What happens to competition when everything is free, when there’s no obvious financial differentiator? How do you get customers to choose you over the other guys?
With the recent bomb dropped by JPMorgan that they’d be offering free trades to everyone via their new You Invest Trade Service, brokerages are on high alert and looking to understand how this will affect them and the market. Certainly JPMorgan is the first incumbent—but not the last—to make a serious move in this space, and while fintechs like RobinHood built their platforms on free trades, they have less overhead and less offering to contend with. In other words, the incumbent fall out is likely much more significant. But the potential is also astronomical for those who do it right.
How Will You Stand Out?
Since it appears that trading is becoming a commodity with a race to lower pricing until it’s ultimately free, the competition is going to have to create other factors in order to differentiate themselves going forward. As we’ve posted about in the past, these could include user experience and ease of use and delighting customers via good design. As well as attracting new customers. (More on that in a bit.) But there is so much more FIs can do. In fact, no financial company has leveraged the full platform like Expedia has in the travel category or Amazon in the consumer shopping space. This industry is stuck in the mid/late 90’s, whereas consumer spending platforms have evolved and changed with or even ahead of the time. Finance needs to up their game.
Here’s how we see things evolving:
Pricing is No Longer a 2-Year Study
Gone are the days where pricing used to be modelled out with firms conducting tons of research and testing before changing their fee structure. Today, FIs need to be more nimble and push out pricing changes to be immediately responsive to market changes and influences. Being able to pivot or better yet, being first out of the gate, could make or break a new pricing strategy. And leave everyone else scrambling.
Market Cap Erosion
With their announcement, JPMorgan shaved $9B off the market cap of everyone else. With the trading fee revenue stream eliminated, it impacts all companies as it relates to their valuation and market cap. So if brokerages remove trading fees, where will that “lost” revenue come from? Several incumbents have said they too could go to $0 trading, particularly in a rising interest rate environment, but why do it if you don’t have to?
RIP Legacy Systems
For most established banks and credit card companies, account conversion on legacy systems still takes place offline. This is not only slow but costly. JPMorgan has invested tens of millions to change this on-boarding process, therefore creating a solid ecosystem of digital products. JPMorgan’s ability to cross sell between Asset Management and Banking is key to their success. The Chase Mobile acts as a digital branch for customers, allowing users to make deposits, payments, keep tabs on their account, and will soon add You Invest to this digital suite. All this capability in one place sounds very familiar…
Will We See “Prime Trading”?
Stash and Acorns have proven out that customers are open to subscription based financial services, a model that Amazon Prime has pioneered in retail. And, by moving away from the fee-based model to a consumer-friendly ecosystem model, JPMorgan believes that creating a digital ecosystem will help the bank better align with clients’ interests.
“We’re very focused on delivering more service. All our analysis shows that those customers who do more than one thing with Chase will stay with us longer,” [emphasis added] says Jed Laskowitz, CEO of the bank’s You Invest service.
For example, You Invest will offer free portfolio-building tools and access to the bank’s stock research allowing customers to construct a portfolio composed of cheap ETFs and stocks. This sets up Morgan to create its own passive investment vehicles, essentially getting that fee back albeit in a way that serves the consumer and the bank. So, by offering free trades, JPMorgan could actually grow the business as customers use other services.
Remains of the Day
Time will tell what no fee means for incumbents, or if JPMorgan resorts back to a more traditional fee structure. In the meantime, one thing is for sure, and that’s that nothing is for sure. FIs are going to have to look to other industries to see how they can model a more robust and streamlined offering, tap into untapped customers and still find a way to grow their bottom line.