- Commission-free trading apps have boomed in popularity
- Gamified features keep users entertained
- Advance in tech is coming at the expense of investor education
The meteoric rise of the gaming industry has shown that people of all ages love to play. It’s not surprising: games satisfy our needs for autonomy, provide a social community and offer all-important immersion for those wanting to escape the horrors or boredom of real life. They also make us feel good when we do well.
Recent years have shown that the thrills don’t end with Candy Crush. Anyone who’s watched Charlie Brooker’s Black Mirror episode ‘Nosedive’ will be familiar with the notion of social media as a game. Of course it isn’t, but the way these platforms encourage us to constantly seek likes and new followers reflect the behaviour seen in gamers.
The worry now is that some of the tricks used by these carefully designed, addictive apps are trickling into the more sober world of investing. The astonishing rise of Tesla this year turbocharged by a frenzy of new investors rushing to buy share fractions while paying no commission suggests that many of these deals were not part of a well researched investment plan.
The notion of investing being a game is nothing new. Almost a century ago John Maynard Keynes likened it to a game of Old Maid, or musical chairs, played by investment professionals among themselves. “These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated,” he said in The General Theory of Employment, Interest and Money, first published in 1936.
The difference today is that investing has been made so accessible that nearly everyone can play, regardless of whether or not they know the rules of the game. “Tech has advanced so quickly that citizens are being introduced to apps without really knowing how they work,” says Pinar Ozcan, professor of entrepreneurship and innovation and director of Oxford Future of Finance and Technology Initiative. “A lot of these companies are start-ups and educating the customer requires resources that they do not possess, so financial education is the piece which is missing in the industry right now.”
On the one hand, commission-free trading apps should be praised for breaking down barriers in financial services so more people can get involved. For a long time the industry has charged customers too much. And If these neo-brokers can make investing fun and encourage disaffected millennials to think about their finances, then all the better. Gamified features themselves can help breathe life into the industry. Seven Investment Management’s 7IMagine, an app made by the makers of Nintendo’s Donkey Kong, is a great example of a tool that injects some fun into the rather tedious task of working out how much money you should be saving.
But there’s a difference between gamifying the learning process and turning the whole practice of investing into a game. And with fintech investing apps there are some interesting dynamics at play.
Born out of the US
Few investment apps have captured people’s attention like Silicon Valley’s Robinhood, the pioneer of commission-free trading. Touted as a trading app for the Tinder generation, Robinhood attracted an astonishing 3m new users in the first three months of this year alone. Users can invest with just a few swipes, and confetti is thrown up to boost the fun factor when you’ve placed a trade.
Users like Robinhood because it’s easy to use. But a concern is that its addictive and colourful interface has been designed to feel more like a game than a serious pathway to sensible financial decisions. A big problem is the lack of financial education. Concerns came to a head earlier this year with the tragic death of Alex Kearns, a 20-year-old trader who took his own life because he misread the app and falsely believed he had lost over $700,000 trading options.
In a report assessing this year’s surge of retail investors in the US published by Allianz Global Investors, the authors concluded that “these newly baked investors have little prior experience in trading nor a sound understanding of capital markets. They ignore the fundamentals and seem to be provoked by the FOMO (fear of missing out) phenomenon as well as gambling incentives promoted on social networks.” Allianz also raises concerns about these erratic investors undermining the integrity of markets.
The financial illiteracy of many new investors is exposed by some ludicrous events that happened earlier this year. Following the global switch to remote working, Zoom Video Communications became the gathering platform for video communications, and its share price shot up. Unfortunately for some people rushing to the stock, they accidentally invested in Zoom Technologies, a small online service company, leading to a massive increase in its share price.
Something similar happened with a small China-based real estate company that trades in the US under the name of FANGDD Network group, whose stock inexplicably quintupled in a day. No prize for guessing what companies the users of Robinhood thought they might be trading.
Fortunately for UK investors, the rush to free investing is more tame. There’s a crucial difference in regulation that has prevented a surge in Robinhood-like players. While Robinhood does not charge its users, market makers pay Robinhood to give them business. This is illegal in the UK. So the more users trade on Robinhood, the more the platform makes, giving it a direct incentive to encourage people to trade as much as possible – regardless of whether that might be in their interest or not. This is also why most of the major investment platforms in the US have removed dealing fees for trading stocks and ETFs, while the most UK platforms still charge £5 to £15 per trade.
Robinhood was due to launch in the UK earlier this year, but it delayed the launch following a spate of bad publicity. The launch was postponed “indefinitely”, and it looks unlikely it will go ahead any time soon.
Closer to home
Back in the UK, a handful of commission-free trading apps have soared in customer numbers this year. It is important to distinguish between those like Robinhood that also offer derivatives trading, such as Trading 212 and eToro, and those that focus on stock purchase, such as Freetrade, Stake and Revolut.
Freetrade, which was set up in 2018, saw its user numbers boom from roughly 50,000 at the start of the year to over 250,000 today. That’s more new customers this year than Hargreaves Lansdown, whose results show it added 184,000 new customers over the year to the end of September.
Freetrade’s average portfolio size is quite small at £4,000, but its founders hope that this will grow. Users have access to over 3,000 securities listed in the UK and the US, but smaller cap stocks are only available to their premium users, who pay £10 per month. The app is simple and user friendly, but financial education is sparse. A 24-year-old graduate from Leeds told Investors Chronicle that he started investing with Freetrade for the first time in March when the markets fell and his friend sent him a referral code for a free share. When asked if he would have been prepared to invest if he had to pay a £10 transaction fee per trade, his response was “probably not”.
Australian trading app Stake, which only gives access to US securities, came to the UK in March this year and now has around 20,000 UK investors. The founders aim to significantly reduce the cost of trading by investing straight into the US, rather than through market makers in London. If you have over £30,000 held on the app and pass as a sophisticated investor, Stake also lets you invest in US listed ETFs. This is not possible on the likes of Hargreaves Lansdown or AJ Bell, as they only sell ETFs which meet European and UK regulatory standards by offering a Key Information Document, which most US ETFs do not.
Matthew Leibowitz, chief executive officer at Stake, says they use gamified features to engage and educate users. “Businesses are incentivised across all industries to gamify and engage people with their product, so it’s not unexpected that it is happening in brokerage; that is the experience people want,” Mr Leibowitz says. He adds that fintechs such as Stake are competing with the likes of Instagram and Facebook for people’s attention – they are not competing with traditional financial services firms.
Stake lets you spin a virtual wheel and gives you a free share upfront when you sign up for the app, and Freetrade gives you a share if you refer a friend. A spokesperson from Freetrade says this is by far their most cost-efficient way of attracting new customers. Although it is a fun freebie, it is hard to see how it correlates with encouraging users to make sensible long-term financial decisions.
While these new apps have laudable aims of making investing more accessible, there is a natural tension, says Professor Ozcan, as they need to grow quickly if they are going to survive. “Typically, fintechs struggle to get a lot of customers at once because of trust issues, so the more volume and revenue they get per customer the better,” she says. While most commission free-apps in the UK are currently bleeding money, their business model is to make money from foreign-exchange charges and premium subscription accounts.
Professor Ozcan adds that “this may motivate [fintech investing apps] to design their apps in a way that encourages people to spend more and do more, perhaps with gamified features, and if this makes it easier and more user friendly then great, but if it encourages them to go against their own financial well-being, then a border has been crossed”. Most commission-free trading apps have lively communities where users share insights and investment ideas, which can be very helpful, but also leaves users vulnerable to unchecked advice.
The slippery slope to derivatives trading
A handful of the derivatives trading platforms have also started to offer commission-free investing. Platforms such as Trading 212 and eToro will charge you nothing to have an account and trade stocks with them. While this is a loss-making operation, the bulk of their business comes from users trading contracts for difference (CFDs – a form of derivatives trading), where the platforms make a significant margin on the spread.
Arin Melvin, 30, who started investing for the first time this year with eToro says he chose eToro because his friend showed him the app and he really liked its simplicity and its low cost. He says the app is "really easy to use" and he chooses to invest in companies that he is familiar with. While is not currently trading CFDs on the app, he hasn’t ruled out doing so in the future.
Less cautious users can get sucked into derivatives trading in just a few taps. It’s clear from communities on Reddit and Youtube that some investors are taking on huge amounts of risk. Financial regulations help manage expectations by forcing companies to show how many customers lose money, and the numbers are startling. Across the major CFD trading platforms, 70 to 80 per cent of retail investor accounts lose money. People using these apps should remember that they are designed to encourage users into their more lucrative products.
Trading 212 sends frequent push notifications via its app (unless users opt out), which keep people up to date, but also plays on investors' desires not to miss out. While you could set up an account and start trading within minutes, it is important to read the terms and conditions carefully of any platform you invest with. Trading 212 says, for example, that it reserves the right to place your money in a bank outside of the UK. If your money was placed with a bank that was not UK authorised and regulated, you would not be protected under the Financial Services Compensation Scheme if that bank went into administration. However, when contacted by Investors Chronicle, Trading 212 confirmed "at the moment 100 per cent of client money is held in the UK, hence our clients have no risk associated with non-UK banks. Indeed, when drafting the provision, our agreement had inserted the option of using a non-UK bank, as it is standard language. But we have never actually held client money outside of UK and we do not intend to so in the future."
eToro calls itself the world’s leading "social" trading platform, as it has a "copy portfolio" function. This enables you to automatically copy the trades of more experienced investors. eToro says it aims to “leverage the wisdom of the crowd” and is trying to take on more traditional asset management by letting you copy strategies for a low price. eToro’s website says that its 50 most copied traders had an average yearly profit of 29 per cent in 2019, and the headline figures for its most copied traders this year are very alluring. The downside is that many users are left with unrealistic expectations of returns and no system for managing risk.