How FinTech is Providing Low-Cost Investing for the Future
By Austin Thiele
Disintermediation, the removal of the middleman, is providing low cost investing to the public.
New cutting edge “fin-tech” is making this low cost investing accessible Focus on ease of use, mobility, and low cost. You hear about the stock market nearly every day in your passings. This stock has gone up, this one has gone down. Company X is set for a stock-split and analysts to have just increased their price target for Company Y.
All of the jargon related to the financial field can be pretty hard to understand, which is why many investors have chosen to employ a financial advisor or broker to navigate these waters for them. However, these kinds of services carry an expensive fee. As technology continues to change industry after industry around us, the financial industry is no exception to this phenomenon. Financial technology- which has garnered the nickname “fin-tech” has been changing the financial landscape, president ly for lower/limited income investors.
Current start-up fin-tech companies are effectively seeking the disintermediation of the financial sector. Disintermediation, as defined by Investopedia is, “...the process of removing the middleman or intermediary from future transactions.” Now you might ask, “Austin, what does this have to do with the kind of technology that fin-tech startups are developing?”
Allow me to answer that question for you, again with the help of Investopedia. They state that “The goal of disintermediation is to lower the overall cost involved in the completion of transactions.” As you can see, this strategy directly coincides with the promotion of lower/limited income investors into the investing world. Taking this fact into consideration, numerous apps for mobile devices have arisen, focusing on a generation squeezed by stagnant wages and rising cost of living-millennials.
Acorns is one such app. To use, you link a credit or debit card to the app. When you make a purchase using this linked card, it will automatically round your purchase up to the next dollar. This extra change is then invested for you into ETF’s which are “exchange-traded funds”. Without getting too technical, exchange traded funds allow you to invest not in one stock, but an entire sector or index. ETF’s are a low-cost low-risk investment because you are investing in a range of stocks for the price of a single comparable stock-the difference being the diversification you receive when investing in an ETF is far greater than a single stock.
This diversification protects you from large drops that a single stock may take by averaging your return with the gains of other stocks present in the ETF. The trade off here is that your portfolio may also lag when big gains occur because the ETF may be weighed down by stocks that performed negatively during the same period. Hence, Acorns prides itself as a “low-risk” investment. Acorns ease of use and low cost has been its claim to fame in the showdown for the millennial generation’s investment dollars. But that does not mean that other competitors haven’t shown their teeth either.
RobinHood is another emerging fin-tech company that seeks to compete for the millennial dollar. To continue illustrating this trend of disintermediation, RobinHood’s hook is that you can make trades on your phone for free. Full-service advisors, those you can call and ask about investment advice, tax questions, portfolio holdings, etc. will run you around $150 dollars or more per trade. That means for any trade you make, the investment would need to increase in value by $150 dollars before you broke even on your investment!
That $150 of profit is what RobinHood wants to protect its investors. RobinHood’s trading platform is completely mobile, so much like millennials are described to be, you can make investment decisions on the go. Unlike Acorns, Robinhood gives you the opportunity to invest in any stock that you would like. You have the option of investing in individual stocks, as well as exchange traded funds or indexes. This kind of freedom of investment will attract individuals who are more active investors and want to spend more time researching, choosing, and acting on investment decisions.
In conclusion, the continued development of fin-tech will further disrupt the normalities of Wall Street. With the popularity of these new platforms for investment, established firms will need to dream up new innovations to attract a demographic keen on ease of use, mobility, and low entry costs. As the disintermediation of the financial field continues, and fin tech makes this low cost investing available, traditional firms will have to introduce new methods or change old ones in order to compete in this new investing environment.
Photo by Grace Stroke