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Deposit Dudes


The End of Stock Trading Fees?

The downward trend continues as major brokerage players start to offer commission-free online stock trades

As of late, there has been a lot of activity around brokerages and their trading fees.

Several big names - Schwab, Fidelity, Interactive Brokers, TD Ameritrade, E-Trade, and Ally - have recently moved to eliminate self-directed stock commission fees and are now offering trades at no charge.

This has seemingly been the trajectory since Robinhood came onto the scene in 2013 and started offering commission-free trades.

After the launch of Robinhood, many brokerage firms reduced their trade fees, and some big banks, such as Bank of America, Citibank, and Wells Fargo, followed suit.

The race to the bottom of stock trading fees was continued by Chase with the launch of its You Invest platform in September 2018, which further increased the competitive pressure.

On October 1, 2019, Schwab made a splash by announcing commission-free trades. The competition did not remain idle - within about a week, online brokerage rivals E-Trade, TD Ameritrade, and Fidelity jumped on the bandwagon and eliminated their stock trading fees.

Now that many brokerage juggernauts offer commission-free trades, how will these companies compete in the future? How will they make up for the lost fee revenue and how will they differentiate themselves from their competition?

In regard to differentiation, Robinhood seems to have offered one answer to this question with the launch of its new, free Cash Management feature, which currently pays a generous rate of 1.80% APY on uninvested cash and offers customers a debit card.

Diversification of product offerings and high interest yields may be a strategy for fintech brokerages to differentiate themselves from their competitors.

For traditional banks like Chase and Bank of America, the strategy might be a bit different because traditional institutions already offer a variety of deposit products. However, traditional banks typically pay significantly lower interest on their savings products compared to alternative providers, which may put these institutions at a competitive disadvantage.

However, the strength of accounts offered by traditional banks is that they are rich with banking features and the balances in customers’ investment accounts can go toward the combined balances to make those feature-rich products, such as Chase Sapphire Checking and Bank of America’s Preferred Rewards levels, free of charge.

In regard to lost fee income, brokerages need to find new avenues to make up for the money they no longer earn through online stock trades.

One option that brokerages have for additional revenue is loaning out their customers’ money. Uninvested, or so-called “idle cash” in clients' accounts, is swept into one of the brokerages’ subsidiaries. The brokerage pays the client interest on these funds, but this interest is very little compared to what the brokerage earns by loaning out the money.

Another possible consequence of these recent brokerage developments may be more mergers and acquisitions in the years to come. Case in point is the recent announcement of the merger of Schwab and TD Ameritrade. In markets with falling and disappearing fees, especially smaller brokerage competitors are more likely to merge together or to be acquired by large competitors.

The competition is really heating up in this space, so it is doubtful that this will be the last play. 2020 may have more twists and turns in this space which, while enticing for customers, could put stress and downward pressure on institutions’ fee revenues and perhaps catalyze more creative fee structures, product building, and possibly even digital account management differentiation.

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