Millennial Wow, or how Freetrade can win
Disclosure: I am an investor in Freetrade
Last month start-up stockbroker Freetrade zoomed past 500k users¹, affirming its position as a leading challenger in the U.K.’s DIY retail investment space. That market (worth ~£200bn) is dominated overwhelming by the company that pioneered it over two decades ago: Hargreaves Lansdown. This powerful incumbent has over 40% market share², and is still growing at a fair clip — revenues were up 16% in H2 2020 vs H2 2019.
Freetrade is riding something of a high right now, with the GameStop frenzy sparking a leap in users, including a surge of more than 50,000 users in just one day. In amongst the giddiness it is important to keep grounded and recall just what Freetrade is up against.
Over roughly the same period that Freetrade have been alive, Hargreaves have grown Assets Under Management (AUM) by 118% and doubled clients (users) to 1.5m. All the while maintaining a retention rate of around 93%³. To put that in context, Freetrade’s target AUM for end 2020 was £430m⁴, or 0.36% of Hargreaves’ AUM. That is quite the mountain to climb.
Hargreaves posses formidable strategic advantages. The company is widely known — perhaps as close to a household name as you’re going to get for a stockbroker in the U.K. — and widely trusted, having built up its brand and reputation since the 90s. It is known, in part, for having great customer service. It also benefits greatly from stickiness, or ’switching costs’ — no-one with £10k or £100k carefully invested in a portfolio has much interest in pulling that setup apart and transferring their small fortune of (probably) life savings to some new provider.
So Hargreaves is dominant, deeply entrenched and growing; hardly a sitting duck.
Freetrade cheerleaders would point to rapid growth (150k>550k users in ~9 months), a superior product experience and the attractions of a radically lower-cost pricing model. And all this is true, but does it really add up to actually one day taking the taking the crown from Hargreaves?
Pricing is a bit of a red-herring in the long run. Yes the pricing models are different, but in the end Hargreaves can always lower costs or build new pricing tiers. The net effect could easily just be lower industry margins (as per the FT’s lex column recently: “There must be a risk that Hargreaves’ juicy profit margins come under pressure”⁵). Freetrade could delight on user numbers but remain decidedly unremarkable on revenues, set against sky-high, start-up-valuation expectations.
Rapid user growth and ‘best-in-class’ product execution hit all the right notes in start-up land, but they are no guarantee of fundamental structural change in an industry. Monzo, that darling of the Fintech world and one of the most charismatic start-ups to emerge from the U.K. in recent years, offers striking parallels of how this can go. Despite lofty talk of re-making the banking industry, Monzo is — how shall we say it — in a bit of a funk. It has lots of users yes, but also a regulator breathing down its neck because it doesn’t make any money. It hasn’t remade the industry (yet), except inasmuch as the incumbents are copying most of their features.
To make this concrete consider that Goldman Sachs’ Marcus entered the U.K market in September 2018 and within 8 months had amassed over £6bn in deposits, 86x what Monzo had built in deposits (£71m) since launching⁶. User numbers do not necessarily equal deposits. The success of network-effect-driven global super-apps like Uber, Airbnb, Facebook, Instagram, Google etc has left us with a legacy of thinking user numbers are all that matter to start-ups. But that isn’t true in finance, driven as it is by switching costs, trust and regulation. Traction in Fintech needs to be measured by something with a pound sign in front of it.
Freetrade’s product experience is vastly superior to Hargreaves’ yes, and the roadmap is piled with exciting features. But so is Monzo’s relative to the traditional banks. The experience of the start-up banks should give pause for thought about the extent to which a whizzy UI and shiny features can unlock the movement of billions of pounds of private capital.
So what is to be done?
Freetrade’s best chance of becoming a major player in this industry is to completely own and dominate the millennial market, picking up the loyalties of emerging investors early in their journey before habits become entrenched. This idea is hardly novel but let’s remember that Hargreaves are also actively focussed on this same segment, and with some success — the average age of a Hargreaves investor was 37 in 2020, down from 54 in 2010⁷.
The strategic dynamic between Freetrade and Hargreaves is perhaps best framed as a battle to win the hearts and minds (and wallets) of millennial investors. The difference is that for Freetrade the battle is existential — without victory here it is hard to see how it can be a major force in the industry. The game then is for Freetrade to establish themselves as the overwhemingly favourable option for any millennial who wants to grow their own wealth over the long-term.
How does Freetrade win?
Freetrade’s unique advantages are:
- a ‘silicon valley’ product culture (underpinned by a modern tech stack);
- unequivocally millennial brand positioning and ethos (helped by being native to this demographic), and
- the ability to go all-out on this demographic without risking collateral damage elsewhere
This can be parsed-out into a strategic formula for assessing the attractiveness of any major product initiative that Freetrade might undertake. Let’s call it ‘Millennial Wow’. Under this approach, Freetrade should prioritise building large-scale features or product offerings that have the following four characteristics:
- Centre-stage: These should be major, front-and-centre features that are woven indelibly throughout the entire product and user experience. The opposite of a bolt-on, these features should become inseparable from the product. In fact they should become the product. (Note this applies to pricing tiers as well as the product itself, in an Amazon Prime sense)
- Millennial mindset: These features should be built out of an almost existential understanding of the needs of millennial investors particularly (not investors generally), and a deep appreciation for their values. This requires intuition, imagination and a Steve Jobsian awareness of what people really want. Incidentally if a feature is off-putting to other age groups then all the better because, as per Hamilton Helmer’s 7 Powers, this creates a defensive barrier against competitors copying it for fear of creating collateral damage amongst their own customer base.
- Unique value: Always important of course, but offering millennials something they cannot easily get elsewhere is clearly of superior value and is core to the sense of ‘wow’. This is a hook, a persuader, a retainer of loyalty, all of which will light up the key user metrics.
- Involves running uphill: Per Paul Graham, “one of our rules of thumb was run upstairs….Running upstairs is hard for you but even harder for him⁷”. This means building things that are hard, really hard. The more execution risk the better. If it is hard for a ‘silicon-valley’ start-up then it will be near-impossible for a traditional incumbent. This, as PG says, is one of very few barriers to entry that start-ups can create.
So let’s consider the idea of Freetrade going into Crypto (as part, presumably, of the general investment account). How would that fare?
- Centre stage — 2/5. It would be a prominent and primary feature within the app, but then it cannot be integrated with ISAs or SIPPs so will always remain only partially integrated. Many features such as discover, performance metrics, watchlist etc are built around companies or funds so it is not obvious how Crypto would integrate with these.
- Millennial mindset — 4/5. Crypto is a very much part of millennial culture. It may not solve deep-seated needs (hence not 5/5) but it is /distinctively/ millennial (largely one imagines because of that generations native familiarity with technology compared to their parents’ generation). The continued public concerns around Crypto (the sort you’ll find if you pick up the Telegraph) are actually a boon here — if older generations are fearful and distrustful that makes it harder for incumbents to follow in Freetrade’s footsteps
- Unique Value — 2/5. The unique value is not so much in having a crypto wallet, which are widely available, but in having all of your investments in one place — stocks and shares, crypto — and held with a trusted provider where you already hold some of your savings. But still, its not hard to hold crypto with Revolut or Coinbase. And effectively this is competing head-to-head with Coinbase, one of Silicon Valley’s top companies who already have a 6 year head start in the U.K. market.
- Running uphill — 4/5. Freetrade would not be the first to do it but building this kind of feature is hard. It comes with serious regulatory, security, technical and design challenges. There is no rule book on how to do this right yet (although there are several excellent examples).
Overall Score: 3/5
Truth be told, the items on the (visible) Freetrade roadmap look pretty underwhelming from the stand-point of millennial wow — mostly conventional, iterative improvements on the current experience. Which isn’t to say they’re bad or not valuable, but simply that they look unlikely to be of strategic significance.
The wind is all behind Freetrade right now, they have users pouring through the door, a strong and increasingly recognised brand, first-rate product execution, a huge community of fans and followers, and unique market positioning blending ‘tech start-up’ with mainstream investment provider.
Millennial wow is motivated by taking this story as far as it can go, to the moon, to the day when Freetrade is the major player in the market and billions of pounds are being transacted through its servers each week. It is a call for brave, intuitive, radical, first-principles thinking about what experiences Freetrade could bring into existence for younger investors. An opportunity to influence how a whole generation thinks about investing, while at the same time ensuring (inevitably) limited resources are focussed on the point of maximum strategic advantage.
¹ Hargreaves Lansdown, Key financial data https://www.hl.co.uk/investor-relations/key-financial-data
² Interim Results 2021 from https://www.hl.co.uk/investor-relations/results-and-presentations#
³ Interim Results 2021 Analyst Presentation from https://www.hl.co.uk/investor-relations/results-and-presentations#
⁴ Freetrade Crowdfunding 2018
⁵ FT, Hargreaves Lansdown: platform game https://www.ft.com/content/b691edec-3ad7-4341-862b-010872fe6ed9
⁶ Business Insider, UK customers are swarming to Goldman’s Marcus https://www.businessinsider.com/goldman-sachs-marcus-uk-growth-2019-5?r=US&IR=T
⁷ FT, Where do the next generation of investors go from here?https://www.ft.com/content/f520cd54-98ba-44cc-85f2-88057b624ef8
⁸ Paul Graham, How to Make Wealth http://www.paulgraham.com/wealth.html
