Few areas of the wealth and banking industries appear immune from disruptive technologies, and online broking is the latest high-fee zone to be targeted by modest start-ups.
Average share trades through online brokers such as CommSec and ETrade attract transaction fees of $20 or $30, and up to $70 for phone trades. For trades worth more than $10,000, the fees can run into hundreds of dollars.
So it shouldn’t be surprising that when Palo Alto, California-based Robinhood began offering no-fee share trading in the US this year, the company was flooded not only with US applicants but email inquiries from Australia asking if it was coming here.
“The demand was one of the reasons we chose Australia” as the first country for international expansion, Robinhood’s Jack Randall says in an interview.
Robinhood’s product is a smartphone app that enables share trading with no fees per transaction, no minimum trade and no minimum account balance.
It’s aimed at millennials (who spend more time on their phones than any other device) and its users average 26 years of age — a demographic major financial institutions have found hard to engage.
The firm’s business model is typical of small disrupters such as peer-to-peer lenders that are targeting fat margins on personal and business loans.
Though still tiny, they all have the potential to squeeze the lucrative fees charged by financial institutions in many areas of their businesses.
Robinhood employs just 30 people, has yet to advertise and uses technology to execute a simple offering: no fees on share trading, undercutting the average fee charged by US brokers of $8 or $10 a trade.
Robinhood is refreshingly transparent about how it can afford to do this — it cross-subsidises the broking by keeping interest on uninvested cash balances, and will soon start to charge fees on margin lending.
“The costs of the transaction are incredibly minimal, they are fractions of a penny, like sending an email,” says Randall. “The reason brokers charge up to $60 in Australia and $10 in the US is because 30 years ago when these brokerages began, you still had trading tickets on the floor, they’re big organisations with physical locations.”
Before Robinhood opened for business, it had 800,000 people signed up on waiting lists; it won’t reveal exact user numbers now but says it is in the “hundreds of thousands”.
Without any publicity, 10,000 Australians have already signed up ahead of a launch in the fourth quarter once regulatory approvals are cleared.
Initially, Australians will have access to US-traded stocks and US-listed exchange traded funds only, but the plan is to expand to Australian equities further down the track.
Robinhood’s co-founders, Vlad Tenev and Baiju Bhatt, were roommates at Stanford University, then moved to Wall Street where they built trading platforms for large financial institutions.
That’s where they learned that institutions effectively paid zero to place stockmarket trades.
Last month, Robinhood announced a second funding round of $50 million that will enable the international expansion. Its investors include Google Ventures, Andreessen Horowitz, Index Ventures and apparently Snoop Dogg.
Randall says 25 per cent of Robinhood’s customers are small-scale, first-time investors, and millennials have generally been uninterested in share trading because of the transaction costs on small trades.
Industry experts say the wealth management industry is highly exposed to potential disruption from small, targeted competitors, even though their business models have yet to be tested over the long run.
“We think nearly all wealth firms are at risk here because of the opportunity to provide one service for free while making a margin elsewhere in the value chain,” says Oliver Hesketh at Tria Investment Partners, a consultant to the investment management industry.
As some of our local start-ups like Moneyplace have found, trying to move to a low-cost operating model from within the sprawling bureaucracies that fill the big banks proved impossible, so they struck out on their own.
With new entrants from overseas, the major banks are entering a whole new world of competition.