Aspiring Robinhood from Europe would love you to trade with them

Robinhood’s decision last summer to drop its UK launch kicked off a race to fill the void left by broker memestock. A year later, an army of European suitors tries to convince legions of ordinary people to trade with them.

Startups with cheap and user-friendly mobile apps for commerce and investment are rushing to strengthen their presence across Europe in what they see as a fragmented and largely untapped market for people who want to buy and sell themselves actions.

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

Germany’s Trade Republic began recruiting clients in Spain this month, on the heels of its launch in France, after raising $ 900 million earlier this year in a fundraiser led by the venture capitalist American Sequoia, who also supported Robinhood.

Freetrade expects to receive “imminently” the blessing of Swedish regulators to establish a foothold for its continental ambitions, with full deployment across Europe slated for next year.

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

But as they fight for control of Europe, startup bosses say their fight will play out differently from that of the United States.

The problem is that fewer Europeans actually trade stocks. Despite a surge in stock market transactions during the pandemic and pressure from European authorities to encourage investment, the percentage of European household wealth held in stocks and funds remained stuck at around 25% in the decade after the crisis. financial, according to a report by the EU’s financial regulator. More than half of Americans invest directly in the stock market.

The United States already had a well-established set of retail brokers, catering to individuals rather than sophisticated institutions, when Robinhood entered the scene in 2013. The app led a race to deliver commission-free transactions against players like Charles Schwab, TD Ameritrade, Etrade and interactive brokers.

This means that European apps see less of the need to steal market share. Instead, they want more retail bettors to share.

They believe lower costs and more sophisticated technology will make them more attractive to young, novice investors than established UK investment platforms, such as Hargreaves Lansdown, or historic European brokers who are often attached to big banks.

The wave of individuals trading their own money during the pandemic – which saw the share of retail volume on the pan-European exchange Euronext 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 a more sustainable and less speculative investment.

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

But start-ups are questioning whether the retail investment craze will endure if markets start to weaken, and have drawn the attention of regulators worried about the ‘gamification’ of trading and excessive risk-taking. by novice investors.

The stock trading frenzy reached its peak during episodes of Covid-induced market volatility and when people on social media forums like Reddit pumped out the stock of languishing US companies like GameStop and AMC – the se – saying “memestocks”.

Robinhood’s leading role in the memestock saga and accusations that it encourages dangerous business habits have led many European players to distance themselves from American society.

Bubble chart showing the extent 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 reached a valuation of $ 5 billion after raising funds in May.

Hecker said European clients already have access to a number of derivative-focused platforms that cater to avid day traders. So the competition is to come up with simple, easy-to-use apps that offer both long-term investments and stock trading capabilities.

But even though European authorities are keen to see more people investing their money in the market, to help increase savings for aging populations whose retirement prospects are threatened by low interest rates, regulators fear that applications of Lightning-fast trading can cause more harm than good – with people risking addiction and money they cannot afford to lose.

The UK’s Financial Conduct Authority has attributed the increased “accessibility” of investments to apps, with more than 2.8 million new accounts opened in the 12 months to April. But he said the surge in registrations around the January memestock craze suggested the apps might “make it easier for consumers to make bad decisions,” because it’s so quick to sign up and start trading. to negotiate.

In Europe, the practice of retail brokers taking a fee from market makers to complete the trade – known as payment for order flow – has come under scrutiny amid fears. that this can lead to lower prices when trades are executed.

A change in the rules regarding these payments could affect apps like Trade Republic that depend on these fees.

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

European regulators have started to tackle this practice. The European Securities and Markets Authority (Esma) said order flow payment “raises significant investor protection issues” and in July asked national regulators to prioritize the issue. Masters said it seemed likely some authorities will crack down.

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

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

Businesses face a multitude of local obstacles in their march across Europe, ranging from different tax rules for investments to setting up customer service in the local language. Clients also differ in their ease of taking risks and managing their own investments.

“One of the main reasons why there is no right solution for the European market at the moment is that no one understands how to operate in 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 top funder of Monzo Eileen Burbidge.

The fintechs have pushed to expand their range of services and nibble the territory of their rivals, with a cross between savings providers, stock trading and derivatives. Revolut, the British challenger bank, has embarked on trading as it rolled out across Europe.

Several apps integrate crypto, which according to Scalable founder Erik Podzuweit is no longer considered “something super creepy” among young investors.

As they plan their European expansion, startups need to avoid falling into the traps that have caught other investment tech companies, such as some robo advisers. The high customer acquisition costs and the relatively low revenue each customer generates make their race to scale particularly difficult.

Some experts say demand has been supported by a long period of rising markets, which could suddenly turn sour. Your average home-trading person could quickly turn around if stocks start to fall.

“There is a big potential dark cloud on the horizon of the huge increase in consumer and business interest in cool new trading apps. And it’s the fact that at some point this bull market is going to weaken and run out of steam, ”said Holly MacKay, CEO of personal finance research firm Boring Money.

“It’s a numbers game and I think that ultimately a few will be acquired by big global brands. And some will just run out of steam and make money.

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