from the interest charged on these loans. Users pay interest on the amount borrowed, and this interest income adds to the company’s earnings.
M1 Spend	M1 Finance has introduced a digital banking service called M1 Spend, which includes a checking account and a debit card. While M1 Finance aims to provide users with a comprehensive financial platform, it may generate revenue from interchange fees charged to merchants for debit card transactions.
M1 Invest	M1 Finance’s core offering is its investment platform, M1 Invest, which allows users to create custom portfolios of stocks and ETFs. While there is no explicit fee for using M1 Invest, the company benefits from users’ investments and engagement on the platform. As users invest and their assets grow, M1 Finance may benefit from increased trading activity and assets under management (AUM).
M1 Spend & Earn	M1 Finance’s checking account, M1 Spend, offers a feature called M1 Spend & Earn, which allows users to earn cashback rewards on qualified purchases made with their M1 debit card. While the primary benefit goes to users in the form of cashback, M1 Finance may receive a portion of the interchange fees earned on these transactions.
Challenges and Competition	M1 Finance operates in a competitive landscape with other online investment platforms, robo-advisors, and fintech companies. Staying competitive, expanding its user base, and ensuring regulatory compliance are ongoing challenges. Providing value-added services and maintaining user trust are key priorities.
Future Growth Strategies	M1 Finance’s future growth strategies may involve: – Product Enhancements: Continuously improving and expanding its financial services and platform features. – User Acquisition: Attracting new users and increasing assets under management. – Partnerships: Collaborating with financial institutions and fintech partners. – Financial Education: Providing resources to help users make informed financial decisions. – International Expansion: Exploring opportunities in new markets.

Table of Contents

Origin Story

M1 Finance was founded by Brian Barnes, who developed a passion for investing after his parents opened a brokerage account in his name during the fifth grade.

As an adult, Barnes became disenfranchised with the financial services industry.

He argued that fund managers were only concerned with building their own wealth and not the wealth of clients whose funds they were supposed to be managing.

Barnes also noted that the industry as a whole lacked innovation, was overly complex, and the barriers to entry were high.

In 2015, the M1 Finance platform launched in 2015 to offer a low-cost, convenient, and automated means of investing. Just six years later, the company had approximately $3.5 billion in assets under management.

M1 Finance revenue generation

M1 Finance has a standard assortment of revenue streams for an investment platform. Following is a look at each.

Order flow payment

When a user places an order on the M1 Finance app, the order is forwarded to a market maker who then compensates the company for facilitating order flow.

Here, the market maker earns money on the bid-ask spread as they try to match buyers and sellers of the same security.

When a customer opens a sell position, the market maker facilitates the transaction by selling the security.

To make a profit, the selling price the market maker offers is lower than the price the customer might receive selling on the open market.

This profit is essentially very small but is amplified over thousands or even millions of daily transactions. A portion of this profit is shared with M1 Finance.

Subscriptions

M1 Finance also offers a single premium subscription dubbed M1 Plus.

For $125/year, customers get access to three core products:

M1 Invest – offering $0 trading commissions, smart transfers, and custodial accounts.
M1 Borrow – a lending service for amounts exceeding $10,000. In this case, M1 Finance charges a 2% interest fee. Note that users on the free M1 Basic plan are charged an interest rate of 3.5%.
M1 Spend – a checking account with 1% cashback where ATM and international fees are reimbursed.

Cash interest

M1 Finance also makes money by lending out consumer funds to other financial institutions. They then collect interest from these institutions, otherwise known as net interest margin.

Short sale interest

The company makes further revenue by charging interest on securities it lends out to short-sellers.

The exact rate is dependent on market demand and supply.

Interchange fees

Through its VISA debit card linked checking account, M1 Finance collects an interchange fee when the card is used to make an eligible purchase.

The interchange fee is a percentage of the total purchase amount paid by the merchant in question. Typically around 1%, an undisclosed portion of the interchange fee is shared with M1 Finance.

Key takeaways:

M1 Finance is a North American online trading and personal financial services platform. It was founded by avid investor Brian Barnes who noted the industry was complex, lacked innovation, and self-serving.
M1 Finance makes money through order flow commissions facilitated by market makers. It also charges access to a premium subscription plan encompassing the M1 Spend, Borrow, and Invest products.
M1 Finance collects interest fees from financial institutions and short-sellers to whom it lends securities. Through its VISA debit card linked checking account, it also earns shares interchange fees with merchants.

Key Highlights

Origin and Founding: M1 Finance is a North American online trading platform for stocks and ETFs, founded by Brian Barnes. Barnes, inspired by his childhood experience with investing, aimed to create a low-cost, innovative, and automated investment platform to disrupt the traditional financial services industry.
Challenges and Innovation: Barnes observed that the financial industry lacked innovation and was overly complex. He sought to address these issues and create a platform that prioritized clients’ wealth and convenience.
Platform Launch and Growth: M1 Finance launched in 2015 with a focus on providing an automated and user-friendly means of investing. Within six years, the company accumulated approximately $3.5 billion in assets under management.
Revenue Generation Strategies: M1 Finance employs various revenue streams commonly used in investment platforms:
- Order Flow Payment: M1 Finance facilitates order flow for users, earning compensation from market makers who make profits from bid-ask spreads during transactions. A portion of this profit is shared with M1 Finance due to the high volume of daily transactions.
- Subscriptions (M1 Plus): M1 Finance offers a premium subscription called M1 Plus, providing access to three core products: M1 Invest (commission-free trading), M1 Borrow (lending service), and M1 Spend (checking account with benefits). Subscribers pay $125/year for this enhanced suite of services.
- Cash Interest: M1 Finance lends consumer funds to other financial institutions, collecting interest income from these lending activities.
- Short Sale Interest: M1 Finance generates revenue by charging interest on securities it lends to short-sellers.
- Interchange Fees: Through its VISA debit card-linked checking account (M1 Spend), M1 Finance earns interchange fees when users make eligible purchases. Interchange fees are shared with M1 Finance.
Holistic Platform: M1 Finance offers a comprehensive platform that encompasses trading, lending, and cash management services. This holistic approach provides users with a range of financial tools and benefits.
Innovative Pricing Model: M1 Finance’s subscription-based model (M1 Plus) offers an array of features and benefits to users, enhancing their experience while providing a predictable revenue stream for the company.
Efficiency in Scale: M1 Finance’s revenue streams, particularly order flow payments and interest income from lending, benefit from the high volume of transactions and lending activities on the platform.
Positive Disruption: M1 Finance’s journey highlights how innovative platforms can disrupt traditional financial services by offering cost-effective, user-friendly, and innovative solutions to common investment challenges.

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