The term unbundling evokes imagery of packaging tape or the sound of popping of bubble wrap. But in the financial industry over the past decade it has become synonymous with disrupting legacy processes, enabling consumer choice and breaking down barriers to entry for companies looking to bring innovative new products to market.
The unbundling movement has allowed for new levels of efficiency and lowered costs across traditional payments, banking, telecom and retail industries, with sweeping innovations being introduced by technology companies who have made choice and enablement part of their core DNA.
But the brokerage industry, always the stalwart of legacy techniques and technology, remains slow to adopting the opportunities that are part of the unbundling movement. With the new millennial investor demanding an a la carte investing experience built to suit their mobile lifestyle, will the brokerage community catch up to the movement?
TURN INSIDE OUT
To understand where unbundling is heading for holdout industries such as brokerage, its important to tell the story of how it originally turned traditional processes inside out.
Take how banks and retailers interacted in the late 60s. In the early days of charge and credit cards, transactions performed at retailers were limited to only participating merchants and banks. If you had a Wells Fargo card for example, you could only perform transactions at a few, participating merchants (and then only if you also had a Wells Fargo account), limiting choice and buying power to one local department store per bank card.
Then, Visa and MasterCard entered the space in the early 70s, creating a community of member banks with a centralized payments system and everything changed. Their technique abstracted the credit process, created efficiencies and consumers to make purchases at any merchant with these cards, lowering costs originally associated with those transactions and opening up consumers and retailers to choice.
Unbundling has hit every sector of the technology industry today. Take the example of Twilio. Twilio created their own movement by making widely available their cloud API for developers to collaborate on building interactive and complex communications. This freedom of collaboration has empowered software developers to create communication solutions that you find when interacting with your Uber driver or with the customer service department at a retailer. This has enabled not only choice for unique communications features when developing applications, but has increased the efficiency of the end user experience.
OPENING THE BOX
So in a world where everything is becoming unbundled, whats keeping the brokerage industry from going all in? There has been some movement in the retail investor space by the likes of Robinhood and Betterment, who are now providing investors with an economical alternative to behemoths like Schwab or Vanguard. But what about the B2B space, like the brokerage services industry?
They are being incrementally eroded by the agility and value-proposition of a new set of separate offerings that that are opening up the box and letting customers now also pick a la carte trading services to meet their needs. With U.S. households controlling over $30 trillion in investable assets, the brokerage industry is among the last to be unbundled.
Traditionally, brokerage capabilities have been locked within the four walls of legacy brokerage firms, with discount firms like Charles Schwab and TD Ameritrade and full service investment banks like Morgan Stanley and Goldman Sachs. This made it difficult for the unbundling movement to reach the space, as fintech companies had to build entire brokerage operations themselves at high cost to attempt to provide choice.
Recently though, the space has opened up, with new brokerage APIs now available to fintech companies looking to offer new services and choice. In fact, innovation is exploding in the brokerage space, with firms like Plaid in banking and Xignite in data providing the middle and back-office services for new front-end solutions to be developed. (Disclosure: my firm Tradier offers brokerage and digital advisory services.)
Firms that leverage these companies can now offer a product at a fraction of the price the large brokerage firms can offer because they no longer have to build their own back office operation. These innovative technology providers are helping organizations create new products for the industry and enabling choice for consumers for a previously locked space.
The last time we saw any true innovation in the brokerage industry was back in the early 90s when discount online brokers first came on the scene. Twenty-five years is a long time to wait for the next wave of innovation. The good news is that the full unbundling of brokerage is imminent and the entire market will benefit from more choice and better, transparent pricing.
Dan Raju is CEO and co-founder of Tradier and formerly chief information officer of TradeKing.
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