Incumbents vs. FinTechs: Product Offer Throwdown

Previously, we have done comparisons on mobile account opening and the design of these offerings as it relates to incumbents vs. FinTechs, so we thought it only fair to do a more detailed comparison based on product offerings and where the industry is headed. While you can call our design evaluation subjective, our side by side product and feature comparison demonstrates how the large incumbents serve a stronger set of offerings to a broader base of investors, but at the expense of simplicity. While the FinTechs have limited offering but a more honed feature set.

Set-It-And-Forget-It

Pretty much everyone is working on some form of a robo, and many have already started their own. In fact, due to competition for passive investors from low fee, automated investing startups like Wealthfront and Betterment, incumbents (Schwab, Fidelity, E*TRADE, TD Ameritrade) were quick to roll out at least one automated investing account and many now offer more than one option.

While the incumbents are dominating AUM (Vanguard $112B and Schwab $33B vs. Betterment $14.5B and Wealthfront $11B), the independent robos are pushing the tech envelope. “For people who are looking for a quality, digital online experience, independent robos are a step ahead of the incumbent ones.”

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The start-ups are forcing banks and brokers to adopt technology faster than ever before, while the established players are pushing the robos to incorporate more traditional services in their products. In fact, many of the digital-only startups are layering in human advice to complement their automated offerings. This should give pause to any incumbent, or at the very least, make them rethink their features and user experience.

In a Galaxy Not Far Away: Pricing Wars

Whether it’s executing trades, managing portfolios or simply owning mutual funds and ETFs, costs have been collapsing on Wall Street. Feeling the pressure from low cost or no cost entrants like Robinhood and Tastyworks, Fidelity finally slashed trading commissions to $4.95 in February of 2017.  This quickly resulted in similar changes from the other incumbents (Schwab, E*TRADE, TD Ameritrade), and Fidelity and Vanguard have also aggressively cut fees on ETFs. Now, with J.P. Morgan offering fee-free trading and access to research and portfolio building tools to their 47M customers, it just may become the industry standard.

And while Robinhood gained attention for attracting more than 5 million users, and a $5.6 billion valuation, in just a few years, J.P. Morgan, the biggest U.S. bank, has a distinct advantage: it already has financial ties with half of American households. In other words, market share is up for grabs and while low fee or no fee might hook customers in, what will keep them needs to be more thought out than simply “free stuff.”

Tales of the Crypto

While none of the large retail brokers have added direct trading of cryptos, there have been a few interesting developments. TD Ameritrade and E*TRADE allow crypto futures to be traded on their futures trading platform and Fidelity and E*TRADE both have innovation labs exploring uses of blockchain and crypto. “It’s no secret that we are actively exploring cryptocurrencies, including Bitcoin and other digital assets in our Blockchain Incubator at Fidelity.”

For a large conservative financial firm, Fidelity was early to realize the potentially transformative impact of cryptocurrencies and blockchain technology, even allowing users to link Coinbase accounts via a web widget. But while they’ve been experimenting, other FIs have been diving in, from big traditional exchanges that offer bitcoin futures, to companies such as Square and Robinhood that allow users to trade digital coins.

Robinhood, which earlier this year added crypto trading, only offers this feature in select states. Square added crypto trading to their Cash app in late January, with Square Cash averaging 2M downloads per month, 3x the growth rate of Venmo. Coinbase surpassed Charles Schwab in the number of open accounts in late 2017 (11.7M vs. 10.6M), but the value of those accounts is still a fraction of the value of Schwab ($50B vs. $3.26T)

Not everyone is on the blockchain bandwagon. As E*TRADE’s Lance Braunstein says, “For me…it feels more like a solution waiting for tangible problems to emerge. We don’t have a dying need to use blockchain.” But as we’ve written about in previous posts, with blockchain’s ability to greatly speed up processes and reduce cost, why doesn’t everyone have a dying need to use it?

Amazon of Investing

While all of the challengers in the investing space have well-defined customer journeys and easy to use interfaces, there’s still a large difference in the breadth of the offering. Customers with specialized needs (securities lending, bonds, futures, trust capabilities, advanced options tools) will probably be better served by more established players. While customers seeking to simply capture market returns with excess cash will probably enjoy the better digital experience and onboarding provided by the newer players in retail brokerage.

What interests us is how both facets are pushing the others to be better. FinTech is pushing the incumbents to simplify, while the incumbents are pushing fintech to be more than just a pretty interface. But the question is, will anyone become the Amazon of investing? Will anyone ever have everything for everyone? And what will that look like? Time will certainly tell.

 

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