Broker Apps: Take it or leave it?
Investment through a simple application on your mobile? The new platforms are successful in the U.S. and are now trying their luck in Europe. However, trading with them requires a lot of attention. It seems so simple, almost like a game, with two or three movements on the keys of the mobile phone or by scanning a QR code, you enter the American application Robinhood. You can invest the money as easily as flirting on Tinder, uploading videos to TikTok, playing Free Bets, or promoting yourself on Instagram.
Theoretically, you are the one who defines how conservative or speculative you want the investment you make to be. If you pay a monthly subscription, you gain access to the so-called margin trades. You actually borrow money – even more money than the amount you have deposited in your account – to invest more and at the risk of losing more.
More than 13 million Americans already use the Robinhood app. The pandemic seems to be intensifying the willingness to invest from home, as users have grown by three million since the beginning of 2020, and Robinhood is now a serious competitor to established investment companies. Sure there would be plenty more since when there is a need gap in the market, only one needs to make a start, and then dozens follow.
“The old capital, which had accumulated in current accounts, savings books, and time deposits, must start moving,” 30-year-old Christian Hecker, who recently co-founded the Trade Republic investment platform in Germany with two friends, told DW.
Billboards praise “a new era for capital” and say it has already attracted 150,000 members. “The Robinhood model is starting to spread in Germany as well,” said Julian Grego, Digital Banking Director at Bitkom, which represents more than 2,700 new technology companies, and the Trade Republic is not the only example. If the app has users in Germany, it is a matter of time before it will expand in the rest of Europe.
‘Space for innovation’
Christian Hecker’s company charges a one euro commission for each transaction through the Trade Republic. But there are also cheaper solutions. For example, Scalable Capital offers unlimited transactions at three euros per month. At the same time, established investment companies charge the client up to 20 euros for each transaction.
“The prices of new market players are a declaration of war for the established protagonists of the industry,” said Julian Grigo. For his part, Hecker argues that it enables young people to take care of their own aging, making the right investment choices at a time when “competitors’ high commissions prevent them from investing.”
In the U.S., new online brokers are attracting more and more interested parties, although the old names in the industry are constantly lowering their prices to prevent the rise of Robinhood. The same could happen in Germany. After all, Hecker points out, “in an industry that has not changed at all in the last 20 years; there is definitely room for innovation.”
According to Julian Grigo, online brokers are considered very attractive and, for the additional reason, try to be user-friendly. However, there are still many disadvantages. For example, few of the new platforms offer the opportunity to invest in ETF stock portfolios. At the same time, Trade Republic limits the possibilities for buying and selling shares on a single stock exchange.
Unlike traditional industry names, most Robinhood platforms follow the logic of so-called payment for order flow. This is an incentive system that is supposed to match the interests of the seller and the buyer, only that the commission for the order goes exclusively to the seller, which “can create a conflict of interest,” according to the German Federal Financial Supervisory Authority (BaFin). In the Netherlands and the United Kingdom, the payment for the order-flow method is prohibited.
Gambling and the protection of young people
There is another important risk: the widespread use of new apps allows young people to start “investing” at a younger age, without often realizing the consequences and potential dangers of their choices. The case of Alex Kearns, who, at the age of 20, committed suicide by falling on the train tracks because he thought he had lost 750,000 by gambling on the Robinhood platform, had caused a sensation in the USA. It later turned out that this was not the case. However, even though it wasn’t, it is registered that way in public opinion.
However, Christian Hecker, the founder of Trade Republic, shamefully rejects any suspicion that he is luring people to gambling. “We do not give incentives for more transactions, and besides, contrary to what applies to Robinhood, our client may lose all the money he has deposited in his account, but no more.”
As for Robinhood itself, it seems to facilitate the plans of Hecker and other competitors in Europe: in June, the US company announced that it was indefinitely postponing the establishment of subsidiaries in Britain and Germany.
April 2013: Robinhood is founded in San Francisco. At first, it is just a means to monitor the movement of shares, but quickly the idea comes to evolve into an online stock market without commission.
October 2013: Robinhood gains approval from regulators to act as a brokerage and extends beyond stock trading.
December 2014: Robinhood launches the first trading app in the Apple App Store. The reviews are favorable, and many point out that unlike other online platforms such as E-Trade, it does not charge a commission.
June 2015: Robinhood wins the Apple Design Award.
August 2015: Robinhood launches its app on Google’s Android operating system, reaching many more devices. Within two weeks, the daily number of active users tripled to 176,883.
May 2016: Robinhood also wins the design award from Google.
January 2017: Robinhood has 200,000 daily active users.
April 2017: Robinhood raises $110 million from venture capitals, with this round of funding valued at $1.3 billion. From a small startup, it becomes a rhino of Silicon Valley.
December 2017: Robinhood introduces option trades.
May 2018: Robinhood raises $363 million in funding and is valued at $5.6 billion. It now has 664,775 daily active users.
December 2019: Robinhood launches a new tool, which allows users to buy stock fractions. This also will enable individuals with very limited budgets to invest in a company.
March 2020: Robinhood users exceeded 2 million.
May 2020: In a new round of financing, Robinhood secures $280 million in assets and a valuation of $8.3 billion.
June 2020: Deutsche Bank analyst Parag Thatte relies on Robinhood data to show how institutional investors are “chasing” amateur investors.
December 2020: Robinhood hires Goldman Sachs to help it go public, according to Reuters.
Story by Rania Synodinou. With information from Deutsche Welle