How M1 makes money
M1 offers commission-free investing, so we often get the question, “How do you make money?” In this post, we’ll explain how M1 makes money so we can continue giving you the Finance Super App™ without charging commissions.
For a complete list of fees, please refer to our fee schedule and link to the fee schedule.
On M1, we offer products for clients to Invest, Borrow, and Spend.
- Invest is a commission-free, automated, and customizable brokerage, which now also trades crypto.
- Borrow gives users access to a flexible line of credit in just a few taps, with some of the lowest rates on the market.
- Spend provides a free high yield checking account an the Owner’s Rewards credit card1 where you can earn up to 10% cash back on brands you invest in.
Through these products, we make enough money to support our growing business and invest it back in the products and features our client’s request. Let’s walk through each product so you can see why a lot of finance companies don’t need to charge many of the fees they do.
How M1 makes money on Invest
Unlike other investing platforms, you’ll never be charged commissions or markups on trades, a platform usage fee, or to deposit or withdraw from your connected bank. But we do make money in different ways, including miscellaneous fees.
Interest on brokerage cash
This revenue stream is the easiest to understand because it’s the same way retail banks make money. Banks take people’s money as deposits in a checking or savings account. The banks then use this money to fund loans where they charge interest.
When M1 customers hold cash on our platform, we can lend it out. Since the cash needs to be available at a moment’s notice to either withdraw or make investment purchases, we primarily lend the cash to banks on an overnight basis. The amount we receive tracks the Federal Funds rate — the interest rate controlled by the Federal Reserve.
Federal Funds Effective Rate from June 2012 to June 2022
Our clients hold less cash on M1 than people typically do on competing brokerages for a couple reasons.
- We use fractional shares2 so money can more efficiently go into the investments our clients want.
- The default option for M1 clients is to automatically invest cash anytime the balance goes above $25.
M1 clients do still hold cash, whether they’re waiting to make an investment decision or are holding cash as an asset within their investment portfolios. We lend out this cash as one of our revenue streams.
Interest on lending securities
In addition to lending cash, brokerages like M1 can also borrow securities. This provides capital for other activities, including tax and dividend trades. To lend a security, a brokerage must first borrow the security and sell it on the open market. When it wants to close out its position, it will buy the security on the open market and return the shares to the lender. This strategy is commonly used and has created a large marketplace to lend and borrow securities.
When lending the security, the lender still owns the security outright. They own all economic interest, both from the movement in stock price and through dividends en lieu. The lender can recall the security at any time and sell whenever they want.
When M1 lends out securities, we make interest on the cash. This interest rate is highly variable and fluctuates daily based on any given security’s available supply and demand for borrowing. The borrower pays this interest rate on the value of securities they borrow.
We only lend securities in high demand, which accounts for less than 5% of the total capital we have on the M1 platform. There are market participants willing to pay interest rates to borrow these securities, so we make use of this option and lend out a portion of securities held on M1.
Payment for order flow
When we buy or sell a security on behalf of our clients, we have a choice of where we send the orders for execution.
- Exchanges are marketplaces where participants interact and match with securities. The exchanges publish the highest price someone would be willing to pay for the security (the bid) and the lowest price someone would be willing to sell a security for (the ask).
- The bid is lower than the ask and the price difference between the two is called the spread.
- Exchanges make money in part through matching buyers and sellers at the ask and bid respectively and pocketing the spread.
There are alternative, off-exchange markets that specialize in electronic market making. These industry participants pay brokerages like M1 a tiny amount per share to execute using their services rather than other exchanges. In return, they’ll provide better prices than what’s available in the public markets, which comes with price improvements for our clients.
This revenue stream is a bit of a bogeyman in our industry but unnecessarily so. These participants add substantial liquidity to the market, making it much more likely you’ll be able to buy or sell exactly when you want. Since they came around, spreads have decreased substantially. While most people don’t see the spread as an outright fee, it’s an implicit cost anytime you buy and sell a security. Smaller spreads mean your trading costs are lower. We do take this payment, $0.002 per share, for all securities except OTC stocks.
What about crypto?
M1 does not charge commission for investing in cryptocurrencies. Apex Crypto is assessing 1% (or 100 basis points) fee to all crypto transactions on purchases and sales, reflected in the execution price. M1 and Apex Crypto have entered into a fee rebate agreement.
How M1 makes money on Borrow
M1 Borrow gives you access to a flexible and low-cost line of credit using your portfolio as collateral. This lets you access liquidity in the form of cash by borrowing against your portfolio while staying invested, also known as margin lending.
Since you don’t have to sell any securities and pay taxes on any capital gains, portfolio margining is a tax advantaged way to borrow money. You can also often deduct the interest expenses against your investment income on your personal taxes3. The other advantage is that there’s no additional paperwork, credit check, or approval process—the money is available on demand.
Clients can borrow up to 40% of their total assets (the sum of all their stocks, funds and cash) without any lengthy process or paperwork4. Our borrow rate is lower than most mortgages, HELOC (home equity line of credit), auto loans, and nearly every other type of loan out there. Despite having a low rate, we still make money because our costs are lower than the capital we loan out.
See the current Borrow rates >>
How M1 makes money on Spend
Interest and interchange
M1 Checking is a checking account and debit card integrated into the M1 Finance app. With it, you’re able to direct deposit into M1, pay bills from M1, and use the M1 Visa® Debit card anywhere Visa is accepted.
It provides two additional revenue streams available to us:
- Interest from cash balances. People hold cash within the M1 Spend account to cover day-to-day purchases, something we can monetize in exactly the same way we do cash in the M1 Invest account.
- Interchange fees. We receive a small percentage of the transaction value, called interchange, anytime you use your M1 Visa® Debit card. The fees are paid to M1’s bank to cover handling costs, fraud and bad debt costs and the risk involved in approving each payment.
Annual fee and interchange
The Owner’s Rewards Card is a unique credit card for investors that rewards you for thinking like an owner. It’s the only card that integrates into your portfolio to potentially help you grow your wealth, long-term.
It provides two additional revenue streams available to us:
- Annual fee. The Owner’s Rewards Card has a $95 annual fee, waived with an active M1 Plus membership.
- Interchange fees. We receive a small percentage of the transaction value, called interchange, anytime you use your Owner’s Rewards Card. The fees are paid to M1’s bank to cover handling costs, fraud and bad debt costs, and the risk involved in approving each payment.
How M1 makes money on M1 Plus
M1 Plus is a membership program that gives you benefits across the entire M1 platform. You’ll get additional trading options, a discount on M1 Borrow, interest on cash in your M1 Checking account, cash back on your M1 Visa® Debit card, and the annual Owner’s Rewards Card fee waived.
The $125 annual Plus membership fee is another way we make money. But anyone who uses any or all our products and services could save significantly more than the cost of the annual Plus membership.
The bottom line on revenue
Nearly every financial service company makes money in all the ways outlined above, whether they charge fees or not. We simply decided these revenue streams were enough, so we don’t need to charge hefty fees.
We have no problem with a company looking to make money. People pay for things when they get more value from it than it costs, and companies generate revenue from the difference between what they charge and what it costs to produce. It’s a symbiotic relationship between companies and their customers. Things tend to ebb and flow between who gets the better end of the deal.
In financial services, the pricing pendulum has swung too far. It mainly benefits companies that have maintained high profit margins for a very long time. We think it should swing back towards you.
Progress is driven by some combination of a better product at the same price or the same product at a better price. At M1, we strive to offer a great product at a better price. So, we decided to build our entire business on revenue streams that don’t focus on fees.
We make up for this loss in potential revenue by making our business far more efficient and lowering the costs of operating the business. We do this by replacing high salaried financial personnel with the latest and greatest in technology and automation. As a result, you’ll get better service at a lower cost — and M1 will grow on its existing revenue streams.
Originally published March 19, 2019, updated on August 9, 2022.
- The Owner’s Rewards Card by M1 is Powered by Deserve and issued by Celtic Bank, a Utah-Chartered Industrial Bank, Member FDIC. Review Cardholder Agreement for more details. 1.5%-10% credit card cash back rewards earned on eligible purchases subject to a maximum of $200 cash back per calendar month.
- If you choose to transfer your account to another broker-dealer, only the full shares are guaranteed to transfer. Fractional shares may need to be liquidated and transferred as cash.
- Consult your financial, tax, or other adviser to learn more about how these benefits (or any limitations) would apply to your specific circumstances.The availability of tax or other benefits may be contingent on meeting other requirements.
- To qualify, customers need a taxable account (IRAs do not qualify) and a minimum of $10,000 total account value. For more information, read our FAQs.