Financial Analysis: Will $5B Trade Republic, Germany’s Robinhood, win the race for European wealth?
Financial Analysis: Will $5B Trade Republic, Germany’s Robinhood, win the race for European wealth?
Navigating dooming PFOF regulations and a potential cut in interest rates
Gm Fintech Architects —
Today we are diving into the following topics:
Summary: The battle for European wealth is heating up. Just last month, Trade Republic, Europe’s largest pure-play neobroker valued at $5B, announced profitability and a freshly obtained EU banking license. At the same time, Robinhood announced plans to launch in the UK and Munich-based Scalable Capital announced a new fundraise at a stable $1.4B. This week we dive into the rise of the neobroker model with a focus on Trade Republic, analyzing its performance among competitors, and whether it can win the race against $10B behemoth Robinhood.
Topics: Wealth tech, Retail trading, Robinhood, Trade Republic, Fidelity
Special thanks to Michiel for this fantastic analysis
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Long Take
The rise of retail
Like many fintechs, neobrokers came onto the scene in the early 2010s as challengers to their traditional incumbent counterparts. In the case of investment management, the incumbents are online trading platforms formed prior to the dot-com boom and operated by the likes of Charles Schwab, Fidelity, and E*Trade. The rise of electronic trading in the ‘90s, together with more widely available internet connections, provided an easy gateway for individual investors to participate in stock markets.
As a result, the stock holdings by US families rose from an average value of $130K in 1992 to about $300K by 2010. Trading platforms that facilitated this new volume found profits by charging higher commissions for individuals, who traded less frequently and with smaller volumes than institutions. In 2010, Charles Schwab generated 20%, or $600MM, of its retail trading income from commissions alone.
Many individual investors remained excluded from markets, and stock holdings by all US families reduced materially after the economic correction of 2001 and global recession of 2008. This is due to a combination of the growing frustration with large financial institutions, distrust of post-bubble public equities, and of course a squeeze in household income during those periods — but also in part due to commission fees, which could reach $10 per trade.
These experiences prompted a new business model for the next wave of online brokers, made popular by none other than Robinhood, founded in 2013. These neobrokers offered zero-commission trading with no account minimums, and instead monetized trading volume through payment-for-order-flow (PFOF). PFOF is paid by market makers who receive the right to execute a customer order from online brokers in exchange for a percentage of the profit (the bid-ask spread). The income can be mere cents for a single trade but can be a significant revenue driver when volumes are high. By 2019, Robinhood was making $200MM in transaction fees on PFOF and it wasn’t long before incumbents caught on.
The next wave of retail adoption was triggered when incumbents (Fidelity, Schwab, and TD) launched their own zero-commission trading offering in late 2019, followed by global lockdowns and a series of government relief schemes. Some say retail participation was additionally boosted by the cancellation of sporting events during the pandemic, which prompted a shift in betting activity to the stock markets. The combined result was a nearly 3x increase in retail trading volumes between 2019-21. Bloomberg estimates the share of retail volumes in total equity markets doubled to 20% in the decade leading to 2020.
This formed the backdrop for a renewed influx of capital into the investing tech space. The segment received peak funding of $15.2B in 2021, up from $4.2B in 2019, and grew its share of total Fintech funding to a high of 18%. Of course, investment management technology also broadened substantially as a category, representing not just trading or portfolio management automation, but B2C companies that combined elements of roboadvisors, neobanks, digital lenders, and investment companies.
Trade Republic leads EU neobrokers
Among firms raising fresh funding was Trade Republic, a Berlin-based neobroker that launched in 2019 to bring the Robinhood model into Germany. The firm offers trading for stocks, ETFs, derivatives, bonds, and crypto and currently operates in 17 countries across the EU. Unlike Robinhood, however, the company markets itself explicitly for longer-term passive investments. That’s partly due to the negative press associated with day trading during the pandemic, as well as due to the growing pressure on EU households to complement public pension benefits.
Since launch, Trade Republic has amassed 4MM accounts with $38B in assets — an impressive $10,000 per user. Its latest funding round in 2022 valued the firm at $5.4B, ahead of most European competitors. Note that we exclude Revolut given its neobank core focus and economics.