Zecco, a company wanting to disrupt America’s online brokerage industry by offering free stock trading to the masses, is making progress.
The company says it is opening a thousand accounts a week, and its growth is accelerating. Yet the company is also facing growing pains, and is in a race to reach critical mass before the big online brokerages drop their trading fees as well.
We first covered Zecco in September, right before its launch.
We wanted to check back to determine if free online stock trading is for real, or if it’s just another ill-fated business model destined for the dot-com deadpool.
After analyzing the landscape, we think zero-dollar trading is here to stay.
Three days after Zecco’s launch, Bank of America introduced its own commission-free trading program, and in February, Wells Fargo jumped into the scrum. Bank of America and Wells Fargo require minimum account values of $25,000, while Zecco requires only $2,500 to open an account.
In the early ’80s, upstart discount broker Charles Schwab & Co. rose to prominence by offering $129 commissions that undercut the full service brokerage firms who at the time charged $500 or more. Traditional brokerage firms like Merrill Lynch and Morgan Stanley scoffed at the upstart Schwab. In the mid and late ’90s, Schwab, joined by E*Trade and a slew of others, pioneered online trading and drove fees even lower by allowing investors to buy and sell stocks with a mouse click.
Over the last five years, online brokerage fees have continued to drop. Today, fees hover at just under $10 a trade.
Has the industry suffered amid this dramatic drop in trading fees? Not at all. Today, the top three online brokers, Schwab, TD Ameritrade and E*Trade, collectively boast 14.5 million individual accounts with over $1.7 trillion in customer assets. The three had combined 2006 profitability of near $2.4 billion, an all time record.
Early Zecco results are encouraging. In just five months, the tiny Ontario, CA startup says customers have opened more than 12,000 accounts. The company claims signup are accelerating, with 1,000 new accounts being created weekly • and this, with no marketing.
However, Zecco has also has suffered hiccups. Some customers have found the site cumbersome, and others failed to follow through on funding their accounts after creating them • leaving Zecco with more than the 30 percent industry average of un-funded accounts (Zecco wouldn’t give an exact total of customer deposits to date. Each of the three big online brokers disclose these numbers monthly).
Zecco says its funded accounts have an average asset balance of around $15,000.
Freetrade.com Failed: Can New Free Traders Succeed?
Zecco, Bank of America and Wells Fargo aren’t the first to offer commission free trading. Ameritrade (the predecessor to TD Ameritrade before its merger with TD Waterhouse) was the first major online brokerage to launch a free online trading brokerage division in November, 2000, with an effort called Freetrade.com. Freetrade never gained significant traction, so the service was shuttered about two years ago and rebranded as a no frills $5-a-trade service called iZone.
Today, however, the zero dollar brokers are more likely to succeed. Brokerages are getting much better at making money elsewhere: from asset-based fees, such as interest income earned on clients’ margin accounts and cash balances, or by lending their clients’ stock holdings to other investors and hedge funds.
Zecco plans to make money this way too, including on stock-option trading fees for which it charges $3.50 per trade plus $.60 per contract.
Zecco’s CEO Jeroen Veth says he has no illusions he can compete forever on price alone. Zecco must maintain high standards of customer service, improve its user interface, and improve the breadth and quality of its research, he admits.
However, like most new Internet companies, Zecco also wants to make money from advertising. This is affecting the user’s experience. The site is cluttered and clunky. Google Adsense ads are intermixed with site content, which is annoying. It’s not always clear when a link will take you to a Zecco feature, or wisk you away to an advertiser’s site. The site is littered with ads for competing brokerage firms and questionable get-rich-quick stock schemes. The company would do well to drop the Google ads in favor of better managed ad content.
MySpace Meets MyZecco?
Notably, Zecco is planning an upgrade to the service for early this summer which will provide investors improved social networking capabilities. The new features will enter a controlled beta test within three to four weeks. If this produces more page views, it could help drive advertising revenue, too.
“We’re the only [online broker] to combine the Web 2.0 angle with a brokerage platform,” Veth says. “Trading execution has become a commodity. Investing has become more about the community interaction. Investors want to communicate with their peers, share philosophies and debate differing opinions. The industry is headed here.”
Whether Veth is correct to bet his company on the social networking angle remains to be seen, though the idea isn’t so far fetched. Long before Web 2.0 became a tired buzz phrase, millions of investors in the ’90s were hooked on stock message boards such as Silicon Investor, Raging Bull, Yahoo Finance and the Motley Fool. While Yahoo Finance is the industry’s 800 pound gorilla in terms of message board participation, an ill-fated user interface design change last year alienated many long time users who may now be more inclined to switch if Zecco can deliver a better experience.
Competitors looming on the horizon
The biggest risk facing Zecco is if the big three online brokers suddenly drop their commissions before Zecco has a chance to build critical mass in client accounts and social network participation.
Meanwhile, on the social investing front, Zecco is already facing competition from social investing upstarts such as Bullpoo.com, Motley Fool’s CAPS service, and socialPicks, not to mention hundreds of independent stock market-related blogs.
A final, though as of yet unconfirmed risk, is if Yahoo or Google enter the stock brokerage business. The prospect is plausible given that social investing and online stock trading are destined to merge closer. It took Zecco less than 12 months to go from business plan to working brokerage platform. Others could do the same.
Or if Zecco can prove the model, it will be an acquisition target.
Angels in Europe
Zecco is backed by $10 million in angel funding by European investors. It closed its first $4 million in seed funding prior to launch.
Two of the company’s earliest investors were Morton Lund and SÃ¸ren Kenner of LundKenner Ventures in Copenhagen, Denmark. Lund was an investor in Skype, and if parts of Zecco’s strategy sound similar to Skype’s, it’s no coincidence. Lund and Kenner, according to Veth, were instrumental in contributing critical strategy, planning and development resources. The two didn’t invest cash.
In November, the company closed a single round of $6 million from Marcel Boekhoorn, a prominent entrepreneur and investor based in The Netherlands. Boekhoorn is the company’s largest investor.
Veth says Zecco is sufficiently capitalized to meet its objectives. The company may consider another round of funding in late 2007 if it decides to accelerate its already aggressive growth plans.
Mark Coker is a contributing writer for VentureBeat. He’s founder of Dovetail Public Relations, a Silicon Valley technology marketing firm. He has no clients among the companies mentioned in the story, nor among their competitors. More on Mark at http://www.linkedin.com/in/markcoker