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How online trading platforms attract retail investors at the expense of Dutch banks

Erdem Tekin
September 15, 2020

Part 1 in the Retail Investor series

With zero interest rates, people are seeking different methods to earn extra money, even accepting higher risks in the process. So, when a sudden investment opportunity presented itself disguised as a global “black swan event” where most stock exchanges took an unexpected nosedive, a consequential problem occurred in the Netherlands. Two of the most popular online trading platforms (or online brokers) could not handle the surge of new customers and had to temporarily freeze the registration process.

Some aspects of this bizarre and unprecedented situation do not make sense. Why do people accept waiting weeks in line to become customers at these online trading platforms? And where are the banks in this story?

In the Netherlands, thousands of people saw this moment as an opportunity to buy stock at a so-called “discount” price but were disappointed when the popular online trading platforms could not handle the surge of new customers.

Why were people waiting in line to become customers?

Many of the retail investors were “beginners” who had no prior investing experience. This led to a huge surge of new customers at DeGiro and subsequently Binck Bank as well. But there were a few problems:

  • The first bottleneck was the timely onboarding process of a great number of new customers. The onboarding of new customers has certain regulatory requirements, such as social security checks and tax information controls.
  • The second bottleneck was maintaining customer service for existing customers. For example, DeGiro had to prioritize a certain balance on new and existing customers. Usually DeGiro had 500 new customers per day, but with the stock market plunge in March 2020, this went up to 5,000 per day (source: FD). The time invested by DeGiro to onboard new customers came at the expense of high-quality customer service. At the height of the waiting list, 30,000 customers had to wait about average six weeks. The same situation occurred at Binck Bank, albeit with a shorter waiting time of approximately one week.

These factors can also be partially correlated to the strict measures undertaken by the National Institute for Public Health and the Environment (RIVM), to ensure the safety of the employees working from the office. These factors, combined with the stock market plunge, created a perfect storm for the online trading platforms. Many potential investors missed their opportunity to buy “discounted” financial instruments, or sought alternative trading options (Dutch banks, wealth managers such as Evi van Lanschot, or mutual funds specialists such as Robeco).

Why do retail investors for the majority flock to online brokers and ignore the Dutch banks?

Dutch banks probably had no significant struggle onboarding new customers (at least there was nothing to suggest otherwise), nor are they likely to suffer loss of high-quality customer service with many new clients onboarding at the same time. Why then do retail investors for the majority flock to online brokers and ignore the Dutch banks?

The main factor is the pricing strategy. Retail investors prefer online brokers for their competitive prices. Transaction fees and monthly subscription fees are lower compared to the banks. The most basic version of the DeGiro subscription does not charge monthly access fees at all (unlike the services offered by banks). For many people, the transaction fee is one of the most important factors in the selection process, even though this may give a distorted view of reality. Fees are not always as transparent as they should be and there are often hidden costs associated with particular activities.

Secondly, online brokers specialize in investment and do not have to provide a wide range of financial services and products like banks. Their specialty allows them to focus on their trading platforms, a strategy that pays off by enabling more innovative services. This is especially important for execution-only investing services (customers trading without any assistance from an advisor).

Behind these two factors there is another hidden but rather important component. The cost structure of trading platforms depends heavily on the volume of exchanges connected to the trading platform, the number of present customers and consequently, the volume of trades executed on the platform (other vital non-industry specific operations left aside). A broker needs these to be in balance to survive and compete. The strategy is to lower the operational cost base (fixed costs), by attracting more customers to your platform. Also consider that customers will trade on your platform if the most popular exchanges and services are available. Unfortunately, the most popular exchanges are also the most expensive ones. To make matters worse, exchanges are very non-transparent in their connection fees to different brokers.

At this point, reality has bluntly demonstrated that retail investors in the Netherlands flock to online trading platforms such as DeGiro and Binck Bank. How do Dutch banks see themselves in this situation? If they wish to remain all-finance service providers, then perhaps a new strategy is required.

What’s next?

In the next article we will explore how some European and non-European banks were able to overcome the surge of new customers by offering advanced and service-oriented offerings such as robot advisors. If you are interested in this topic, connect with me on LinkedIn.