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Hello Quartz readers!
A few weeks ago we discussed TransferWise’s claim that it’s aiming to charge zero fees (which seems unlikely). This week Charles Schwab ran a similar marketing pitch—the US retail brokerage said it was cutting some trading commissions to zero.
Zero has a nice ring to it. Of course, it costs money to execute stock trades, and the company has to get revenue from somewhere. Like other brokers in the US including Robinhood, Schwab sells these retail orders to large trading firms like Citadel and Virtu. You can read more about how online brokerages make money from payment for order flow, here. Schwab says it will lose as much as $100 million in revenue each quarter from the commission cuts, but it’s worth noting that it made $139 million in order-flow revenue in 2018.
Payment for order flow has been contentious. The expense to the customer is obscured in the spread between the bid and the offer for the trade, and in the amount of rebate that wasn’t given to the customer. Watchdogs have also worried that it creates a conflict of interest for the broker, who could be tempted to send customer orders to the trading firm that offers the best rebates, rather than the best deal for the customer.
For those reasons, payment for order flow isn’t allowed in the UK. “We consider PFOF to be bad for our markets,” the Financial Conduct Authority said in a newsletter (pdf) in 2016.
This made me wonder how Robinhood will operate in Britain. The “commission-free” trading app for millennials said in August that it plans to eventually launch in the UK. Since payment for order flow isn’t allowed here, the company will presumably get revenue from things like interest on customer deposits, charging traders who buy stocks with borrowed money (margin), or perhaps premium services.
Premium services are part of the way that Revolut, another fintech unicorn, is monetizing brokerage in Britain. The London-based company rolled out trading for US stocks this summer just before Robinhood’s announcement.
Revolut expects to make money from stock trading either through more subscriptions to its Premium and Metal offerings, or via commissions when users trade outside of their commission-free limits. Revolut’s brokerage fees appears fairly straightforward, though bundling services together can pose its own problems for transparency and naturally tends to favor the seller, as noted by the Harvard Business Review.
Meanwhile, offers for “free” and “zero fee” seem to remain strangely enticing for marketing purposes. The rise of big internet platforms with multi-billion-dollar valuations demonstrated that free email, search, and social media actually comes at a pretty high price (meaning the loss of individual privacy and data protection). Maybe one of these days, offers of “free” services will be a red flag.
1️⃣ BlackRock has been in talks with Tencent during the past year, according to the Wall Street Journal (paywall). The early stage discussions have been about how to make BlackRock’s models and tools for investing more widely available in China.
2️⃣ Visa got off to a slow start with fintechs. The card network says its deal with Revolut, which will use Visa for global expansion, shows the company is catching up.
3️⃣ Japan is using tax breaks to encourage electronic payments. Shinzo Abe’s government is hoping its tax increases will be modest enough not to harm the economy, and that card-rebates will push the country away from banknotes and coins, the Financial Times (paywall) reported.
4️⃣ Automation and tech will cut US banks’ headcount by about 200,000 during the next decade, according to a Wells Fargo report. The job losses will be concentrated in call centers, back office operations, and bank branches.
5️⃣ Branch closures can create a vicious cycle. Customers sometimes switch to digital because branches are far away, not because they don’t like going to banks, according to Deutsche Bank research.
The future of finance on Quartz
Brex, a startup that provides credit cards to other startups, started a cash account for customers that offers higher interest rates. In some ways, it resembles the accounts that Robinhood had to walk back in December.
Zimbabwe shut down cash services for mobile money. The government said these services, known as cash-in and cash-out, were being abused. Amid a cash shortage, notes and bills are now worth more than electronic money.
Facebook hopes to roll out payments for Messenger and WhatsApp “in a lot of places” this year. That’s not to be confused with its Libra cryptocurrency project, which is still being discussed with regulators around the world.
Taxpayers could end up on the hook for startup flops in Silicon Valley. Public pensions have ramped up their private equity investments, and lower returns on those bets could result in funding shortfalls, or worse.
European banks should stop complaining about negative interest rates. “Negative rates are for the purpose of society. Not against or for the banks,” said Jean Pierre Mustier, the president of the European Banking Federation (EBF) and chief executive of UniCredit.
Always be closing
- SoftBank’s Vision Fund is putting a few hundred million dollars (paywall) more into Greensill, a supply-chain finance company.
- Fintech-as-a-service provider Rapyd raked in $100 million from investors including Tiger Global and Stripe.
- Savings app Digit has raised $27.5 million, led by General Catalyst. Citi Ventures also invested.
- A unit of Carrefour Brasil bought a 49% stake in Brazilian startup Ewally Tecnologia e Serviços. Carrefour intends to offer digital checking accounts to customers.
- SoftBank Group is partnering with Inter-American Development Bank for possible investments in Latin American startups.
I hope your week has been a profitable one (pick your own metric). Please send any offers for zero-fee services, tips, and other ideas to jd@qz.com.