Signals: The Broker App-pocalypse Is Here

The pandemic was a wild time for brokerage businesses. But today, many brokerages which were enticed by the allure of payment for order flow (PFOF) are seeing no sunlight. Call it a post-ZIRP aberration or a broker recession… the broker app-pocalypse is here, and it’s time to put up or shut up.

With trading demand substantially cooler, even Robinhood (the king of neobrokers) has lost over half of its active monthly users since 2021. And unfortunately, it looks unlikely that those users will be coming back anytime soon.

That’s not to say the whole business has frozen over. After all, legacy brokerages like Fidelity and Vanguard remain strong thanks to their outsized influence in the workplace retirement plans of millions of Americans. And even Robinhood has drummed enough demand to make a run on Wall Street. In fact, year-to-date, Robinhood stock is up 42%.

But for many brokers, the slowdown and consolidation currently afoot in the digital brokerage business means trouble — and with venture capital no longer as invested (literally) in investing apps, the latter is an increasingly enticing option.

Since the start of the COVID-19 pandemic, at least 12 U.S-based brokerages have closed — either as part of an acquisition, a sale of user assets, or business failure. Even in recent weeks, Stocktwits and Goldman Sachs’ Marcus Invest have decided to exit the broker business, porting their users over to would-be competitors.

U.S. Brokerage App Closures Since the Pandemic

Name

Closed

Acquirer

USAA

May 2020

Schwab

Dough

Nov. 2021

TastyTrade

All of Us Financial

Jun. 2022

PayPal Holdings

Gatsby

August 2022

eToro

levelX

Dec 2022

n/a

Flyte

Mar. 2023

n/a

Zingeroo

Apr. 2023

n/a

ZInvest

Dec. 2023

n/a

Q.ai (Forbes)

Dec. 2023

n/a

Stocktwits (f/k/a Trade App)

May 2024

Public

Marcus Invest (Goldman Sachs)

May 2024

Betterment

Unfortunately, the demise of many aforementioned brokerage businesses have something in common — whether they’re small names you’ve never heard of or name brands. Let’s expound on three core problems with why investing-oriented fintechs are struggling:

This might strike the fintech-familiar as a no-brainer, but America might be all brokered out. It isn’t 2014 anymore, so no commission trading and a modestly appealing user experience won’t acquire users — or VCs interested in raising your next round. Today, the marketplace is saturated with brokers and investing apps… and there’s a few problems that come all that competition:

I’d venture to guess that many investing apps don’t pay their marketing teams enough for what they do… seriously. The world of performance, affiliate, and cost-per-click (CPC) advertising is a mess. Many companies are unsuccessful — and they obviously fail if they can’t grow. But even the successful ones haven’t been able to avoid the costs.

The sheer number of new finance-oriented apps have pushed up ad rates on campaigns. And despite a lull in the broader ad market, some finance apps are still paying hundreds of dollars to acquire a funded account. Sources who were willing to share some anecdotal data also told me that the ‘earn back’ on acquired users could take years.

Just take Futu Holdings, which operates the U.S-based MooMoo brokerage app. According to its own financial filings, the global brokerage added 220,000 paying clients last year — but its rate of new customer acquisition fell by 8.6% quarter-over-quarter to close out 2023. 

Whether that was a temporary slowdown is too speculative for my two cents, but its spending speaks for itself: the company spent over USD$90 million on selling and marketing expenses to acquire those users last year — an effective cost of $453.40 per new paying user. 

While this seems to be working for them, as evidenced by their $547 million net income last year, it’s easy to see how that cost could be prohibitively expensive for smaller brokerages. After all, I’m not really aware of many fintech companies that have a nearly nine-figure annual marketing spend.

A lot of that $90 million that Futu spent was on acquisition — but outside of paying invoices to tech giants and publications, there usually has to be a carrot for the prospective customer. And increasingly, the bonuses and rewards offered by fintechs are mind-boggling.

Banks have paid customers bonuses for years… tl;dr: the customer sets up a checking account and sends X number of direct deposits — and then they get a nice little kickback. 

But the financial industry is now seeing acquisition efforts unlike anything it has ever seen before. Last year, Robinhood began offering customers a 3% match on all incoming retirement deposits — and it soon will offer customers a 1% match on all incoming deposits. 

Other brokerages like SoFi Invest and Webull have followed suit with their own copycat match, which makes it clear that this is hardly an aberration. Soon, it might be possible that these sorts of incentive structures will become commonplace. And for undercapitalized fintechs, that could spell doomsday.

Perhaps the biggest question is why casual investors would choose a no-name broker with a limited track record over a more resourced name brand like Fidelity or Vanguard? 

For the most part, the answer is: “they wouldn’t.” Many customers are likely to go with a company that they recognize and trust — and oftentimes, this seems to just be the firm which already manages their workplace plan. Firms of this size already boast the scale and resourcefulness to offer financial planners, tax preparers, and digital resources to educate them.

However, there are some reasons why more serious investors might want to try something new. Robinhood has proven that great design, great product, and the allure of free money can entice customers to go with a smaller name. But outside of its great products, Robinhood also has something that many neobrokers do not — brand recognition. And in the increasingly crowded brokerage space, that makes a huge difference.

The sweet allure of payment for order flow (PFOF) created a deluge of fintech aspirants which took after Robinhood. Years later, after churning out a stack of made-to-order Robinhood clones, virtually every new broker-dealer shares the same fundamentals. They all offer no-commission trading, have apps, and allow you to do fractional investing. 

As a result, the modern trading ecosystem is relatively undifferentiated. After all, there’s only so many ways that you can buy and sell stocks — or trade options, futures, or other derivatives. That means that the differences among brokers comes down to design and features.

Many legacy names in the financial services space have a significant user experience and design problem. And sadly, so do many new brokerages! Anecdotally, I have used almost every single major U.S-based brokerage app — and many leave something to be desired. 

I estimate that it’s pretty easy to tell when something was built by product-conscious people, rather than by executives building a Fintech Frankenstein of half-baked, made-to-order features that they’ve convinced themselves they need to have “full functionality.” 

In reality, building a complicated and regulated app isn’t like queuing at Five Guys to customize your order… but many companies still represent themselves by unprofessional, unserious, and untrustworthy design. And in a world where those are prerequisites to doing business with serious people with serious money, brokerages which do not embrace reinvention or redesign will probably suffer or fail.

Among newer brokerages, novelty features have been one of the more significant differentiators in user experiences. Apps like Composer are capitalizing on AI and rules-based trading, while eToro has launched a copytrading feature in some regions. 

Brokerages have also embraced investing as a cultural phenomenon. Firms like Webull and Public have built social feeds a la Stocktwits in an effort to connect investors with one another — and drive engagement by turning investing into a community affair.

However, those novelty features have mostly attracted a novelty crowd. None of these apps are massively mainstream or publicly-traded as of this writing — even if they are pretty cool! 

But more importantly, some are learning that the marriage of these features doesn’t always work out.  For example, Stocktwits announced last week that it would sell its brokerage assets to Public, while brokerage app Invstr announced it would be refreshing its product in an effort to pivot towards new “AI-oriented portfolio” features.

Nonetheless, many brokerages are going beyond novelty features — some are even turning their brokerages into subsets of a large product ecosystem, which has given some fintechs a lot to flex.

For what it’s worth, many large banks own brokerages. This was probably not their original business, but brokerage and wealth management businesses now represent a meaningful portion of Bank of America, Chase and Schwab’s business models. Today, those rich resources at banks have made them indispensable to clients — and helped them collect billions in advisory fees. 

Many fintech upstarts have taken note. Take Ally and SoFi for example: both got their start by doing loans and cash management, but now offer all sorts of services under one roof (including… you guessed it… brokerage services!) In a similar way, Square’s Cash App added stock and crypto trading in its app. 

And most recently, you’ve even seen modern broker-first businesses like Robinhood push beyond the broker biz. As of today, it offers one of the most aggressive cash sweep interest rates and is rolling out a credit card alongside new futures trading features.

New features are just another way that fintech companies can fuel growth and generate new lines of income. Fundamentally, this is a natural progression of many products. And for companies just getting off the ground, having a limited featureset could be a challenge. 

I’d venture to say that it’s nearly impossible to compete with companies which had a decade (or more) headstart on you. There is one exception, though: having something truly disruptive. 

This is one reason why brokerages and broker apps in emerging markets were able to buck the slowdown in the U.S. However, faced with a series of app closures of their own, it’s fair to assume that global brokerages will continue to dwindle unless the industry returns to the abnormally-high levels of engagement seen throughout 2020-2022. 

Here’s what that likely means:

Consolidation

The most apparent side effect of a tightening brokerage space would be consolidation. This could actually set up some interesting outcomes — or potentially even new competition. For example, Ally’s 2017 acquisition of TradeKing tee’d up its own brokerage business. However, it’s unlikely that we’ll see as many fast-growing fintechs looking at the broker business as an opportunity — especially given the high regulatory hurdles that it brings to a business.

Product Expansion from the Survivors

Many brokerages are not going anywhere, but companies which have concentrated their business on payment for order flow (PFOF) and broker-adjacent lines of revenue might start to look beyond buying and selling stocks. That’s why, in spite of consolidation, we’ll probably start to see investing fintechs begin to offer crypto, options, futures, or other derivatives. And some will take after Robinhood in rolling out retirement, credit, or other features which cater to customers.

Higher Costs to Entry

Many new brokers didn’t have a huge impact on legacy names — and although companies like SoFi and Robinhood are experimenting with effectively giving customers free money to move their 401(K) or IRA, those higher costs are likely going to disincentivize new entries into the space entirely. Many upstarts cannot afford the cost of acquisition, nor the increasing demand of bonuses or rewards meant to drive funded accounts.

Future Investing Apps Will Be Companion Apps

Marketing isn’t the only expensive line item in running a brokerage — running the actual business itself is expensive. As a result, it’s likely that future investing fintechs will be companion apps, rather than full-service broker-dealers. This could mean that we end up with more digital registered investment advisors (RIAs) in the coming years, but I still wouldn’t imagine that there would be a substantial acceleration of these services unless there was some renewal in trading demand.