How $33 billion fintech Revolut is taking on free stock trades

A boom in retail trading volume — which kicked off last year with so-called meme stocks like GameStop Corp. and AMC Entertainment Holdings Inc. — has financial services firms flocking to launch the next online investing app.

England’s largest digital bank, Revolut Ltd., is the latest to unveil commission-free trades in the United States, becoming one of the largest fintechs to wade into the lucrative online marketplace and potentially into the crosshairs of U.S. regulators. 

The $33 billion mobile app now offers more than 1,100 securities, including cryptocurrencies and fractional shares, along with banking and lending products. Users even have the ability to queue up orders during off-trading hours.

“Investing can be complicated, and we know there are many people who are curious about it,” said Gabe Vallejo, U.S. head of wealth and trading at Revolut. “Now customers will be able to manage all aspects of their financial lives, from investing to budgeting. No matter where customers are in their financial journey, they have an entry point.”

The London-based bank, which received approval to become a licensed broker-dealer in the States in June, is building an app to manage all of a client's finances, offering consumers greater control and visibility over their financial lives. Since its U.S. launch in March 2020, the financial superapp has expanded to include paycheck advances of up to two days and traditional savings accounts with FDIC protection. 

Unsecured lines of credit are up next, according to the company.

“The U.S. is a massive market with millions of customers who don’t currently have access to a sophisticated financial services app,” Vallejo said. “We believe there is an enormous opportunity to build on the enthusiasm we’re finding for our products and services in the U.S.” 

The 6 million people who downloaded trading apps in January of 2021 alone are proof, and they represent a new breed of investors who are younger and more tech-savvy than previous generations. Morgan Stanley & Co., for example, opened more new accounts in the first two months of 2021 than in the last six months of 2020 combined. 

“The invasion shows no sign of slowing down, with firms like Revolut and eToro building on their U.K. track record to enter the biggest market of them all,” said William Trout, director of wealth management at Javelin Strategy & Research. 

Homegrown firms like Robinhood Markets Inc. and Charles Schwab Corp., however, have generous head starts and millions more funded customer accounts. Robinhood's monthly active users hit 19 million in its most recent quarter, up from just 11 million users in the same period in 2020, according to research from Axios. For comparison, Revolut currently has upwards of 300,000 customers in the U.S.

There are regulatory concerns as well. The controversial but common practice of taking payments for order flow, where companies earn revenue on commission-free trades by selling the orders to market makers in return for a fee, has been a point of contention for regulators. 

In October, a Securities and Exchange Commission report warned of potential scrutiny of online investing platforms that use payment for order flow. SEC Chairman Gary Gensler has said the SEC could consider strengthening regulations to ensure commission-free trading brokerages aren’t encouraging investors to trade more in order to capture and sell additional flow.

“They don't want to kill the whole business model,” said Vinod Jain, senior analyst for capital markets at Aite Novarica. “And at the same time they want to ensure investors understand the ramifications.” 

The SEC is signaling increased oversight, noting the potential conflict between the firm’s desire to increase trades, and thereby increase revenue, by inducing investors to trade more frequently, said Jean Sullivan, head of wealth management at Celent. “The overall increase in trading apps and transactions is a definite concern,” she said. 

At Revolut, investors can only trade up to 10,000 shares or no more than $10,000 at a time, a spokesperson said. The app also provides educational information with access to pricing, available funds, fluctuations and market news.

“Investment in educational content and tools is becoming table stakes as firms try to avoid becoming a target,” Trout said. “Firms can and should do more.” 

For Revolut, the biggest opportunities will likely be in attracting new clients from among the cohort of first-time investors who have gravitated toward online investing apps in recent months, rather than prying customers away from competitors. “It's something very similar to the phone market,” Jain said. “People are just not switching.” 

The Financial Industry Regulatory Authority Inc. recently released a study on the “New Investor,” a group that opened accounts for the first time in 2020, which could be a potential source of new clientele. These millennial investors trade more frequently and have smaller account sizes than most wealth management clients. They’re also perfectly happy taking on turbulent markets, and significant risk, on their own.

One major advantage could be what the superapp is already providing in the U.S. Revolut offers the ability to bundle multiple products, including investing, savings, budgeting and lending, and has the desire to grow into a one-stop shop for financial services. Just a few of the products available on the app are debit cards with cash-back offers, savings accounts with round-up card payments, and compatibility with Apple Pay and Google Pay.

“As a digital bank, Revolut should have something of a leg up,” Trout said.