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Most ‘ordinary’ people don’t trade; they wouldn’t even know where to start. But UK start-up Dabbl has a radical idea for changing this. Its app lets users photograph a product they like, find out who makes it, then invest in that company with a couple of taps. The service lists 1,300 shares and exchange-traded funds (ETFs).
Dabbl launched in 2017 as one of a number of start-ups setting out to demystify share buying and make it ‘free’. These companies automate as much of the transaction process as possible and present everything inside a user-friendly app interface.
Their emergence was inevitable; after all, the internet doesn’t like gatekeepers. For decades, aspiring authors had to win the approval of book publishers. Now, anyone can self-publish on Amazon. In the same way, budding investors no longer have to find (and pay) a broker. Instead, they can tap a few buttons in an app.
The company that started the trend is US-based Robinhood. Earlier this year, it completed a Series D round worth $363m, having achieved its ‘unicorn’ status in 2017 thanks to a simple proposition: commission-free trading via a mobile app.
Robinhood launched in 2013, and by November of 2015, it had processed over $1bn in transactions. Today, it claims to have four million users.
They do it for you
The company says its mission is not to eliminate the expert wealth fund, but to introduce an untapped new audience to investing. Its co-founder Baiju Bhatt told TechCrunch: “We find a lot of people don’t do (trading). It’s not that they have some disagreement with entering the stock market, but they don’t know how to do it.”
Dabble shares this outlook. In a 2018 survey, it found 58 per cent of millennials said they had considered starting an investment portfolio. Yet 72 per cent said the investment process was too complicated, while 62 per cent said it was just for the rich.
Interestingly, Robinhood was not the first to try the zero-commission model. Zecco launched an online service with no fees in 2006, but it soon switched to permitting free trades only to clients with $25,000 of assets. In 2012, it merged with Trade King.
Then there was Loyal3, which launched in 2009 to offer investing in a small number of public stocks and IPOs for zero fees, but closed in 2017.
Both companies kept costs down by automating transactions and batch-processing trades and made money by earning interest on the balances left in customer accounts. Evidently, they were defeated by historically low rates.
Robinhood relies on a similar model. However, it believes its app-first service can gather a much bigger audience. It has also launched a premium tier called Robinhood Gold, which supports extras like extended hours trading and instant access to funds.
For now, Robinhood has the US market mostly to itself. Its only competition comes from Matador, which launched in May 2017 and offers similar features but with an emphasis on social trading and community.
Meanwhile, European companies have been testing the model, with London-based iDealing entering the market first. In 2015, it launched a platform that lets investors trade stocks, bonds, ETFs and some derivatives on the Belgian, Dutch and French Euronext markets for nothing. Freetrade and Dabbl followed in 2017. The former is piloting commission-free trading for those with portfolios smaller than £10,000, along with a host of premium paid-for services.
All of these apps are trying to remove friction from the trading process. As Freetrade’s founder, Adam Dodds, told the FT: “Everyone in the UK right now is designing products for a 50-year-old man with a large portfolio. If you know how to use an iPhone you can use our product.”
Bring on the banks
However, these start-ups still face the friction of persuading people to download their app in the first place. This might explain why the UK challenger bank Revolut recently declared its intention to enter the space. Revolut has one million UK customers using its app-centric banking services – although its application for a European banking licence has yet to be approved – and already enables customers to buy foreign currency and cryto with a tap. In June it promised to add ETFs and options to the mix, but no launch date has been announced so far.
Shortly after Revolut’s announcement came an even bigger one – from JP Morgan. In August the US bank added a trading option to its banking app, allowing 47 million people to buy shares, mutual funds and ETFs from a smartphone. They can make 100 free trades in the first year.
Clearly, large and well-resourced companies are moving into the zero-commission trading space. However, ‘high touch’ investment advisors don’t see them as a threat. Carl Androsiuk, a senior trader at Dolfin, says: “The market is becoming like a pyramid, with the apps at one end, and companies like Dolfin at the other. They’re offering trades in a small number of ETFs, while we’re offering a much wider range, and providing services an app never could.”
He gives the example of Dolfin’s recent investment in Yellow Cake, a uranium mining company. Dolfin responded to a client’s interest in Yellow Cake’s equity IPO by securing an invitation to the investment roadshow, and managing the operational and transactional process.
“I can’t see how an app-based business could ever add this kind of value,” says Androsiuk.