On Wednesday, US brokers TD Ameritrade and E*TRADE released statements saying that they are going to be launching commission-free trading services.
That announcement came less than a week after Interactive Brokers and Charles Schwab revealed that they would be doing the same.
Four big brokers announcing the launch of the same service in less than seven days is pretty unusual. But it’s indicative of how seriously the incumbent firms in the American retail trading industry take new brokers, like Robinhood and Acorns, that have attracted millions of customers in the past few years via a commission-free offering.
And, though it’s certainly leading the way, the US is not the only place where new companies are making old-school stockbrokers feel a little anxious.
In Europe, particularly in the UK, the market for commission-free stock trading is heating up. Over the past few months, a few big names, including BUX, eToro, and Revolut, have launched the service.
But one broker has already been offering the service for over a year. London-based Freetrade launched its iOS application in October 2018. That was followed by an Android app in April of this year.
"To be a real stockbroker, you have to go deep"
Since going live, the broker has managed to attract over 50,000 customers. And though it’s likely to have some competition in the near future, it appears to be the only dedicated commission-free stockbroker now active in the UK, with all of its competitors providing the service as part of a wider offering.
That, according to Freetrade’s chief marketing officer, is part of the appeal. Speaking to Finance Magnates on Tuesday, Viktor Nebehaj said that the firm’s commitment to one service wouldn’t just give it an edge, but that it ss necessary to providing a solid investing experience for clients.
“If you are going to be a real stockbroker, you need to go deep and build the best service possible,” said the Freetrade CMO and co-founder. “Looking at some other providers, it’s clear that stock trading is a loss maker that they’re just using to cross-sell other services.
“There’s nothing wrong with that. But I think we are well-positioned to provide a superior investment and trading service because it’s the one thing we’re focused on doing.”
Building a long-term business
To provide that superior service, Freetrade has done several things. First of all, the broker has become a member of the London Stock Exchange - something no other commission-free trading provider has done.
The company has also taken the time to get things right when it comes to Regulation . Freetrade was authorized by the Financial Conduct Authority in October 2017, a year before it went live. And in July of this year, the broker received the green light from the British regulator to provide fractional shares trading.
Depending on how quickly that service gets brought to market, that may make Freetrade the first company in the world to offer a combination of fractional share trading in the US, UK and European equities markets.
“We are looking to build a long-term business,” said Nebehaj, explaining the thought-processes behind the companies’ decisions thus far.
“Ultimately, we want our clients to have their life savings on our platform. You can’t do that by cutting corners or doing things half-heartedly.”
Expansion plans
Building such a business isn’t going to be easy. Unlike CFDs, which generate significant revenue per client, equities trading is trickier to make money from.
Still, it can be done. In their most recent financial report, IG Group revealed that its 38,000 stock-trading clients generated £5.9 million in revenue last year. Considering that’s something of a side-business for the firm, those numbers weren’t bad.
Given that Freetrade has a similar number of clients - and that number is likely to increase exponentially in the coming months - the firm certainly has the ability, unlike many start-ups, to become a solid, profit-making business.
It will, however, take hard work to ensure that happens. And speaking to Nebehaj, it’s clear the firm is doing its utmost to ensure it does.
“Our immediate plans are to expand in Europe,” said Freetrade’s CMO. “The first place we are looking at is Ireland and then it’s probably going to be Germany. Then we have fractional shares trading to launch, which is likely to generate more revenue.
“You also have to think about our big cost-savings. We put a lot of energy into our technology early on. That means we are capable of doing a lot with a smaller group of people. It also means that we can scale rapidly without any problems.”
Who needs venture capital?
The Freetrade team’s efforts have paid off, with investors injecting over £10 million into the company since 2017. Unusually, that money hasn’t come via venture capital. Instead, Freetrade has used CrowdCube - a British crowdfunding platform - for all of its fundraising.
The speed at which it has done this has been mind-boggling. In May of this year, the broker raised £1 million in 77 seconds, with users ultimately investing £2 million. That made Freetrade the fastest fundraiser in CrowdCube’s history, beating the previous record set by challenger bank Monzo.
On the heels of that rapid round of fundraising, the company returned to the crowdfunding platform in late June for another one. When the round had closed on July 9th, 5,000 investors had put another £4 million into the broker.
“We have smashed our fundraising targets every time,” said Nebehaj. “On a personal level, it’s very rewarding to see the company you worked so hard on doing well. But, more importantly, it shows that people, who have done their due diligence on us, think that Freetrade can provide a great service and become a successful company.”
Beating the competition
The decision to snub traditional means of financing and use CrowdCube is very much a modern-day, millennial generation phenomenon. It’s also one that reflects FreeTrade’s own burgeoning base of customers.
“Our clients are overwhelmingly millennial,” said Nebehaj. “The average age is 30 but we do have a small number of outliers. One customer is 90! He posts quite a lot on some of our discussion groups too.”
Nonagenarians aside, Freetrade is already facing competition for millennial customers. Speaking to Finance Magnates last month, the CEOs of both eToro and BUX said that they are targeting ‘digital natives’ - marketing lingo for ‘young people.’
Robinhood has also launched a UK subsidiary, though it is yet to go live. With that sort of competition, I asked Nebehaj, how can Freetrade make sure it stays ahead of the pack?
“I would reiterate the fact that we are focused solely on stockbroking,” he said. “We are not just onboarding clients to sell them another product. That means our technology and product is extremely advanced but it also has a big impact on customer experience - something that’s very important to millennials.
“If you are selling CFDs, you tend to have a really short customer lifecycle and that is then reflected in how you treat clients. Aside from building a long-term product, we’re also quick to adapt and cater to what our customers want because we want them for the long-run.”
Freetrade’s customers seem to agree. After Revolut launched commission-free trading last month, a discussion board was started on Freetrade’s CrowdCube page to look at how the challenger bank’s service may affect the broker’s own offering.
“Revolut have their fingers in all of the pies,” says the final comment,” but Freetrade has its whole freakin fist in the trading pie.”
It’s hard to disagree. And with the market for low-cost stockbroking services looking set to take off in Europe, don’t be surprised if you see Freetrade’s name at the top of the commission-free pecking order in the years to come.
