Discount brokerages Charles Schwab and TD Ameritrade have made bold moves in the escalating price war in online stock trading. Both companies eliminated all fees for trades in stocks and ETFs.
These businesses don't need to charge transaction fees to be profitable. Discount brokerages generate significant income from interest income on cash balances in customer accounts. In 2018 net interest income represented nearly 60% of Charles Schwab's revenue while fees from trades were 7% of overall. While the Company runs pre-tax profit margins of 45% and hence can eliminate transaction fees and still generate healthy profits, it did so in response to market competition.
Upstart Silicon Valley companies like Robinhood and Webull have forced the industry to change its economic model. Robinhood has been offering no-fee trades since its launch in 2013. Trading expenses are subsidised by the ancillary revenue Robinhood makes from net interest income and securities lending.
As millennials have avoided traditional brokerage accounts and flocked to the Robinhood app (Robinhood was last valued at close to $8bn), the Company has been able to convert the fee-free model into something that is wildly popular with younger customers.
While it is still too early to discern any competitive impact by insurtech startups on pricing in the insurance industry, it's just a matter of time.
Schwab said it will eliminate commissions on trades for all U.S. stocks and exchange traded funds. The announcement -- which was quickly matched by rival TD Ameritrade -- sent shock waves across Wall Street. Shares of E*Trade Financial slumped 16%, while TD Ameritrade lost more than a quarter of its stock market value. Schwab’s share price also took a hit, tumbling nearly 10%. The gambit is just the latest in an intensifying, industry-wide war over fees for everything from stock trades to index funds and financial advice. These types of aggressive price cuts -- admittedly a small boon for ordinary Americans routinely nickel-and-dimed by financial firms -- have some observers wondering whether anyone can win in a business where more and more services are handed out for free.