How the rise of Fintech paved the way for a retail investor boom

The Covid-19 pandemic proved to be a disruptive force in virtually every industry. However, the health crisis and subsequent closure measures also paved the way for financial technology companies offering revolutionary new services to achieve widespread global adoption.

Before the pandemic, platforms such as the American trading app Robinhood already made headlines on Wall Street by introducing zero-commission trading. At the end of 2020, driven by government stimulus packages and more leisure, retail investors flocked to the stock market to invest their money in what appeared to be a roaring recovery after a brief economic crash earlier this year.

(Image: Seking Alpha)

As the chart above shows, there were some industries that benefited significantly from the inflow of retail investment – none more so than technology stocks. Data suggests that S&P listed technology stocks as much as $ 40 billion in retail flow since the beginning of 2019, a figure that more than doubled the second most lucrative industry.

In what has traditionally been a relatively exclusive party that has been dominated by institutions, retail investors have grown to make their mark on Wall Street. In January 2021, we even saw lots of Reddit users gather to generate a brief squeeze on the GameStop stock (NYSE: GMA), and later in the year we saw more meme-based investments like AMC Entertainment (NYSE: AMC) more than 2000% in value in a strong positive price movement.

(Image: Statista)

The fact that the leading examples of meme stock investments have originated from NYSE-listed companies is made more logical when we observe that US investors have resorted to fintechs that offer digital investment options far more enthusiastically than their ROW counterparts. With around 70% of these fintech adopters based in the US, there has been a lot of attention to new investor enthusiasm for listings in the US. However, we may see this change in the coming years as fintech-powered alternative online brokers emerge across the UK and Europe.

As platforms targeting open banking solutions become more widespread across Europe, it is likely that we will see more investors flocking to buy shares when signs of an improvement following the ongoing inflation-driven sales begin to emerge.

In fact, the growth of fintech has been so strong that Tearsheet reported on a recent survey which found that as many as 72% of consumers in the US would leave their bank if it did not support their preferred fintech app.

For such support for a technology field that is still relatively new, it is clear that the future is even brighter for the fintech world. But how does this bold new frontier change the investment world? Let’s take a deeper look at how retail investment has changed fundamentally in recent years:

The arrival of zero commission trading

At the end of 2019, we saw the introduction of ‘zero commission trading’, which promised users that they could buy and sell shares of their choice without incurring any fees.

This highly controversial but popular shift in business models for trading platforms meant that brokerages would receive payment for order flow (PFOF) from returning market makers for their order traffic to go directly through their firm.

In essence, instead of paying a commission on the purchase of a stock from a brokerage house that automatically finds the most competitive price, customers will instead get their purchase through the highest bidder to trade at the price they want to claim.

One of the biggest controversies of PFOF came in the wake of the GameStop card clip, where the US Securities and Exchange Commission suggested that some brokerages may encourage clients to trade for the business to profit from PFOF.

Prior to the event, in December 2020, the SEC fined the leading US fintech investment platform, Robinhood, $ 65 million for failing to inform customers of the PFOF it received for trades that did not result in the best execution.

(Image: Robert Li – Medium)

Despite the well-publicized controversy, and the outspoken criticism of Wall Street folks like Warren Buffett against PFOF investment platforms, we can see a strong correlation between the introduction of PFOF operating models and an increase in users of various fintech platforms and traditional investment platforms. . .

Outstanding access to trading tools and convenience

The biggest innovation brought by the rise of fintech is undoubtedly convenience. One of the fundamental problems with investing is that it is an extremely time consuming activity. But thanks to platforms like eToro, investments can become so passive that customers do not actually have to think about the stocks they buy and sell.

Thanks to eToro’s CopyTrader feature, users can see and discover some of the world’s most productive traders and emulate their actions. With an average annual profit of 30.4% for eToro’s 50 most copied traders in 2021, the platform offers an innovative way to help investors who may not have the time they need to prosper.

Other fintechs such as Robinhood took several steps towards democratizing investment by introducing greater access to IPOs and ETFs. In an institution that had been dominated by institutions, fintech on its own helped to level out investment competition.

However, one of the biggest innovations for fintech has been the introduction of open banking services for customers. Through integrated platforms such as Revolut, it is possible for users to manage their bank accounts, invest in stocks or cryptocurrencies, convert their money into a variety of foreign currencies and gain unparalleled levels of insight into their spending patterns to better manage their wealth.

Although the global economic outlook is challenging today, we can be confident that fintechs will be a driving force in the recovery of the stock market, and with more access than ever before to investment tools, retail investors will be well positioned to play a more active role in building their fortunes and managing their finances.