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Discount Brokerage Weekly Roundup – November 18, 2019

After what’s seemed like an epic storm of information and discount brokerage news, there finally appears to be an eye of calm. Even in the midst of the calm, however, there are still swirls of activity that point to even more turbulence in the future.

In this edition of the Roundup, the future is in focus with a couple of unfolding trends making news this past week. Up first is a story about the convergence of tech and finance and how the landscape of personal financial management is set to transform yet again. Next, we look at another online brokerage in the US contemplating a move into – wait for it – sports betting. As always, we’ve got a great selection of comments and commentary from DIY investors on Twitter and in the investor forums.

Checking for Competition

With the dust settling on the online brokerage melee in the US, it’s becoming increasingly clear that the line between technology company and financial services firm is getting very blurry. One of the recurring themes we’ve noted in the online brokerage space is that order execution alone isn’t going to be the primary driver for revenues or sustainability, rather, the road forward is going to rely on diversification.

The recent wave of commission fee drops in the US among the biggest online brokerages, also masked the fact that many other smaller players also stepped forward into commission-free stock trading world, most notably, the payment processor Square, which is run by the CEO of Twitter.

In addition to commission-free stock trading, Square is also launching fractional share trading (something that Schwab also announced it would be opening up to its customers) and with that announcement, the moat around the world of stock trading appears to have been effectively breached.

Why that matters is because the barrier to leap from providing one type of financial solution (e.g. transaction processing) to another is entirely surmountable with the right mix of technology and resource. Which brings us to the big announcement this past week that is surely making waves among financial services providers.

This past week, there were multiple news stories citing that Google is apparently going to launch into the world of providing checking accounts (in conjunction with Capital One) starting in 2020. While this is not the first of the major technology names to jump into the financial services realm (Apple did so with their consumer credit card in partnership with Goldman Sachs and Amazon has discussed launching checking accounts as well), Google is a formidable competitor in the space.

Clearly, as currency and money become increasingly digitized, the tech giants have a natural advantage to harness their expertise and move into the world of finance.  As the commission fee wars in the US have readily shown, being an intermediary is becoming a highly challenging role to play without the scale and technology to keep pace. In the case of Google entering the world of personal finance with a checking account, they have both the scale and the resources to rattle a few cages.

Of course, just because Google moves into a space, doesn’t necessarily guarantee it’s success (Google Hangouts anyone?) however it should be sufficiently concerning to the financial services world as a whole to see a large technology company move into something so ubiquitous as a checking account. On the (very big) assumption that Google is able to succeed, it is not hard to envision them moving into other corners of personal financial wealth management that could benefit from greater automation or integration with other technology.

In Canada, there was another big story brewing (not related to Don Cherry) that saw an online brokerage here make the initial moves to launch into banking too.

Questrade, the poster child for the “non-bank-owned” online brokerage is, ironically, now reportedly working on setting up their own banking arm. This past week, there was a reference to a news story of Questrade applying to federal banking regulators to launch a Schedule 1 bank, known as Quest Bank (in English) and Banque Quest (in French).

There is no firm timeline published at the moment, however, the first steps in creating their own banking division are underway. And, while there is already chatter on the investor forums about this possible development and what it will take for Questrade to successfully compete against its larger and better known rivals, there are significant hurdles still to clear for it to gain traction.

Like Google, or Amazon, or Facebook, Questrade is banking on having an installed user base that they can cross market to. The playbook is a familiar one for clients of E*Trade Financial or Interactive Brokers or even Robinhood, where there is some element of a traditional banking feature that is now available to DIY investors via their online brokerage.

Stepping back, it’s also evident that an online brokerage banking is not an original concept, given that banks also do online brokerage. So, in what is essentially a race to the middle – the prized combination of being great at financial service and great at technology – is what firms on either end of the fin-tech spectrum have to get right.

To be fair, banks are not taking the onslaught of competition from technology firms lying down. Groups like “RBC Ventures” demonstrate how financial giants are leaning into the innovation ecosystem by acquiring and incubating promising technology firms. While Google has a substantial head start on creating a portfolio of helpful “apps” to keep users inside of their own network, RBC Ventures appears to be attempting to build an impressive portfolio of everyday useful apps or services that could be offered to the general public and pass along perks to RBC customers.

In fact, RBC was reportedly aiming to win 500,000 banking clients from the RBC Venture program within five years.

Undoubtedly the winds of change are starting to blow in the financial services space yet again. Another big tech player wading into finance and a Canadian online brokerage wading into banking means that distinguishing service providers is going to be increasingly difficult. For DIY investors, the challenge will be untangling who offers the best set of features at the best price. Tied into that assessment is who will make finance the most accessible and easiest to manage on their platform.

Gambling on Betting

It’s sometimes fascinating how worlds collide. The world of wealth management, historically, was one in which continuity, certainty and conservatism were the hallmarks of success. Gambling, casinos and sports betting were almost antithetical to the world of investing.

Fast forward to 2019, and the other side of a crypto-bubble; a commission fee battle and relentless automation mean that the world of wealth management is willing to entertain “creative” approaches to generating new interest and revenue.

This past week there was an interesting story that crossed our radar about one of the largest online brokerages in the US, TD Ameritrade, exploring a venture into sports betting. If this sounds a) unbelievable and b) similar to what Interactive Brokers has done, both of the above are true.

Although nothing has been confirmed in terms of a specific offering, Chief Information Officer of TD Ameritrade, Vijay Sankaran,  has confirmed that they are exploring the possibility of entering the realm of sports betting. Few details were provided and though this is very much in the exploratory stage, the fact that a second major online brokerage in the US is looking to tap into the sports betting world might signal an emerging trend.

Quote from Business Insider article

In July of this year, Interactive Brokers announced the launch of their simulated sports betting program which lets participants play with virtual money to try to pick a winning portfolio. The upside for participants in this program: up to $1000 in commission credits towards an Interactive Brokers trading account. Interactive Brokers has positioned the interactive and simulated sports betting platform as a learning tool and a way to generate new leads for the online broker. The rationale is that those who are successful at betting on sports would likely be competent investors or traders.

While sports betting may not appeal to the vast majority of investors, the investment by at least one major online brokerage in a whole platform and now the exploration of a second online brokerage in the space is a decent indicator that brokerages are open to finding new sources of revenue, even if they have to roll the dice (pun intended) with who they reach out to.

Discount Brokerage Tweets of the Week

From the Forums

Too Soon?  

A Redditor in their mid-20s is looking to invest for the first time and is considering a TFSA. Fellow forum users provide advice, recommending adequate research and risk assessment.

An Uncommon Family Heirloom

After discovering preferred shares in their family’s portfolio, a Redditor asked for information on how they work. Forum users engage in a discussion about what preferred shares are and how one should move forward with them.

Into the Close

That’s a wrap on another week of activity. With Christmas just over a month away, it looks like there’s only a few more weeks left for major developments for discount brokerages to announce. We’ve got our ear to the ground for the remainder of November and December as we still expect some more exciting developments to unfold before the year is done. Until then, good luck staying focused on the news that matters.

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