The bottom line: While this appears to be a typical price war among industry incumbents, what we’re seeing is a broader fight for trading volume and relevance started by digital disruptor Robinhood, which used technology to upend the status quo. The correct response to digital disruption is not to engage in price wars but to strengthen customer experience and enhance core strengths and capabilities as a bulwark against the emerging competition.

In a move that was welcomed by retail traders and that shocked investors in the sector, Charles Schwab and TD Ameritrade announced zero trade commission fees on ETFs and stocks (and option trades, in TD Ameritrade’s case) in response to Interactive Brokers’ similar move earlier this week when it announced its IBKR Lite service with zero trading commissions. The major incumbents — Charles Schwab, E-Trade, Fidelity, Interactive Brokers, TD Ameritrade, and Vanguard — are responding to Robinhood and other fintechs by cutting trading commissions to zero to maintain share and some semblance of growth.

Schwab saw its stock drop nearly 10% on the 1st, E-Trade declined 16% on expectations they will match, Interactive Brokers was down 9%, and TD Ameritrade plunged nearly 26%. Interestingly, Interactive Brokers did not feel the pinch on September 26th, when it moved “first.” E-Trade ended up following suit on October 2nd, announcing at the close of trading that it was now offering $0 base rate trades for stocks, ETFs, and options.

Robinhood’s Value Proposition Is Looking More And More Like A Commodity

UK challenger bank Revolut is offering free stock trades to customers, broadening its offering beyond banking services, and is readying an expansion into the US, creating more competition for Robinhood and the incumbent discount brokers. Given these competitive moves from incumbents and upstarts, Robinhood’s long-term growth prospects are diminishing as its competitive advantage of commission-free trading is becoming a commodity — just as it readies for an IPO in the next few months.

The central reason for cutting fees to zero is to maintain customers and customer growth rates. Most direct investors see zero trade fees as a key driver to switch brokerages, as “lowest fees” was the most important factor for consumers when selecting a provider for an investment account.[1] Yet maintaining growth (or stemming losses at some firms such as E-Trade) is going to be difficult now that firms have run out of pricing leverage with consumers. And with most trade commissions at zero now, customers will be looking to other offerings and capabilities from their broker.

Prices And Fees Are The Least Important Driver In Customer Experience Quality

When we examined the drivers of quality customer experience for the direct brokerage sector using Forrester’s 2019 Customer Experience Index (CX Index™) data, we found that customer service experience was the most important driver category and that the human contact of calling a customer service representative elicited the most positive emotions. Even though customers are choosing direct brokers for the convenience of self-directed and automated investing rather than working with an advisor, the human connection remains paramount.

Interestingly, the prices and fees category of drivers was least important to consumers in their perception of customer experience quality. Direct brokers now must focus on the other more important drivers, such as web and mobile experiences.

Other areas where firms can build potentially game-changing capabilities for investors are in proprietary automated investing models and tools (i.e., robos), better educational tools and investment research offerings, human-centric advice offered in a variety of forms, and easy-to-reach, fully capable, live representatives. A top driver of customer experience quality for the direct brokerages relates to communications. Wherever possible, the jargon needs to be removed — from legalese to investing jargon and acronyms — and replaced with clear, plain language.

The past few days should be a wake-up call for everyone in financial services. For any firm, the time to power up digital and CX transformation work is here — the disruptors are at the gate, but it is not too late.

Read more on this topic in Vijay Raghavan’s recent report, “The Race To Zero Fees In Investment Management,” to learn the key actions firms must take now to differentiate beyond price to win and retain investors.

[1] Source: Forrester Analytics Consumer Technographics® North American Financial Services Topic Insights 2 Survey, 2018