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Inside the battle to be Europe’s Robinhood

Robinhood’s decision last summer to abandon its UK launch fired the starting gun for a race to fill the gap left by the memestock broker. A year later, an army of European contenders are trying to convince legions of ordinary people to trade with them.

Start-ups offering cheap and user-friendly mobile apps for trading and investments are racing to build their presence across Europe in what they view as a fragmented and largely untapped market for people who want to buy and sell shares themselves.

“It’s a land grab right now. The battle hasn’t even started,” said Adam Dodds, chief executive of Freetrade, the UK-based neo broker.

Germany’s Trade Republic this month started signing up clients in Spain, hot on the heels of its launch in France, having raised $900m earlier this year in a round led by US venture capitalists Sequoia, who also backed Robinhood.

Freetrade expects to “imminently” receive the blessing of Swedish regulators to establish a beachhead for its continental ambitions, with a full rollout across Europe planned in the next year.

Investors including Tencent and BlackRock have backed German robo adviser Scalable Capital, which has branched out into stock and crypto trading and raised €150m in fresh funding in part to push into France, Italy and Spain. Dutch fintech Bux most recently moved into Ireland ahead of a planned UK expansion.

But as they struggle for control of Europe, start-up bosses say their fight will play out along different lines than it did in the US.

The problem is that fewer Europeans actually trade shares. Despite a surge of stock trading during the pandemic and a push by EU authorities to encourage investing, the percentage of European household wealth held in equities and funds remained stuck at around 25 per cent over the decade after the financial crisis, according to a report by the EU financial regulator. More than half of Americans invest directly in the stock market.

The US already had a well-established set of retail brokers, catering to individuals rather than sophisticated institutions, when Robinhood came on the scene in 2013. The app led a race to offer zero-commission trading against players like Charles Schwab, TD Ameritrade, ETrade and Interactive Brokers.

That means European apps see less need to steal market share. Instead, they want more retail punters to share around.

They believe lower costs and slicker tech will make them more attractive to younger, novice investors than the UK’s established investment platforms, such as Hargreaves Lansdown, or incumbent European brokers that are often attached to major banks.

The wave of individuals trading their own cash during the pandemic — which saw the retail share of volume on the pan-European Euronext exchange peak at twice the normal level — has boosted the confidence of neo-brokers.

The hope is that the frenzy around memestocks can be converted into more durable and less speculative investing.

“I call it the Americanisation of the retail investment space in Europe,” said Yorick Naeff, Bux CEO. “Europe used to be a savings-focused culture. Now that is changing.”

But the start-ups face questions around whether the fad for retail investing will prove sustainable if markets start to falter, and have drawn a critical eye from regulators worried about the “gamification” of trading and excessive risk taking by novice investors.

The share dealing frenzy reached its peak during Covid-induced bouts of market volatility and when people on social media forums like Reddit pumped the stock of languishing American companies such as GameStop and AMC — so-called “memestocks”.

Robinhood’s leading role in the memestock saga and accusations that it encourages dangerous trading habits has led many European players to distance themselves from the US company.

Bubble chart showing the scale of startup fundraising by five companies in 2021

“What Trade Republic is trying to build is not a European Robinhood,” said Christian Hecker, CEO of Trade Republic, which sailed to a $5bn valuation after its May fundraising.

Hecker said European customers already have access to a number of derivatives-focused platforms that cater to devout day traders so the competition is in offering simple and easy-to-use apps that provide both long-term investments and stock trading capability.

But even though European authorities do want to see more people investing their money in the market, to help boost the savings of ageing populations whose retirement prospects are threatened by low interest rates, regulators are concerned that super-slick trading apps could cause more harm than good — with people risking addiction and money they cannot afford to lose.

The UK’s Financial Conduct Authority has credited apps with increasing the “accessibility” of investments, with more than 2.8m new accounts opened in the 12 months to April. But it said the spike in sign-ups around the January memestock craze suggested apps could “make it easier for consumers to make bad decisions” because it is so quick to sign up and start trading.

In Europe, the practice of retail brokers taking fees from market makers to execute transaction — know as payment for order flow — has come under scrutiny over concerns that it can mean worse prices when trades are executed.

A change to the rules around these payments could hit apps like Trade Republic that rely on those fees.

Jonathan Master, a partner at law firm Eversheds Sutherland, said the FCA has made it clear that it regards payment for order flow as “incompatible” with Mifid, the pan-European financial regulation.

European regulators have started to grapple with the practice. The European Securities and Markets Authority (Esma) said payment for order flow “raises significant investor protection concerns” and in July asked national regulators to prioritise the issue. Masters said it seems likely some authorities will clamp down.

Hecker said he is “very confident” that Trade Republic’s use of payment for order flow is in customers’ best interests. He said the payments help the app to offer free execution to users who buy stocks or ETFs as part of a regular savings plan, while the company charges €1 to execute other trades.

The debate over payment for order flow highlights the relentless downward pressure on pricing among apps that are often compared to American peers that don’t charge upfront fees. European start-ups have had to look for other ways to make money, including foreign exchange and tiered fees for additional services.

Companies face a daunting array of local obstacles in their march across Europe, ranging from different tax rules for investments to setting up local-language customer service. Customers also differ in their comfort with taking on risk and running their own investments.

“One of the main reasons there is no good solution for the European market at the moment is because nobody understands how to operate across these different markets in a way that makes both financial and logical sense for retail investors,” said Martin Sokk, co-founder of Lightyear, a UK-based app launched this month, with investors including Wise co-founder Taavet Hinrikus and early Monzo backer Eileen Burbidge.

Fintechs have pushed to broaden their range of services and eat into rivals’ territory, with crossover between savings providers, stock and derivative trading. Revolut, the UK challenger bank, has moved into trading as it rolls out across Europe.

Several apps integrate crypto, which Scalable founder Erik Podzuweit said is no longer considered “something super freaky” among younger investors.

As they plot their European expansion, start-ups must avoid falling into traps that have caught other investment tech companies, such as some robo advisers. High customer acquisition costs and the relatively small revenue each client brings makes their race for scale particularly difficult.

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Inside the battle to be Europe’s Robinhood

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Some experts argue demand has been buoyed up by a long period of rising markets, which could suddenly turn sour. Your average person trading from home might quickly turn tail if stocks start to fall.

“There’s one large potential dark cloud against the horizon of the huge surge in consumer and corporate interest in funky new trading apps. And that is the fact that at some point this bull market will falter and run out of steam,” said Holly MacKay, CEO of personal finance research firm Boring Money.

“This is a numbers game and ultimately I think a few will be acquired by large global brands. And some will just run out of steam and cash.”

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