FinTech Startups May Innovate But Large Incumbents Simply Copy

An upstart’s biggest challenge is coming up with an innovative product or service that will attract customers’ interest and loyalty. In the financial industry, with so many options already available, the key is to take what other, more traditional companies are offering and devise something more enticing.

One startup company, Robinhood, thought it had the perfect lure: to offer online trading with no fees. This has been working well, especially with attracting younger clients who don’t have much to invest and whose every dollar counts. Founded in 2013, Robinhood now has over 6 million customers and has been valued at more than $7 billion.

Its business model of allowing free trading was unique. The company knew that if it could keep these young customers on board, as they became able to invest more as the years went on, the company would see its assets increase.

However, this innovation did not sit well with big investment firms that rake in a lot of revenue through online trading fees. To counteract this strategy, American brokerage firm Charles Schwab just introduced no-fee trading, thus posing more of a challenge to upstarts as well as to other traditional brokerage operations.

Although Schwab’s past fee of $4.95 per online stock and ETF trades may not sound like a lot, to investors with little money to spare, it was just another reason to choose a company offering the same service for free. In light of this new development, and to hold on to their investors and attract new ones, other companies such as TD Ameritrade and Ally are planning to do the same.

For Robinhood, this sudden change may be devastating, possibly cutting their valuation in half. After all, why should investors go with a relatively new company when they can get the same savings at a bigger and more well-known brokerage firm?

Robinhood did just recently launch a cash management offering giving their customers access to high-yield earnings on money not yet invested. But they’ve been forced to put this approach on hold when questions arose about the insurance being offered.

Even if this new service does move forward, it’s not something that other firms don’t already have. Schwab itself offers high-yield checking and savings accounts through Schwab Bank, and many other financial institutions provide these same benefits as well. It’s not something unique that’s likely to draw in new customers or encourage the ones they have to stay.

While upstarts may come up with new and innovative ideas that give them a lot of cache for a while, over the long term, many of these offers are not viable when big competitors start following the same business model. Once again, upstarts are then forced to think up even more ingenious ways to attract new customers and hold on to them.