What Amazon’s Free Shipping Can Teach Fintech Companies About No-Fee Trading
More and more consumers are going to realize it’s worth their while to join the no-fee revolution hitting the finance industry
Charles Schwab, E*TRADE, and now Fidelity have announced in recent weeks something that was inevitable given competitive pressures, but nonetheless important: None is charging a commission on trades of most stocks and ETFs.
It’s a monumental shift for three of the largest legacy players in an industry that finds itself on fierce competitive footing with a number of well-funded upstart institutions from the world of consumer fintech.
Stock trading isn’t the first fee domino to fall in consumer finance, and it won’t be the last. The race toward free or near-free has been roaring for several years. In many ways, it parallels what has happened in other consumer industries, especially retail. The thinking of consumer fintech writ large is that this shift has the same catalytic impact free shipping had for online commerce over a 15-year period.
Today, online merchants offer consumers selection and pricing clarity unlike anything the world has ever seen. But it wasn’t until Amazon and others started offering free shipping at scale that online commerce really started to take off in the U.S. In fact, consumers now say it’s their number-one incentive to shopping online. More than that, it’s an expectation. (My former Twitter colleague Ameet Ranadive wrote a fantastic piece on Amazon’s responsibility for creating this expectation, if you want to read further.)
Why did this work? On the consumer side, there are a host of psychological reasons. It lowers the barrier to entry. You don’t have to wait to group items together in order to make the shipping fee worth it. Everyone likes to feel like they’re getting a deal. And, finally, everyone hates being surprised with a higher-than-expected bill when it comes time to check out.
On the business side, how were Amazon and the like able to offer free shipping and still make money? First, unit economics: data shows customers place more orders and larger orders with free shipping. Second, it provides an on-ramp to a relationship: Once you get a customer to make one transaction, it becomes far easier to get them to make a second, third, etc. And, of course, it’s cheaper to keep the customers you have than to get new ones.
Now turn to consumer fintech. Some products are already largely fee-free, like stock trading (as we’ve explored), deposit accounts, and lending. Other products, like wealth management, still carry a fee, but its level represents a hearty discount versus the traditional, nondigital way of doing things.
How does a consumer finance institution make money without charging fees?
Just like with free shipping, the absence or lowering of fees versus legacy players has led to (and can continue to lead to) an explosion of new industry entrants, business models, and options for consumers. Everyone has matched and adapted (or will have to), and we’re just at the start of the curve.
Why may this shift change people’s behavior? Just like with shipping, reducing or eliminating fees lowers consumers’ perceived barrier to entry. Investing, for example, becomes not just a rich-people thing, but something anyone can access. In addition, consumers have long believed they’ve been getting a raw deal from financial institutions (“Where are the customers’ yachts?”). Offering lower fees vindicates that point of view by showing there’s fat in the transaction that can be cut and given back to the customer in the form of more value for money.
That’s all great for the customer, but how does a consumer finance institution make money without charging fees?
Narrowly speaking, the absence of fees still leaves revenue generators like net interest margin, securities lending, and gain-on-sale of securitized assets, to name a few options. (Side note: when I was at SoFi, we dedicated a lot of energy to making sure it was entirely transparent how the firm made money on every product, which is well summarized in this post.)
But speaking more broadly, it creates both an opportunity and a challenge to make money by creating entire packages of financial services that make customers want to do more business with you, rather than have to do more business with you. That’s a very good thing for consumers, and gives way to the opportunity for new entrants to disrupt the industry even further.
What inhibits this wave of opportunity for consumer fintech? Primarily high switching costs. It’s a non-negligible amount of pain—involving both time and effort—to move accounts and all the associated transfers, bill pay, orders, and the like.
But in a world where bank account monthly service fees, overdraft fees, ATM fees, and required account minimums are all on a steady rise, more and more consumers are going to realize it’s worth their while to join the no-fee revolution and discover a wealth of new, faster, less-expensive, mobile-first products.
