How the Emergence of Fintech Paved the way for a Retail Investor Boom

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

Prior to the pandemic, platforms like the US trading app, Robinhood, were already causing a stir on Wall Street by introducing ‘zero-commission’ trading. By late 2020, buoyed by government stimulus packages and more free time, retail investors flocked to the stock market to invest their money in what appeared to be a roaring recovery following a brief financial crash earlier in the year. 

(Image: Seeking Alpha)

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

In what’s traditionally been a relatively exclusive party that’s been dominated by institutions, retail investors have grown to make their presence felt on Wall Street. In January 2021, we even saw masses of Reddit users congregate to generate a short squeeze on GameStop stock (NYSE: GMA), and later in the year we saw more meme-based investing as AMC Entertainment (NYSE: AMC) more than 2,000% in value in a strong positive price movement.

(Image: Statista)

The fact that the leading examples of meme-stock investing have stemmed from NYSE-listed companies is made more logical when we observe that American investors have taken to fintechs offering digital investing options far more enthusiastically than their ROW counterparts. With around 70% of these retail fintech adopters based in the US, there’s been much attention allocated to fresh investor enthusiasm for US-listings. However, we may see this change over the coming years as fintech-fuelled alternative online brokers crop up throughout the UK and Europe. 

As platforms geared towards open banking solutions become more prevalent throughout Europe, it’s likely that we’ll see more investors flock to buy stocks when signs that a recovery from the ongoing inflation-fuelled sell-offs begin to emerge. 

In fact, the growth of fintech has been so strong that Tearsheet reported on a recent survey which found that as much as 72% of consumers in the US would leave their bank should it fail to support their preferred fintech app. 

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

The Arrival of ‘Zero-Commission’ Trading

In late 2019, we saw the introduction of ‘zero-commission’ trading, which promised users that they could buy and sell the stocks of their choice without incurring fees. 

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

Essentially, rather than paying commission on the purchase of a stock from a brokerage that automatically finds the most competitive price, customers will instead have their purchase run through the highest bidding market maker to action their trade at the price they want to charge. 

One of the biggest controversies of PFOF came in the wake of the GameStop short squeeze, whereby the US Securities and Exchange Commission suggested that some brokerages may be encouraging customers to trade in order for the business to profit from PFOF. 

Prior to the event, in December 2020, the SEC fined leading US fintech investing platform, Robinhood, $65 million for failing to properly disclose to customers the PFOF it received for trades that didn’t result in best execution. 

(Image: Robert Li - Medium)

Despite its well-publicised controversies, and the outspoken criticism from Wall Street stalwarts like Warren Buffett against PFOF investing platforms, we can see a strong correlation between the introduction of PFOF operating models and a surge in users towards various fintech platforms and traditional investment platforms alike. 

Unprecedented Access to Trading Tools and Convenience

The greatest innovation brought by the rise of fintechs is undoubtedly convenience. One of the fundamental issues of investing is that it’s an extremely time consuming activity. But thanks to platforms like eToro, investing can become so passive that customers don’t actually have to think about the stocks they’re buying and selling. 

Thanks to eToro’s CopyTrader function, users can view and discover some of the world’s most prolific 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 of helping investors who may not have the time they need to prosper. 

Other fintechs like Robinhood took more steps towards democratising investing by introducing greater access to initial public offerings and ETFs. In a landscape that had been dominated by institutions, fintechs were single-handedly helping to level the investing playing field. 

One of the greatest innovations for fintechs, however, has been the introduction of open banking services for customers. Through integrated platforms like Revolut, it’s possible for users to manage their bank accounts, invest in stocks or cryptocurrencies, convert their money into a range of foreign currencies, and gain unprecedented levels of insight into their spending patterns to better manage their wealth. 

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