Tipping Point: how brokers stay afloat with near-zero interest rates

Since the 2008 financial crisis, interest rates have remained near zero. Fearing an incomplete economic recovery, the Federal Reserve remains hesitant to raise them. At first, near-zero rates made stocks attractive to investors seeking yield, and brokers saw new accounts flourish. Today, the stream of yield-seekers has dried up, and new accounts are prohibitively expensive to brokers. To make matters worse, low interest rates eat up their spread revenue. Here’s how brokers can make up the difference on the balance sheet.

Broker Revenue: 1-2-3

Revenue StreamsDiscount brokers rely on a three-pronged revenue model: commissions, fees, and spreads. When existing customers place trades, brokers generate commission revenue, which averages $8.80 for equities and $9.50 for options. Fee revenue comes from charging customers for insufficient funds, management services, and phone-assisted trades. Finally, brokers generate spread revenue by charging interest on margin accounts and collecting interest on idle cash in their clients’ accounts.

Low Interest Rates Kill Spreads

Screen Shot 2016-07-18 at 2.27.18 PMUnfortunately, today’s low-interest environment requires brokers to charge less interest on margin accounts and earn less interest on their clients’ idle cash. As spread revenue dries up, brokers are being forced to rely more on commission & fee revenue by increasing their DARTs through new and existing clients.

In the current overcrowded market, new brokerage clients are increasingly expensive. Due to the huge customer acquisition cost, the broker will not break even on their marketing investment until a new customer places an average of 120 trades.

New customers: a tough sell


Brokerage CostsWhile the last 20 years of brokerage marketing have been focused on new customer acquisition, it appears we’ve reached a tipping point. Paired with an overcrowded market, inadequate mobile marketing solutions have driven the cost of marketing to new customers through the roof.

In addition to traditional ad-spend, incumbent brokerages are now offering cash bonuses up to an unprecedented $2,500 just for funding a new account. On top of that, the new normal is 60-90 days of commission-free trades, which force the broker to absorb four-figure losses, all in an effort to acquire a customer who won’t pay a penny in commissions until four months later. Talk about a buyer’s market.

It’s time for engagement marketing

When we first launched TradeIt, we built a product that encouraged new user behaviors that served the interests of both publishers and brokers. User place orders from a publisher’s platform. Publishers are happy because the user is sticky and spends up to 200% more time on their platform. Brokers are happy because their customer remains engaged and spends up to 300% more in commissions and fees.

 

ROI

*Industry Average CAC vs. engagement campaign with a major US broker.

Today’s retail investor demands mobile first, secure & convenient transactions, and access to personalized products that operate across brokers. Engaging existing customers will save brokers from shelling out cash bonuses, free trade offers, and expensive acquisition campaigns. Marketing to these customers has been shown to generate DARTs for 1/5th the marketing spend.

 

Given the tough climate, it’s time for brokers to focus on engaging their existing customers. The profits are right under their noses.

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