Last week yours truly went to an affiliate event in London.
First of all, sorry to break it you guys, but if you believe you are just an ‘investing’ affiliate and are working with a company that has
- No dealing fees
- No account fees
- No subscription fees
- Ultra low (eg. 20bps) FX fees
You are not a stock affiliate. You are a CFD cross-selling affiliate. Welcome to the party pal.
The other interesting conversations, including with people that aren’t in this industry at all, was on Trading 212’s marketing campaign around account interest. Everyone seemed interested in this.
Readers in the UK and other parts of Europe will have probably noticed that Trading 212 went all in earlier this year with marketing spend. I would say this was particularly pronounced in Q2, when they launched a cash ISA as well, but it’s still going on. They seem to be doing a lot on LinkedIn and have done so since the beginning, so maybe that worked for them.
Anyway, as I said, one of the main products they have used to market themselves is high interest on uninvested cash.
If you compare bank accounts in the UK at the moment, the highest rate for an instant access account that I can see is 5%. Trading 212 was offering 5.20% and is now doing 5.10%. Even though UK rates were cut last month and there are probably more cuts on the horizon, they upped their interest rate on uninvested cash last week. So this is almost certainly a loss-leading offering.
There are a few ways this works.
Trading 212 did loads of out of home spend for this, at least in the UK. They were all over the internet as well – YouTube, X, Reddit, Facebook, LinkedIn, etc. So you saw it everywhere and then go ‘wow, lots of interest, maybe I’ll put some more cash in my 212 account’ or ‘wow, lots of interest, I’ll open a Trading 212 account’. Their decision to up rates last week also made some noise. For example, This is Money did an affiliate article on them in the wake of that decision.
And to that point, the other way this works is with affiliates. If you take BrokerChooser as a simple example, they have a review of the ‘best interest rates on uninvested cash’. Trading 212 sits at the top. These things work. I can confirm from having seen it first hand.
You can also see it because there is no other reason that all the big spenders (Plus500, eToro, XTB etc) would continue to pay to be in top spot where they are allowed to do so. But with interest on cash, you can’t really pay to be at the top – either you offer higher rates than your competitors or you don’t.
Thus a simple way of looking at it is that the product is loss leading but the marketing / onboarding it generates offsets that loss. So instead of paying to be at the top of an affiliate list, you create a loss making product to do so. You eat the cost internally, rather than paying out to the partner.
The question would be – does this work?
There are two goals you could ascribe to this activity. One is that Trading 212 is trying to build up its stockbroking business by growing AUM.
A key route to make money from stockbroking is to capture a spread on the interest paid on uninvested cash versus the amount paid to the client. But Trading 212 already pays such high rates that they aren’t likely to be making any money from this method.
Then you look at their fee structure. They charge 15 bps on FX. That’s it. There is no account fee, no subscription fee, no dealing fee – including for tax wrapper accounts like ISAs. The other method they use to monetise business is share lending. Again, they have to split the interest received on this with the client and it’s unlikely to be a sizeable amount anyway, given total AUM at the firm is less than £4bn.
One explanation you could make for this is that Trading 212 is doing something like Revolut or a similar start up. They are plowing money into their stockbroking business to build up AUM and then one day monetise it.
The problem with this is that they aren’t charging money for any of the normal methods used to monetise this business. The only other thing I can see them doing is clipping off cash when making a market in stocks / fractional shares, which is something they appear to be doing. Note that this is the cash product, not the CFD – many people seem to think they are just doing the CFD. They aren’t, they are doing the cash product as well.
More likely is that they are just using the Robinhood model, except with CFDs instead of options. You get people through the door and hopefully one day they convert into a CFD trading client.
And this leads us back to that first point about affiliates being cross-selling affiliates. One of the things that I increasingly wonder about is if there is something like Moore’s Law at play when you are the first to launch a new product.
Trading 212 was (I believe) the first company to launch a no dealing fee product in the UK in 2017. That means they have seven years of data to work out what conversions are like on this product. And the more that gets fed into the marketing machine, the more information you have.
For example, let’s say you pay £x to on board clients via a comparison site on a stockbroking product. Then you look at this channel and go…
- FTD average
- % that convert to CFD
- Average revenue from CFD conversion
- LTV
You repeat this millions of times across different channels. Presumably you then end up with a good idea of a client’s likelihood of switching over to CFDs, LTV, FTD etc etc. You can see what channels work and what don’t.
Now imagine you are just launching this product and are competing with 212. They have seven years of information to make decisions. You have nothing. That could make life difficult.
Alternatively, they may have just ridden the covid stock trading boom, made a load of cash, and gone ‘hey bro, this thing where we spend loads of cash on onboarding via stockbroking works well, let’s continue dumping loads of cash into that’. Both are strong possibilities.
