The recent trend of accessing stock markets via apps reflects growing interest and acceptance. Moreover, the COVID-19 pandemic has accelerated the pace of digital transformation for financial services companies. The new generation of investment apps not only shifts stock-trading services to a mobile and more technologically advanced environment, but it is completely reinventing the customer experience itself. Instead of using traditional trading channels with established intermediaries and standard fees, these new apps provide investors with a fresh way of gaining direct access to the stock market.
A new model for investment
Robinhood, founded in 2013 and available as an app since 2015, was one of the first providers to focus specifically on small and new investors. The app has gained international recognition, and its name suggests that the founders not only wanted to make markets more accessible, but also to build wealth. As the company website explains, its stated goal is “to build a financial product that gives everyone – not just the wealthy – access to the financial markets.”
A variety of other investment and trading apps focus on their own markets and niches. For example, the Acorns app (founded in the U.S. in 2012) and the Peaks app (a Dutch app available since 2016) are based on the principle of microinvesting. With these apps, payment amounts that have been linked to the credit card or payment app round up, and the difference is invested directly. Freetrade (founded in the U.K. in 2016) and Stake (launched in Australia in 2017) are already active on European markets, where they could gain a lead over Robinhood, which is currently only available to US residents. eToro, originally founded in 2007 as RetailFX in Israel, boasts users in more than 140 countries, including Germany. The app has been around since 2010 and is built on the copy trading concept, where investors can follow and emulate the most successful traders.
Rather than through commissions, these apps primarily generate income through subscription models or payment for order flow. The latter is a kickback of sorts from brokers who execute the orders and seek to earn more on each trade via bid-offer spread.
Apps targeting young people
Naturally, banks and online brokers are also increasingly offering mobile solutions for stock trading. However, this new group of fintech startups has a different structure than traditional providers. As international apps with social media appeal, they are aimed at a particularly young target group of 25- to 35-year-olds who want not only access to stock trading but also a new kind of user experience. It has become clear that accessibility and user-friendliness are key selling points for these new investment apps. For example, according to Bitkom’s Digital Finance Report 2020, 40% of respondents expressed the expectation that “smartphone apps’ ease of use for stock and securities transactions will enable more people to benefit from companies’ performances.”
In a nutshell, the easy access via smartphones makes these “neobrokers” so appealing. Clear design, community integration, and ease of entry has turned UI/UX into an actual product.
Special opportunities – special risks?
Many apps have little to no limit on how small a trade can be, making it possible to buy fractional shares. As mentioned, they charge very low fees — or none at all — and are available outside of regular trading hours. The apps clearly aim to lower the entry threshold for stock trading, and sometimes lure new users with free shares. On the flip side, the apps offer no or minimal investing advice, unlike traditional brokers. Consequently, purchasers must do their own research outside of the app, using articles, forums and social media. This aspect has raised suspicions in the German market. In the survey undertaken for the Bitkom Digital Finance Report referenced above, 69% of respondents stated that “an advisor’s input is absolutely key to making good investment decisions.” As a result, the separation of professional advisory services and the gamification of trading stocks carries certain risks, especially for inexperienced users.
Too much power?
The potential dynamics unleashed by direct market access were demonstrated in an interesting case study in January. Small investors coordinated a purchase of GameStop stock via Reddit to prevent a decline in the company’s value, on which hedge funds had speculated. In fact, the Reddit community’s actions were so successful that U.S. authorities are now investigating the possibility of market manipulation. Outrage erupted, however, when Robinhood simply suspended trading in GameStop shares at the height of the buying frenzy.
Ultimately, the neobroker did have a good reason for halting trading. The security it had deposited with clearinghouse DTCC was insufficient to match increased trading volume. However, this episode illustrates that some luster has fallen from the new market power of small investors: Even trading apps do not eliminate the intermediary function; they only replace it, sometimes with even more opaque conditions than before.
The outlook is promising
And yet, neobrokers are attracting young investors by reinventing the process of investing and stock trading. With pleasing designs and customer experiences geared toward millennials, these apps will be able to gain many users in the next few years. At that point, they will have to show that they can keep up with the momentum that they created. Users expect apps, acting as financial service providers and managers of highly sensitive data, to be error-free at all times and in all places – and rightly so. User trust and compliance with financial rules will play a crucial role in determining whether neobrokers will remain competitive as market penetration continues.
However, the new investment apps’ penetration of the DACH market is still at an early stage. Established providers, especially banking apps, may leverage the trend by incorporating a more attractive UX and simplified investment features into their existing apps. For example, a whitepaper from the Sparkassen Innovation Hub on the topic of changing values recommends “opening up products to small investment amounts” as well as “using a clear, appealing interface (UI), playful elements for data entry and maintenance, [and] the use of status and progress indicators to guide users through processes” to attract a new group of potential investors.
One thing is certain: The phenomenal growth of investment and trading apps, especially in Germany, could be a precursor to interesting developments in the coming years.