Implications of Schwab's $26 billion acquisition of TD Ameritrade, and Tesla's black swan truck; plus 12 short takes on top developments
|Nov 25, 2019|| 7|
Hi Fintech futurists --
In the long take this week, I look at the $26 billion acquisition of TD Ameritrade by Schwab, and the implications that has for innovation, frontier technology, aggregation theory, and corporate strategy. What can you do to remain competitive if your business is behind the top dogs in the industry, even just a little? How risky of a bet should you be making, and how can that be consistent with fiduciary duty? We end on Elon Musk's insane cybertruck, and ask whether there were any cybertrucks TD could have launched to stay independent.
The latest short takes on the Fintech bundles, Crypto and Blockchain, Artificial Intelligence, and Augmented and Virtual Reality are below. Thanks for reading and let me know your thoughts by email or in the comments! Last but not least, these opinions are personal (or maybe made by a robot) and do not reflect any views of ConsenSys or other parties.
Well this morning started out as a bit of a bummer! See -- Charles Schwab to buy TD Ameritrade in a $26 billion all-stock deal. The $55 billion market cap Schwab is gobbling up the $22 billion TD Ameritrade at a slight premium. Matt Levine of Bloomberg has a great, cynical take on the question: Schwab lowering its trading commissions to zero is actually what wiped out $4 billion off TD's marketcap a few months ago. For Schwab, the revenue loss from trading was 7% of total, while for TD it was over 20%. Once Schwab dropped prices, TD started trading at a discount and became an acquisition target. You can see the share price drops reflected below in the beginning of October.
The reason for this impact disparity is that Schwab has been diversifying into asset management, wealth management, banking, lending, and a full suite of other products. The firm has a hand in all the cookie jars, and are known for a proprietary and closed approach. Some would say they have a reputation for sharp elbows as a result. TD Ameritrade, on the other hand, was arguably the most customer-centric discount brokerage, and did not conflict itself as much by going vertically into its own value chain. For example, there are no default TD ETFs that its roboadvisor customers were forced to hold. Oh well!
I disagree with Levine only on one thing. It was not Schwab's trading discount that killed TD. It is SoftBank's massive venture funding engine that was the proximate cause. Without swaths of venture capital backing for firms like Robinhood and Revolut, and by extension the API-first DriveWealth, there would be no free commissions. Without the ability to burn $250 million per quarter and get away with continued hiring and spending on Google Ads, TD and Schwab and Fidelity would still have commissions as a source of revenue. But let's not blame the Fintech start-ups -- they are just trying to survive after all.
Let's point the finger deeper at Napster and Facebook, and the Internet as a whole. Generations of people have now been trained that digital products are free, open, and available to all. As a philosophical tenet, this is amazing and empowering! It is the world we should live in -- only if that were the truth. Of course, it is not the truth. The costs of Facebook have become revealed recently, hidden somewhere between the effectiveness of propaganda bots and our twitchy anxious attention spans. Bodies flooded with dopamine, and eyes bloodshot from staring at a tiny machine sun. I mean, I love my phone.
Would we make this trade again? Probably. The cost of Napster has been a renaissance for music, and the seamless user experiences on Spotify, Apple, and Amazon. People get access to millions of songs for $10 per month across all their devices! That's what you used to pay for a single CD at Tower Records.
So of course entrepreneurs would design Fintechs in this way too -- free, open, available to all. The finance firms have been saying for a while that they are not scared of this. None of the Fintech software is truly new. It rides existing infrastructure rails of custody, exchange, brokerage, banking, payments. It is subject to the same regulation. And finance firms can simply match Fintechs, because the software is "easy to build" after a few years of corporate venture and innovation theater. Further, incumbents supposedly have the scale to defend against Fintechs with large customer network effects.
Well guess what! This is what the newspapers said, as they digitized themselves and built out a free web presence. This is what they said, as the mid-sized ones starved and the large-ones struggled to survive.
It is exactly this part that discourages me. The necessary consequence of building out a large, free service with hidden costs is that it creates monopolies ("attention platforms", "aggregation theory"). Perhaps you can call them utilities in the good case. But the middle of the market is hollowed out. In the newspaper data above, you can see publications with 100,000 to 250,000 subscribers struggling last year. Similarly in finance, it isn't the Robinhoods, or the Betterments, or the SoFis that will kill you. It is the JPMorgans, and the Goldmans, and the Schwabs. The best players in the industry can survive the longest without oxygen, because they have adjacent businesses, good operating margins, strong cross-sell, and the cash reserves to make transformative decisions.
Schwab is going to have $5 trillion in assets. That's like, more than a lot of countries.
TD Ameritrade, being the smaller player without a fully diversified business, had to be the most nimble and innovative. It has an institutional custody business for Registered Investment Advisors, and opened up third party API services for Fintechs as early as 2012. My roboadvisor was one of the first companies to integrate with their financial advisor channel. TD had no choice but to take such risks -- to be open, innovative, and supportive of others in order to compete against the larger providers like BNY Mellon, Fidelity, and Schwab. Now, 10,000 TDA RIAs are panicking about finding a new custodian that doesn't compete with them by offering wealth and asset management products. They will panic, but where can they realistically go?
On the retail side, TD was also taking risks. While JP Morgan, Merrill Lynch, and Schwab were collectively raising their eyebrows, TD launched Bitcoin Futures and invested in ErisX. Will the combined larger entity have the same risk tolerance? Of course not. It will spend the next 3 years working on a multi billion-dollar integration project, and speculative stuff like this is unlikely to have highest priority. For those 3 years, Fidelity has a gift in the form of lead time. Will they capitalize on it, or face an even more powerful integrated behemoth? Looking at acquiring Coinbase sounds like a good option right now.
I should end there, but I really want to tie this story into the Tesla cybertruck launch. And here is how. If you are a company in the middle, like TD, then you are getting squeezed at the top by the large incumbers through power laws, and by new entrants and the chaotic churn of capitalism at the bottom. So as the middle, you absolutely have a higher risk tolerance for innovation. But you cannot outspend on R&D and acquisitions, simply due to the smaller size. That leaves you with either (1) lots of small innovation around the edges, like connecting to roboadvisors or matching trading pricing or offering someone else's Bitcoin futures, or (2) a single Hail Mary bet. A single irresponsible large systemic bet on some wild frontier thing.
That would certainly be irresponsible for a public company like TD. A company sale to Schwab may be detrimental to the industry, but is a positive for TD shareholders. The board of a public company has a fiduciary duty to maximize investment returns, even if that means doing less exciting stuff. Taking strange, black swan risks may not seen as the right approach to exercising the duty of care. But you know, that's what Elon Musk is all about! His whole career is one insane bet after another. The whole public company life doesn't really suit him very well -- to the point of official censure for fraudulent tweets to manipulate Tesla's stock price.
You don't see TD's management tweeting about securing imaginary counter-offers denominated in cannabis meme jokes. But you also don't see them building crazy electric cars from the future, and hammering Ford into the ground on market capitalization and mind share. It was also typical for Musk to blow his product presentation and give fuel to sceptics -- fuel for his own entrepreneurial engine. Regardless, Tesla is defining a new category and industry. What could TD have done to achieve the same?
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