Should big banks be scared about the future of finance & investing?

Apps like Robinhood and Acorns are shaking up a space that has been dominated by large establishments since the beginning of modern finance. What makes these apps so special, why are consumers responding to their message, and should big banks be scared?

Technology has infiltrated every facet of our lives (even when we’re sleeping). It’s only natural that tech companies large and small would turn their attention to one of the oldest and largest verticals (expected to reach a value of $26.5 TRILLION by 2022) in our economy, the financial sector. Tech has promised for a while to upend the way that people bank, even challenging what we consider fiat currency. To date though it can still feel like the only tangible commercial banking improvement (if it’s even an improvement) is commingling baristas and tellers.

In response, a set of young companies with deep pockets and rapidly growing valuations have set their sites on changing how all generations, but particularly Gen Z and millenials, invest in the market. As Schwab still runs ads focused on (and pillorying) the broker, the natural progression would seem to be technology that empowers a broker to be more scalable. Instead, these apps have decided to democratize investing and skip the broker altogether. The removal of humans from the process altogether has enabled lower fees, higher APR cash accounts, and the claim of less biased guidance.

We decided to dive deep into the Fintech (Financial Technology) investment app space to see what these companies latched onto, and why they were finding success.

The Macro Perspective

First, we leveraged our partner,, to get some insight into how these nascent companies have been faring. As you can see in the chart below, thanks to daily usage and revenue growth of platforms like Robinhood, eToro, Wealthfront, and even older staples like ETrade, valuations for fintech companies are through the roof.

Robinhood users well over 2M by the end of 2018


Incredible valuations in the Fintech space

Valuation of fintech startups

E*Trade revenue growth from 2014 through 2018

E trade financial growth

In 2019 Robinhood raised a $323 million Series E round, putting their valuation at over $7B (still well below that of low-fee stalwart Charles Schwab or traditional broker JP Morgan Chase). It’s an impressive start, especially when you consider that they launched their no-fee platform in 2013. For comparison sake, JP Morgan has a market valuation of ~$430 billion and has existed in some form or another since 1799. Keeping with an annualized growth rate of over 80%, Robinhood would catch JP Morgan in market cap by 2027!

Of the almost 900 respondents we polled in the US (95% with a regular checking of savings account), a majority had “heard of” Robinhood, Acorns, or Etrade. Less well known were the options like eToro and Wealthfront. Most impressively though, 42% of respondents were “actively using” one of these platforms to invest. What is it about these new entrants that has enabled them to get such a toehold in a short amount of time?

“Created by Apple, not a bank”

Ignoring the obvious of lower fees (more on that in a minute), there are two other key factors: ease of use and trust.

To understand trust better, let’s turn the clock back to the downturn of 2008. The Great Recession affected every generation differently, whether it was the hardest job market to enter following college for the millennials (the lingering effects that continue to impact Gen Z’s), loss of job/title for the Gen X’ers, or the decimation of retirement savings and pensions for boomers (hardest hit because they actually had savings and pensions, but limited time to recoup their losses). As a result, we expected some lack of trust in financial institutions.

What we didn’t expect was how high it would be 12 years removed from the start of the Great Recession and what would be driving it. About 30% of respondents said they flat-out did not trust financial institutions, and furthermore a full 34% said that they did not trust that financial institutions “operated ethically”. It’d seem like Apple got the message in framing the Apple Card as, “created by Apple, not a bank” (though we’d note that Goldman Sachs, the issuer, is most certainly a bank).

Fees – Actually I’d rather pay more…

As mentioned earlier, these companies are pouncing on that fertile ground, as bank fees are particularly hated amongst consumers (Americans paid nearly $34 billion in overdraft fees in 2018, which is literally money from people that have no money, but that’s for a different article…). So the low-fee or no-fee models that these apps promote are right in line with the expectations for their target customers.

Ease of use tied to trust

Additionally, consumers seem less concerned about sitting down with a person and talking high-yield dividend stocks (this doesn’t mean that customer satisfaction takes a back-seat, more on that in a bit) and are more concerned that the institution or app they’re working with understands their fears and needs. What Robinhood and others have discovered is that by providing education as well as on-demand insights into your portfolio, customers can spend less time and effort to better understand their investments.

With this level of transparency, these companies have realized that they could build up significant trust quickly with their customers without the need for a broker sitdown.

With the ability to constantly monitor your portfolio, there is a sense of peace of mind that you can make adjustments as things go sideways or down quickly. 57% of respondents said that it was “very important” that their money stay safe in a downturn. Taking that a step further, 46% of respondents were neutral or did not care if a company had a physical presence in their city. Edward Jones touting that they have branches than any other broker…is a message falling flat for nearly half the population in 2020.

Other interesting facts:

  • 64% of respondents believe that an individual investor could beat the market, however 57% believed that they themselves have NOT beat the market (this is a rare case where more than half of people here believe that they are below average). Are people listening when you talk about beating lipper ratings?
    • We suspect that this lack of confidence stems from lack of trust in their institution, despite the “pitch” from investment firms that they can find a way to outperform.
  • A whopping 78% of respondents said that access to alternative investments was somewhat or very important to them – people seem less enamored by blue chips and more interested in the cutting edge.
  • Overall customer satisfaction still matters: with 55% of respondents saying that overall satisfaction was a very important factor in choosing their investment vehicle/app (that number jumps to 88% when you include those that said “somewhat important” as well) – it was unclear how much performance could be forgiven by a great experience.
  • There was NO statistical difference in trust of financial institutions between Trump and Clinton voters – given the rhetoric around large banks during the past election, this was quite shocking to us.
  • People with a masters degree were more likely than those with a high school degree to use a broker (traditional method), however there was no statistical difference in those two groups when it came to using one of the newer apps

Money Never Sleeps

All in all, the “new” way of investing promises users an on-demand, easier, and cheaper way of getting involved in the market. Gone are the barriers to entry of knowing a “good” broker, or feeling like you have enough money to invest (Acorns is specifically built around the idea of just rounding up every day purchases and putting the remainder into the market).

Add to that an inherent lack of trust in large institutions, particularly around their ethical standards, and you have a recipe for upstarts to chip away at the calcified base of modern finance. Will the inevitable challenges these companies face as they get more involved in traditional banking erode that trust or willingness to try? Possibly, although recent history suggests that consumers are giving them a long leash. The future for these brands is fertile, exciting, and the runway is long – especially as they consider adding new products to their offerings (we’ll examine other Fintech areas like mortgages in a future piece).

The future for these brands is exciting, and while we don’t know how any individual company will fare, we are confident that the sector will outperform traditional banks. If they can continue to harness their competitive advantages they will shape the future of investing for the better – making the markets more accessible and friendly to all investors.


See more articles here: Corus Insight

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