Technologists' assault on Wall Street continues

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The banking industry is under assault from technologists.

Robinhood, an investing platform popular with millennials, previously grew rapidly based on a commission-free investing model that resonated with a demographic fed up with rent-seeking middlemen. Earlier this year, the company then launched functionality that allows customers to trade cryptocurrencies side-by-side with stocks.

As if that wasn’t innovative enough, Robinhood announced a checking and savings product yesterday that puts it in direct competition with large banks. The new offering will charge no monthly fees, no overdraft fees, and no foreign transaction fees. It will require no minimum balance, has free access to 75,000 ATMs, and a free debit card. But best of all, customers will earn 3% interest on the money they deposit with Robinhood.

This is a game changer for the banking industry. Historically, big banks have offered negligible interest rates (0.06% - 0.09%) and suffocated customers with absurd fees. Those days are now likely numbered though. Robinhood previously forced competitors in the stock investing world to move towards a zero-commission model when they launched their first investment product. It wouldn’t be surprising to see this checking and savings product force big banks to increase interest rates in response too.

There is a twist to Robinhood’s announcement however — it is likely to be a loss leader for the core business. Most consumer banks spend ungodly amounts of money to get consumers to open bank accounts and deposit money. Once the money is deposited, there are numerous opportunities to monetize the customer with fees, upsells, and alternative products. Robinhood sees a similar opportunity it appears, because they require any potential checking and savings customer to also have opened a brokerage account as well. This isn’t a bad thing, but it is noteworthy.

So what exactly could the future look like for Robinhood (or other consumer-focused fintech companies)?

My belief is that every stock, bond, currency, and commodity will be digitized over time. These assets may or may not be based on blockchain technology and/or cryptographically secured. Either way, the idea of having separate brokerage and banking accounts will become archaic.

Consumers will have a single account that holds all of their assets, including cash, and allows them to buy, sell, or hold each asset based on the individual’s preference. The traditional business model of the banking industry won’t apply, so these new companies will refrain from fee-based revenue streams and instead focus on putting the customer first.

Rather than asking “how can we make more money?,” the Robinhoods of the world will be asking “how can we solve our customers’ problems?” This new approach to banking will create a cheaper, more efficient, and more enjoyable experience for consumers. There will be a shift from people hating banks to people buying into certain brands and their ethos.

In order for much of this to happen, there has to be a continued evolution in the underlying technology of assets though. Each stock, bond, currency and commodity has to be digitized — to rebuild the financial system, we need to update each single unit of value first. Think of this like assembling an airplane while in mid-air. Not exactly the type of risk that large financial institutions look forward to.

Robinhood is pushing the pace in an interesting and valuable way. There will be plenty more companies who join them in the assault on Wall Street. The big banks aren’t ready for the speed and innovation required to just keep up, let alone succeed.

Remember, the bigger they are, the harder they fall. This will be fun to watch.


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