The CEO of stock broking platform The Share Centre has questioned the sustainability of app-only challengers, warning that many may run out of cash before they can reach the required scale.
“You’ve got these rash of new entrants coming in, raising money, typically with a very tech-heavy solution,” Richard Stone, CEO of the Share Centre, told Yahoo Finance UK.
“I think the challenge with all of those — and it’s a challenge for them and for the retail investor — is what’s the sustainability of those models?
“These guys are burning their cash on regulation, tech, and marketing because they’re trying to get to critical mass. The question is can they get to critical mass quick enough before the funding runs out?”
Apps like Robinhood, Freetrade, and Wombat have all launched around the world in recent years, offering either low or no fees on stock trading. Wombat, for example, charges just £1 a month for unlimited trades, while Robinhood offers completely free trading. This contrasts with traditional brokers that can charge fees of up to £12 per trade.
The challenger apps have proved hugely popular with both investors and customers. Robinhood has raised over $800m since launch in 2013 and gained over 6m customers. The business has been valued at over $7bn. Last week it announced plans to launch in the UK.
Stone said it wasn’t clear that businesses like Robinhood could ever hope to make money with these unusual business models.
“If you look in our space and go back a bit, the new kid on the black was Nutmeg,” he said. “Nutmeg has raised an awful lot of capital and has built a successful business with over £1bn of assets on the platform — but it’s still losing money.”
Nutmeg lost £12.1m on revenues of £4.5m in 2017, the most recent period public accounts are available for.
Wombat Invest was only incorporated in September 2017 and has yet to file full accounts. Freetrade lost £1.1m in the year to September 2018 on no income.
Robinhood declined to comment on profitability when asked by Yahoo Finance UK last week.
Startups argue that their reliance on technology will help keep their costs down even as they grow. They hope to become profitable once they reach a large enough number of customers.
“It’s fine to say that you’re app-only, online, so you don’t need a lot of the costs,” Stone said. “But actually, you do still need a lot of the costs because ultimately a customer will want to call you up, a customer will have a problem with their portfolio, they will want to transfer to another platform.
“There are just certain things that require a degree of manual intervention in that process.”
Revolut, which recently launched a free share trading product, this year introduced its first ever customer service phone line because “in certain instances picking up the phone is a quicker way of resolving a potential problem,” the company’s general counsel Tom Hambrett told the Financial Times.
Founded in 1990, The Share Centre is an execution only stock dealing platform. The company has over 300,000 retail customers in the UK and manages around £5bn of assets. The company’s result last week showed a pre-tax profit of £200,000 in the first half of the year.
Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at@OscarWGrut.