"Even this understates the change, because the actual way that stock brokers work today is that you keep some cash in your brokerage account to fund potential trades, and the broker earns interest on that cash and pays you less than it earns, and all the trading stuff is almost irrelevant. ... Commissions are way down there; in 2018, they represented a bit less than 7% of Schwab’s net revenue."
I don't think this is about consolidation in the brokerage space because of zero fees. I think this is about investment banks getting into the retail space (see Goldman's Apple card).
Once again, I rely on Matt Levine to explain it ("Goldman Has Some Boring Plans"):
The whole thing is worth a read, but here is one key paragraph:
"One way to interpret this is that Goldman has embarked on a quest to be boring. This interpretation seems plainly correct. The old Goldman approach—making a lot of money on lumpy investment-banking fees, risky balance-sheet-intensive trading, and both-lumpy-and-risky principal investing—is disfavored in modern banking. It is disfavored by regulation (the Volcker Rule, capital requirements) and by market conditions, but it is also particularly disfavored by Goldman’s own investors, who want reliable recurring revenues."
Edit: I should add this interpretation is also the one offered by the author of the NY times article, although the author also claims that slashed fees played a role:
"It continues Morgan Stanley’s strategy of increasingly focusing on asset management rather than investment banking and high-stakes trading, betting on steady fees over bigger paydays and bigger risks."
The writing was on the wall for E-Trade. Banking is in an ebb of consolidation. E-Trade and TD Ameritrade had to sell once Interactive Brokers / Schwab started that game of dropping commission. They didnt add enough other value besides stock trading. They are a component to a larger banking suite.
I have to think Wealthfront and Betterment are targets now too. I have to think American Express is still a viable target as well.
The next thing empires SHOULD be looking at, is overall life management software. Personal Capital, YNAB.
I am somewhat surprised nobody offers an abstracted savings account, that handles 401k, IRA, HSA, paying rent and bills, and access to credit. Instead of showing you the balance of each account, it would show you how much you have, how much you need in the future, and how much you can spend today. And then automatically apply extra cash to the best spots, and automatically use credit and pay it off. Using credit AS part of the budget process. Not completely dissimilar from Singapore's Central Provident Fund.
All businesses are consolidating due to economies of scale and low marginal costs from automation and computing power.
> I am somewhat surprised nobody offers an abstracted savings account, that handles 401k, IRA, HSA, paying rent and bills, and access to credit.
There are numerous differing laws for each kind of account and required disclosures. You also can’t have joint tax advantaged retirement savings accounts.
And a lack of trust busting. Government deregulation, cheap cash, big exits.
>There are numerous differing laws for each kind
Thats why I said an abstraction. All the underlying accounts exist, but are hidden behind a layer. You can peak in and see individual balances, but thats not how the data is presented to you. You dont interact with it and make decisions based on the components. You set parameters, percentages, and targets, and it autobalances the rest. It would need to be able to tap into employer 401K's to make holistic decisions, doing something like blooom combined with automatic tax efficient fund placement. Automatic output of tax documents.
Automatic HSA tagging. Scan and digitize receipts. Maybe even a more advanced "invest the hsa, keep track of the receipts, set targets for optimal reimbursement (potentially years down the road.)" There is so much innovation space left on the consumer experience side of banking.
Like Personal Capital, I have to think Credit Karma is an attractive buy as well, getting into life management: a bank that does your taxes for you, that comparison shops your auto insurance. Personal Capital, Credit Karma, M1, Blooom, Angieslist, HomeAdvisor, and TrueCar would be a really slick bundle if some VC wanted to make an Office 365/AdobeCloud of life management.
>I am somewhat surprised nobody offers an abstracted savings account, that handles 401k, IRA, HSA, paying rent and bills, and access to credit.
I think it'd be complicated to regulate from a risk perspective. Checking and savings accounts get insured by the FDIC, how do you insure a large pile of money invested practically everywhere in varying risky scenarios? You'd need to at least create a boundary between "FDIC-insured low interest funds" and "your results may vary but will probably be fine" funds.
that would still exist, you just wouldnt see it from the UI/dashboard that you interact with day to day. There would be risk parameters, not dissimilar to the "find your risk tolerance" type wizards today.
the important part being to eliminate too many choices. the more choices people have, the more chances they choose a suboptimal one or panic and choose nothing. (paradox of choice.)
Think of the traditional baby boomer era story-- "Dad brings home the paycheque, Mom does the budget."
Give me Mom as a service. Don't let me touch my full salary, just what's left after a responsible adult has done with it.
Let me plug in every account I have, and set up rules like
* Pay the rent on the first cheque of the month and the electric company on the second
* Pay credit cards in full up to a total of $1200/month; if beyond that pay towards the highest rates first while still covering minimum balances
* If there's a break in of cash flow, draw down from savings to $500 to retain the current pay rates, then drop payments on all accounts to minimum.
* Leave $150 per week from cash flow where I can withdraw it for petty cash.
* Anything unspoken for is sent to an automatic purchase of (broad index fund|treasury debt|Pokemon cards) on a weekly basis
After a few years of using the account with $150 per week on it, you check the statement and see that the money that Mom-as-a-service has withheld from you is enough to buy the entirety of Alberta.
Exactly. That is exactly what I am describing. What I would add is a built in line of credit that allows rent to be paid, bills to be paid, without a paycheck being deposited, and without needing to withdraw money from investments, money market etc. This would basically eliminate the need to keep cash in a checking account. Once per period, whatever that period is, money would move from savings to the line of credit. This line of credit would be accessible as a bank account, and as a credit card, to pay bills.
What needs to be displayed to you is some equivalent to cash flow or net income combined with a budget. Knowing you spend x on rent and y on food a month, are you on track to keep cash flow positive?
Yeah, I've been meaning to consolidate accounts for a while now and just haven't gotten around to it. There was value in the E-Trades and Ameritrades when their commissions were a lot lower than Fidelity, etc. So even if you had an account with one of the traditional brokerages for 401ks, etc. it made sense to have an Etrade account for various personal stock trading. That's not true any longer and there's at least some mental overhead to tracking multiple accounts.
I agree with the premise that GS is trying to break into more retail and boring banking. In my opinion they may have already missed the opportunity. JPM/Chase and Bank of America/Merril Lynch figured out this business model over a decade ago and have been building customer bases. Last earnings showed the Apple card to be a disappointment
You are right in that Chase, BofA, Citi and the like have a pretty large head start, but this is just the first innings. I can't even imagine the coming disruptions and ideas in the space. Partnering with Apple -- or Google, which I am sure people have and will -- seems like the right way to get into the space since the mobile phone is the key platform at the moment.
I haven't used apple pay since touch-less cards came out. It'll be interesting to see how they pivot to something beyond pure convenience. I highly doubt the target consumer cares about security. It'll also be interesting to see how far tech companies are willing to partner given increased regulation and scrutiny when finance is involved
Huh, so the friction for you is the actual swipe or chip read? To me the benefit of Apple Pay is not bringing your wallet everywhere, or not taking it out if you already have your phone in your hand.
I use a phone case that holds my cards, so I've got my cards with me already. For me it's how much faster Apple Pay is. Also works way better when I travel out of the U.S., because U.S. cards overseas end up being chip-and-sig, they have to go find a pen, etcetera etcetera. Tap phone, done.
I also like the integration that the Apple Card has with Apple Wallet. I'm not all-in on Apple, I don't own a Mac anymore, but the iPhone and closely related bits are just really nice.
I will point out that most of the money is made in the overnight REPO market, and those rates seem to be shooting higher even as the interest rates are cut.
I know, I am his biggest fan, but this is Matt Levine again on the REPO rates:
If you're a retail brokerage, most of your revenue (60%+) comes from net-interest. This means taking your clients money and lending it out long at 8% when your short-term funding costs you 2%.
For an established bank like MS, the net-interest is a drop in the bucket. The strategy here is about getting a young, educated, well-off retail base.
The demographic trends are such that there is a multi-trillion inter-generational wealth transfer occurring over the next decade as the baby-boomers pass on their wealth to their millennial kids. You want to get in front of that.
> I rely on Matt Levine to explain, more clearly than I could, how brokerages make money
You rely on someone who never worked for a brokerage to teach you how brokerages worked?
> and the broker earns interest on that cash and pays you less than it earns
This has been standard practice forever. It isn't a secret. Also, with interest rates as low as they are, I don't think it is a move for the interest on the cash sitting in these accounts.
> and all the trading stuff is almost irrelevant
Irrelevant? The "trading stuff" is data. Trading commissions isn't that important, but the data is very valuable.
> I don't think this is about consolidation in the brokerage space because of zero fees.
That's right. It isn't about zero fees. It's about data. Trading/investing/customer data. Zero fees is to lure more customers and get more data. Just like Microsoft giving away their OS for "free". Just like google/facebook/etc giving away their services for "free". "Free trades" ( no fee trades ) are about getting more customers, more trades and more data.
> I think this is about investment banks getting into the retail space (see Goldman's Apple card).
It isn't about getting into retail space. Goldman isn't going open a store in malls around the country and sell t-shirts. Goldman's Apple Card is about data.
https://www.bloomberg.com/opinion/articles/2019-10-02/the-tr...
Let me highlight a key passage:
"Even this understates the change, because the actual way that stock brokers work today is that you keep some cash in your brokerage account to fund potential trades, and the broker earns interest on that cash and pays you less than it earns, and all the trading stuff is almost irrelevant. ... Commissions are way down there; in 2018, they represented a bit less than 7% of Schwab’s net revenue."
I don't think this is about consolidation in the brokerage space because of zero fees. I think this is about investment banks getting into the retail space (see Goldman's Apple card).
Once again, I rely on Matt Levine to explain it ("Goldman Has Some Boring Plans"):
https://www.bloomberg.com/opinion/articles/2020-01-29/goldma...
The whole thing is worth a read, but here is one key paragraph:
"One way to interpret this is that Goldman has embarked on a quest to be boring. This interpretation seems plainly correct. The old Goldman approach—making a lot of money on lumpy investment-banking fees, risky balance-sheet-intensive trading, and both-lumpy-and-risky principal investing—is disfavored in modern banking. It is disfavored by regulation (the Volcker Rule, capital requirements) and by market conditions, but it is also particularly disfavored by Goldman’s own investors, who want reliable recurring revenues."
Edit: I should add this interpretation is also the one offered by the author of the NY times article, although the author also claims that slashed fees played a role:
"It continues Morgan Stanley’s strategy of increasingly focusing on asset management rather than investment banking and high-stakes trading, betting on steady fees over bigger paydays and bigger risks."