Retail investing is taking off in the U.S., with daily trading volume in January double what it was a year ago and much of the increase attributable to individual investors.
It's more than just the Robinhood effect: A number of companies are making it easy to tack on investing alongside other financial services, and a broader range of apps now feature stock trading as a result.
The spread of stock trading in apps originally designed for borrowing, saving or paying has big implications. It could lure more people back into the stock market: The percentage of households owning stocks dropped after the dot-com bust and the 2008 financial crisis, and has only recently started to recover. That, in turn, has meant that the stock market's gains in recent years have only benefited some families.
But just adding a "buy stocks" button to an app won't reverse years of worsening income inequality by itself. Easy access to the markets could hurt some novice traders if apps lure them into risky, rapid-fire trading.
For startups looking to challenge the finance establishment, one-stop shopping is another way to attract customers and keep them once they're there with more options to save or invest.
Square's Cash App lets people get paid back by a friend for beers, and then turn around and plow it into shares of BUD. People who use Revolut or MoneyLion for banking can move money from savings into investing. Stash even offers a Stock-Back Card that pays customers for shopping with fractional shares of the retailers they frequent. Several apps promise free stock, often in familiar brand names, for making your first trade.
Online brokers have often marketed themselves to people who are already trading. Apps where trading is an add-on are more often trying to attract customers who are new to the markets.
"There's a big paradigm shift from a brokerage mentality to an embedded finance mentality," said Bob Cortright, CEO of DriveWealth, which has 90 partners with close to 10 million accounts, including Revolut, MoneyLion and Square.
Time for investing
There are arguments for getting consumers started with investing sooner. Starting to invest while people are young can compound into much larger savings in the future. Especially if consumers invest for the long term — and avoid cycling in and out of stocks in search of short-term profits — these relatively small investments can turn into much larger retirement savings over time.
Younger Americans targeted by many of these apps generally invest less, said Brian Graham, a partner at Klaros Group. That's in part because they have less money to save: Wages stagnated after the 2007-2008 financial crisis and student loan debt has skyrocketed.
"We see this whole divide and accessibility problem," said Yoshi Yokokawa, CEO of Alpaca, which provides trading services for financial apps.
It's not clear how many users of these apps are new to investing. More than 2.5 million customers have bought stocks using the Cash App in the 10 months since launch, Square said in its third-quarter 2020 earnings report. Many of those users originally came to the app for peer-to-peer payments. Square now includes dollar-cost averaging options to address market volatility.
With features such as gamification, hyper-targeted customer segmentation and low or no trading fees, embedded investing in financial apps should draw more first-time investors, but there is a danger if apps focus on short-term trading, not longer-term investing, Klaros' Graham said.
"It'll expose people to financial services in a more integrated way. It has enormous potential to do good. It also has enormous potential to do bad," he said.
"A very small portion of American society actually invests in assets. Our customer base has historically been left out," said Dee Choubey, CEO of MoneyLion, whose customers mostly make between $50,000 and $100,000 a year. "Our mission is to create financial access."
Moving money
Smashing banking and brokerage services together isn't a new idea. Following passage of the Gramm-Leach-Bliley Act in 1999, brokers and banks literally merged. Citigroup emerged from the $70 billion combination of Travelers, Salomon Smith Barney and Citibank, while E-Trade bought Telebanc for $1.8 billion. At the same time, the dot-com boom lured retail investors into the market to trade online.
What's different now is that you don't need billion-dollar deals to put banking and brokerage services together. All you need is an API that can route trades from an app to the market. Companies such as DriveWealth, Alpaca and Parkside offer backend trading services for a variety of customers.
Now, there's renewed retail interest in investing with a bull market that roared back after the pandemic crash last year, and low interest rates often don't provide meaningful savings. All-in-one financial apps make moving cash and buying stocks as easy as ordering an Uber — not something that requires expertise or even downloading a separate app.
Some companies offer education for new investors. MoneyLion asks for a customer's financial goals and provides a caution flag if they seek to invest in something that is outside of their risk profile. Square has a digital "My First Stock" slideshow complete with sharks and crocodiles to illustrate risk. Robinhood bought MarketSnacks, a financial media company, in 2019, and now calls it Robinhood Snacks.
Some, following Robinhood's lead, offer commission-free trading, while others like MoneyLion offer managed baskets of stocks for a fee. "It's philosophically different than stock trading apps out there," MoneyLion's Choubey said. "Our customers start out with $1,000 to $10,000 of investable assets. To start off you really should probably not be buying a fraction of a single stock of GameStop. You really should start in a managed way with your goals."
Others use card rewards to get consumers interested in stocks. Stash customers have earned about 25 million stock rewards via the Stock-Back Card, the company says. And 35% of customers who received a stock through the card later invested their own cash in that company. Stash spokeswoman Vera Hanson calls the program a "gateway for customers to explore and discover new investments."
But the common theme is that placing stock-purchasing next to other financial products such as banking or lending is a way to drive increasing interest in investing.
"That consumer behavior is tied to the investment behavior," Cortright said. "It's a way to get young people thinking about investing for the long haul. Sometimes they're not using their own money. It's a reward back for behavior. If every time there's a transaction you generate a lot of financial literacy, powerful things can come out of that over time."
