Revolut Joins the World of Trading
By: Phil Cottis
Tags: Cryptocurrency, Trading, Finance, Fintech

After a relatively long time in the FinTech world, Revolut has now launched its commission-free trading service, and there are a few surprises in there! This looks like another step on their journey to creating the only financial app you need and a world beyond banking.

Revolut isn’t the first, and are unlikely to be the last, to get into this commission-free trading space. RobinHood was perhaps the first to do this and have successfully shaken up the US market – they have over 5 million customers and are now FCA approved and have the UK in their sights. FreeTrade is truly up and running in the UK and has now added ISAs to their list of products. EToro is also big in the US and saw a lot of traction when they offered crypto trading.

So it’s noisy and there’s clearly a wider market trend at play here. It turns out this is even more interesting than the nuances of Revolut’s launch.

What’s in the launch?

First, let's discuss a few points about Revolut’s commission-free trading feature.

Arguably the most impressive element of what Revolut has launched is the fractional investing capability. In short, this allows you to buy part of a share, rather than having to buy a whole one. This allows customers to choose exactly how much they want to invest, rather than be constrained to the cost of whole shares. A single share can sometimes be pricey itself so this offers very low entry point and enables anyone to get into investing. As they say – this is making trading inclusive – nobody is priced out of investing anymore.

Notably, only US stocks are available initially – this is likely because fractional investing is easier in the states. But it sounds as if more stocks from more geographies will be added to the service over time. Given Revolut has a prescience across Europe and are rumored to be looking at releasing int he states, this isn’t such a bad thing for the launch. Most of the biggest brands and companies that will see the most attention are US based anyway (think: Apple, Alphabet/Google, Facebook, Uber, Tesla). It will be interesting to see how quickly Revolut introduces other markets, I wouldn’t expect their current limit to dampen uptake in the short term but could get in the way over a longer period if some of those competitors have a wider pool.

Notably, FreeTrade now has the approval to offer fractional trading in the UK and Europe, so the race is hotting up and this is likely to be where Revolut follows.

Most observers expected this to be a paid-for service and therefore the predictions were that Revolut would make this available for their Premium and Metal customers. However, they’ve introduced a tiered structure which is very smart. Anyone using Revolut as a free customer (on their Standard price band) will great up to 3 free-trades per month. Fancy a few more? That’s fine, move up to Premium and pay your monthly subscription. Need more than 8? You need Metal for that, pay a bit more.

This looks to be a smart ploy aimed at enticing customers up to higher price bands. Generally, if you’re investing to save for the long term you shouldn’t need more than 3 trades a month, however, someone with more of a ‘trading’ mindset trying to get a quick buck and buy and sell more frequently will need those costed subscriptions. This goes hand-in-hand with the current Revolut angle with regards to crypto and FX, both of which are made very easy and provide more benefits at higher subscription options.

Should the incumbents be worried?

This initially looks to be more of genuine trading challenge rather than a tool to help Revolut users to accumulate their savings through well-placed investments over the longer term. Revolut’s audience tends to be millennial, and commission-free trading fits in with their other features which we know their customers already love. However, given this is firmly trading, many of the incumbents in the savings and investments space won't look at this as a direct challenge.

The current savings and investment platforms are specialists in helping their clients accumulate wealth as they go throughout life, and generally lower risk investment options are a more sensible way to achieve this. Hence, those firms who provide that longer-term investment service like some of the banks, Hargreaves Lansdown, AJ Bell, Aviva, Fidelity and the like probably won't view this as direct competition. Some may even be pretty happy that commission-free trading will introduce investing to a wider audience with the expectation that users will move towards investing for the longer-term once they figure out there is a better, less risky way to accumulate money over the long-term.

Investing in funds is generally still seen as the most favored long-term investment. And that’s currently where these new entrants are falling short: they don’t provide these safer, longer-term options to help users save and accumulate wealth or offer much guidance to help them make informed decisions. This is where the more traditional platforms specialize and why they do so well. The incumbents also have a full range of tax-efficient wrappers (products to hold your money in that don’t penalize you for the growth your investments might get), something Revolut can't yet provide but FreeTrade can in part (they have ISAs but not Pensions yet).

Also, these features need to come with a warning. There is a danger this could get messy. Investing is inherently high risk, and even more so with stocks. Could this all be made too easy? Could it be that we look back on the proliferation of uneducated investing without the correct and proper guidance as a cause of loss? How does this protect vulnerable customers who are struggling to put enough aside to make the right decisions with their money? Will regulators take action here to ensure users are aware enough of the risks given lots of people have a lot of money invested with relatively little guidance?

Even this week we’ve seen the stock market has suffered due to the escalating US-China trade war. A global slow down could seriously harm investors, and for those not making sensible decisions, this could have the adverse effect of turning them off investing in the future. Revolut for one don’t need any more bad press and wouldn’t want to be seen providing a service that exposed people financially. These are all interesting questions to consider, and stepping back from investing, none of the FinTechs have gone through a full market cycle including a crash. How will the attitudes of FinTech users change when there is a downturn and a real squeeze on people’s spending?

How will this play out?

Back to commission-free trading. What’s the real trend here and how will the market evolve?

Much of this will depend on the roadmap of those FinTechs. Are they planning to make a real challenge on those incumbents by making this a way to help people looking to accumulate over the long-term or do they see this as a feature within banking just introducing people to investing?

If the former, they will need to move beyond trading into a world that really helps people with their savings and investments, something that is more than a route into the stock market.

RobinHood And FreeTrade look best set here given some of the investment options they provide to their customers (you can actually invest in a limited range of cheaper unmanaged funds). RobinHood is also working on cash management and so seem to be moving towards a service that can genuinely help people manage a diverse set of investments and save for the longer term.

More broadly, what we are witnessing is a commoditization of stock trading. I think we will start to see this feature provided more and more through other banking apps as one or more of these FinTechs look to follow a distribution strategy and put their products through other apps.

If these kind of strategies are a success, then we will likely see a whole lot larger financial institutions add this feature to their bulging propositions. Imagine being able to use FreeTrade’s services through your banking app… If these features can be linked with a current account to help people make the most out of their spare money, that’s great. Even better, do so with guidance in a way that suits their risk profile to genuinely help a population that doesn’t save enough.

My view is that there is currently still a place for a true service that helps to guide and support an individual to accumulate wealth in a smart way, with advice and guidance being key. Stocks are high risk, and having a diverse set of investments, including funds is still incredibly important and very popular with an audience well beyond the millennials who tend to be wealthier. None of the FinTechs can match the diversity of what the savings and investments platforms provide… at least not yet… but watch this space.