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Markets are in turmoil. How do trading apps react?

Coronavirus stock sell-offs are stressing some fintech startups. But they all want customers to stay calm.

Fintech apps on a phone

Robinhood had a rough start to the week. What happens if the markets don't calm down anytime soon?

Photo: The Washington Post via Getty Images

Picture this: As the market plummets 7% amid fear-soaked volatility, your extremely popular investment app goes down — for the third time in a week. You've already been sued for the last screwups. Forget bad: This is catastrophic.

And so, Robinhood's week began.

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As the effects of coronavirus reverberate through financial markets, Robinhood's failures have thrown a spotlight on new investment apps and services. If they don't work during a time of crisis, they could find themselves in hot water with customers, regulators or both. A lawsuit filed against Robinhood is attempting to gain class-action status. In a statement last week, a spokesperson for the Financial Industry Regulatory Authority, which regulates brokers, said that it was in touch with Robinhood and "closely monitoring the situation."

"We know this interruption was frustrating for our customers – especially after last week and on a day that trading was halted market-wide," a Robinhood spokesperson said in a statement. "Our platform is now fully operational and we're working hard to improve our service during these historic and volatile market conditions." Last week, it blamed outages on many factors, including "highly volatile and historic market conditions; record volume; and record account signups."

In a survey of investment app startups contacted by Protocol, companies unsurprisingly were very confident in the robustness of the systems they had in place. (Citing cataclysm, many executives could not be pulled away from their work today.)

Betterment's director of investing Adam Grealish said the company had seen some increased login activity in recent weeks but nothing that had stressed its systems. With the exception of a brief pause earlier today when the S&P 500 stopped trading for 15 minutes due to market conditions, trading has been uninterrupted. He said the company, which just boasted crossing 500,000 users, is prepared for volatility.

"In terms of the technology piece, we stress test our technology on load, on trading volume," Grealish said. "We're constantly doing platform improvements to that end with the ultimate goal of having a stable product in calm and choppier markets."

When Betterment's automated systems detect that there are big swings in the market or of particular securities, alerts warn its team of human investors that it's time to take a look. It doesn't stop or initiate trades, it just says "you should probably start looking at this and understand what's going on," Grealish said. Betterment clarified in a fact-checking email that its team "is always closely monitoring, especially, in a time like this!"

It should be noted that Betterment was criticized for halting trading on its app for 2.5 hours following the UK's June 2016 vote to leave the European Union. It was also separately fined $400,000 by FINRA for rule violations.

In a statement, Betterment's robo-adviser competitor Wealthfront also told Protocol that everything was totally fine: "Our ecosystem is operating exactly the way we intended it to in a climate like this, and we're seeing the behavior we expected from clients."

So did a spokesperson for the cuddly investment app Acorns, who said that the company "does not anticipate any outages related to market volatility."

A Wealthfront spokesperson suggested that, as with Robinhood, volatility might be spurring signups: "From a new signup perspective, when the market began to drop the last week of February, we saw a spike in new investment account opens."

But Grealish said that Betterment's clients haven't been engaging in any kind of mass sell-offs and are, if anything, "looking to deploy capital opportunistically."

"We've seen, actually, last week ad hoc deposits increase over what we normally see," he added. "So it suggests that our customers are taking an opportunity to add money to their longer-term goals, their retirement goals, things like this — money that was sitting in cash before."

Related:

Still, top of mind right now for many of these apps seems to be customer communication.

Stash's CEO has sent out a pair of messages to customers via email and in-app notifications, including one this morning explaining the effects of market volatility like a straight-talking high school teacher. Betterment pushed out an extremely simple explainer with possible actions from Grealish in-app. (Tip No. 1? "Do … nothing! The act of staying put is often the best thing an investor can do.") And members of SoFi Invest received a notification warning them that market volatility could lead to stoppages.

Indeed, all the apps have their own ways of saying the same thing: Calm down. Don't freak out. Don't pull your money out of our investing service!

"The behind-the-scenes conversations are really focused on educating our investors and preventing them from panic selling and regretting that decision later," said the Acorns spokesperson.
 Mario Aguilar

Mario Aguilar (@mariojoze) is a former senior editor at Protocol. Previously, he was the deputy editor of Gizmodo, where he started as an editorial assistant back when Steve Jobs was still alive. Before that he attended the Columbia Graduate School of Journalism and cut his teeth as an intern at Wired and KQED Public Radio in San Francisco.

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Protocol | China

Everything you need to know about the Yuanxin Technology IPO

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.
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