The race to zero on trading commissions

The brokerage war rages on.

Bank of America this week announced that customers of its retail banking loyalty program will get unlimited free trades for stocks, ETFs and options. Previously, retail customers with $20,000 in cash received 10 or more free trades. Now it’s a free-for-all.

Commissions have been declining for years as tech-enabled challengers like Robinhood disrupted the market and acquired millions of users. Major banks and brokers have been compelled to follow suit in order to remain competitive and prevent the erosion of retail assets.

First came JP Morgan, who introduced free trading last year. Then, a few weeks ago, Charles Schwab said it was taking trading commissions for stocks, ETFs and options to zero. It was quickly followed by TD Ameritrade, E-Trade and Fidelity. Now Bank of America is entering the fray.

News that a major player has caved in to competitive pressure isn’t particularly big news in and of itself. It’s simply further evidence of the fee compression (or rather, obliteration) that’s hit the retail trading business.

What’s really interesting – and something that many people have missed – is that Robinhood just launched a debit card. Apparently it won’t charge foreign transaction fees or maintenance fees, and has no account minimums. Instead, the company plans to make money off of interchange fees made on debit card purchases, and collect some fees from partner banks.

This isn’t so much a harbinger of disruption in the retail banking space, as a sign of the convergence that’s going on between “disruptive” challenger brands and established full service banks.

It’s yet another illustration of why balance sheet matters, a lesson all consumer fintech startups need to learn quickly in order to survive. Players with massive scale like Bank of America and Charles Schwab can offer free trades as they have huge volumes of customer deposits earning interest, which means they can generate the cash flow they need. And dropping fees isn’t as harmful to their bottom lines as it might seem – Bank of America estimates that 87% of trades from its loyalty group members were already free.

What does all this mean? Robinhood’s attempt to become a deposit taking institution is a sign that it hasn’t really created anything “new” when it comes to business models. It turns out they too need customer deposits and fee revenue to operate a profitable and sustainable business.

This strategy is essentially a “bundling” of fees, something Mifid II was put in place to eliminate. It was designed to force investment banks to disclose fees for specific services (including research and trading) but of course, that’s the institutional arena. But the practice of bundling (and obfuscating) fees in retail share trading is essentially the same dark art, and one that is (probably) vulnerable to regulatory scrutiny and intervention going forward.

It will be fascinating to see how quickly (and decisively) the regulatory framework surrounding retail fees catches up with the institutional space. Established financial services franchises are adept at navigating the regulatory environment and have a clear edge over challengers here. A case in point – this is actually Robinhood’s second attempt at launching a savings product, one that comes a full 10 months after its first, ill-fated foray into this segment. Don’t believe everything you hear about big banks and velocity of innovation – size remains a distinct advantage when it comes to the age old business of financial services.