This month has seen Dutch DIY stockbroking platform Degiro enter the UK market in a move that looks like it will result in a much better deal for the country’s retail investors one way or another. With prices for transactions which are billed as an average of 84% lower than those of competitors, and significantly lower than the next cheapest option, £1.75 to £2.50 (Club Finance's Frequent Trader is priced at £2.50 but also with a minimum £120 annual admin charge), the cat has well and truly been set amongst the pigeons. There isn’t a huge amount of information in English online about Degiro so at iNVEZZ we thought it would be of value to go straight to the horse’s mouth and speak to Degiro about their company philosophy, business model and how they are able to offer such low pricing.
Meet the founders
I spoke to Gijs Nagel, Degiro’s Director responsible for the company’s retail share dealing offering and one of the company’s founders. Gijs was both accessible and happy to spend more than an hour chatting about the retail investment market in general and how Degiro view what they offer DIY stock market and fund investors, why and how it’s different, and their future plans. A European company with little profile in the UK until now clearly has an incentive to be accessible to the media while launching onto the market. Nonetheless, in the context of dealings I have had with the UK’s established DIY investment platforms, the attitude of Gijs, as representative of Degiro, was refreshing. He clearly believes and has pride in what his company is trying to achieve and how they are going about it and was more than happy to spend time talking about it. While new to the UK, Degiro are becoming a major player. Currently present in 17 European countries, 18 now including the UK, the company is very much on course to become the continent’s biggest retail stockbroker by volume within the foreseeable future. Only two years old, having launched the retail platform in the Netherlands in 2013, the company has taken significant market share in record time in each of the European countries it has launched in so far. Degiro is expected within two years to overtake BinckBank, the stockbroking service that the founders used to be employed by, as the Netherland’s biggest retail stockbroker by market share.
They’ve done that by being so spectacularly cheaper than everyone else. Remember the impact easyJet and Ryanair had on the airline market more than a decade ago? Now imagine if they had offered average ticket prices 85% lower than everyone else rather than just 20%-30% with the occasional eye-catching bargain. You’d probably have foregone a little legroom and a lukewarm beer thrown into the price even more readily than the mass market actually did, and based on those companies’ growth since, despite some griping, most of us didn’t need much convincing.
But how are Degiro able to offer pricing on share dealing and other investment instruments such as bonds and funds so much more cheaply than everyone else? Budget airlines and supermarkets such as Lidl and Aldi did so by cutting away the fat, focusing on the core product rather than the presentation and the customer ‘experience’. I asked Gijs if, in his opinion, the comparison which has understandably been made of Degiro to budget airlines or budget supermarkets was one that the company embraces or that they would prefer they distance themselves from? For Gijs, the answer lies somewhere in the middle. Yes, Degiro has cut away a lot of the bells and whistles many execution only DIY investment platforms offer, such as providing news and research and different tools. However, he thinks that the core service that Degiro offers, its sharedealing platform, is of top quality and akin to what professional stockbrokers and institutional investors and traders use. He used to be a trader himself and was heavily involved in the design of the platform. According to Gijs, professional traders don’t use blinking platforms with all the add-ons, they use simple, single screens and want to be able to make a trade without leaving that screen. Gijs makes the point that all of the extras that DIY investment platforms often provide, such as news, research and various tools and widgets are readily available elsewhere from media or specialist providers. Much of it can be found for free and what requires a subscription is usually better quality than what the stockbrokers’ platforms offer. So Degiro’s philosophy is to offer a high quality platform for buying shares and other investment products and keeping transaction costs to a bare minimum. ‘If investors want the other things, they are available elsewhere. Our job is to facilitate trades via a simple and usable platform interface at a price that doesn’t compromise their profitability’, is Degiro’s approach.
A Tech Start-Up
Degiro characterises itself as a technology driven company. Their entire IT development capacity is in-house and the backend infrastructure of their platform has been purpose built from the bottom up. The infrastructure behind the interface is what, Gijs is firm about this point, is crucial to making a top quality online investment platform. In Degiro, it’s the IT professionals responsible for delivering the underlying technology, who are on the highest salaries, not the stockbrokers. Most of Degiro’s competitors have either commissioned their platforms from 3rd party IT companies or white label an existing platform. Having focused on technology, Degiro feels there is no reason to treat retail investors any differently to institutional investors and so have priced transactions for them at the same level their institutional equivalents trading large volumes and values would expect. The reason they can do this, says Gijs, is that once the infrastructure is there, multiple retail investors executing numerous smaller trades online puts no more strain on the system than institutional investors. According to Gijs, 90% of retail investors just execute trades with the click of a mouse. They no longer look for telephone execution or much else that requires human support, which is what is being paid for at their competitors. While some kind of support facility is still necessary, with Degiro it is lean and, the company feels, reflects the fact that most clients will never, or rarely, actually make use of it.
Efficiency and leanness is at the heart of Degiro as a company, says Gijs, and that runs from the in-house IT capacity to fiscal efficiency, marketing and management. Most online stockbrokers have grown out of family offices or are part of banks and even those who have been most successful until now spend too much money and spend it on the wrong things according to the Degiro man.
Dodgy Dutch or Safe as Houses?
I question Gjis about the concern that has been raised about the fact that the company operates in the UK under a European passport system. While registered with the FCA, they are regulated by the Dutch equivalent. This means that in the worst case scenario British clients have 20,000 euro protected rather than £50,000 as would be the case with an FCA regulated broker. Gijs maintains that the financial structure of Degiro means that users’ funds are actually safer with them than would be the case with many FCA-regulated brokers. All users’ holdings are segregated in a separate legal structure and are not on the company’s books. Most brokers, says Gijs, operate like banks and have clients’ cash and other holdings on their balance sheet so if something goes wrong, like a huge market movement, there is a danger they could get into trouble. We saw recently some of the biggest CFD and Spreadbetting brokers going to the wall as a result of big movements in the Russian rouble and Swiss franc. That’s why a government safety net is necessary according to Gijs, but because Degiro’s users’ holdings are segregated they are untouchable no-matter what happens to the financial health of the company itself. If you have much more than £50,000 with your stockbroker, Gijs maintains that Degiro’s structure means your holdings are far safer than with any bank or broker which comes under the FCA’s £50,000 insurance policy.
The final part of my conversation with Gijs is on an article which ranks highly for several Degiro-related search terms on Google.co.uk, entitled ‘9 Things I Hate About Degiro’. I comment that the high visibility of this blog post must be a source of irritation to him. I also ask if he can respond to the 9 criticisms made. The response is one of part-amusement, part-exasperation. Apparently the blogger in question uses Degiro himself and they’ve had some communication with him. He admits that many of the points are not really of great significance, he trades via Degiro himself and the article should perhaps be called ‘9 Things That Degiro Could Improve’, but the controversial title provides large volumes of traffic.
A lean, mean start-up machine
A couple of days after speaking to Gijs, I also met in person Gert Holstege who runs Degiro’s main operations office. Gert, also among the company’s partners, has the same infectious enthusiasm for what the company is trying to do as Gijs. He spoke of the ‘great retail rip-off’ in the financial markets and the fat cat mentality and gross inefficiencies running from banking through to the other main categories of financial institutions and companies.
Degiro’s office is quiet and calm with employees working away at their computers or sitting in pairs or small groups in discussions. All the country desks offering support to users around Europe are located in that office but I didn’t hear a phone ring. Gert explains that part of the country teams’ job is to answer calls and help with any issues users might be facing but they don’t have any dedicated support staff. Their job is to monitor the stock exchanges in their countries, analyse and be aware of what is happening in each country and figure out exactly what the Degiro needs to offer users in each country. While they are doing that, if a user has any problem, they also pick up the phones and help them. They find the system of having country teams with multi-functional roles to be far more effective than having dedicated support staff. These employees are much more immersed in their understanding of how the stockmarket works, what products and services are required in each country the company operates in and how Degiro works as a platform than someone in a pure support role would be. Gert describes how the company has been getting rave reviews for their customer service in countries as far flung as Spain and Sweden, without a pure support team. Gert says that their aim is to make sure the platform’s users don’t ever have to call them. Part of the multi-functional country teams’ job is to highlight and solve anything that they are receiving multiple calls about. ‘If we are getting calls through to the office from users of an online platform, we are doing something wrong’, says Gert. ‘If there are a lot of calls seeking support for something, we have a usability issue or some other issue, and we have to fix that’.
Degiro in the UK
Apparently the company’s launch in the UK has gone very well. As someone involved in building websites and online functionality, Degiro’s approach when entering a new market was very interesting for me. They approach it like a technology company, not a financial institution. For anyone familiar with the ‘Agile’ approach to project management and product development, this is how Degiro operate. They launch a core product as soon as possible and then add to it and build out the functionality and what it does based on the what is learnt from the initial launch. For them that core functionality to be delivered at launch is an extremely cheap though usable share dealing platform. This is also why the company has launched in the UK without yet offering ISA and SIPP wrappers and a full range of fund products. ‘We launch the core product as quickly as possible, and then we learn what else the market needs, and roll that out as we go along’. They expect to offer ISA and SIPP wrappers within the next couple of months and have the full range of investment products the UK’s retail investors want within six months. It’s certainly a different approach how traditional stockbrokers operate and, I suspect, is why Degiro has a big future. It’s efficient, it’s technology focused and it’s how the biggest tech companies and most successful tech start-ups operate.
My conversation with Gert turns to other parts of the financial services industry. I speculate as to whether a similar lean, technology-driven model might not disrupt retail banking and other retail financial industries. Gert thinks it will and “it might even be us, why not”. Degiro, Gert says, is not worried in the slightest about competition from the incumbent online execution-only stockbrokerages in the countries in which they operate. There is a feeling that they are too slow, too inefficient and too stuck in their long-lunch ways to react quickly enough. Gert sees their real competition as others like them who will enter the market. “New technology-focused companies run by young, hungry people like us”.
Too much, too soon?
One might think a danger for Degiro is getting too big for their boots and expanding too rapidly. It would be nigh-on impossible to imagine any other stockbroker expanding so quickly. None of the UK’s established online investment platforms have ever really made any really significant move towards international expansion. There must be a reason for that? According to Degiro there isn’t really other than having the behind-the-scenes technological infrastructure in place, being a member of the local country stock exchanges and having the legalities in place. It’s just that doing those things takes other stockbrokers months and years, when it takes Degiro months. They are expanding more like an Uber or an Airbnb, and why not? Three years ago if Uber was pitched as a business plan there would have been a host of ‘it can’t work, because…’-es. Regulations, licences, insurance, quality control, what if someone is attacked by a driver etc. etc. etc. Airbnb would have had some similar and some different blockers that meant it would never work. Guess what, it has worked, and most people actually think it’s a lot better. And Degiro doesn’t have anything like the same concerns to solve in their industry in terms of making their service ‘safe’, or even really change the way the business works in any fundamental way. The only thing they have really have to do is convince users that their money and holdings are safe and offer the products they want on a platform they feel comfortable using. Then, 80% cheaper than over there? Where do I sign-up?
An overly positive soliloquy?
This piece may come across as a little bit gushing. Well, it is, but not because it has been paid for in any way, shape or form. It’s because I and several others in this industry who are trying to build products and services to improve the retail investment industry have sat and had so many discussions about how the market needs major disruption. It has been one of the slowest to face the kind of consumer-centric change hopefully Degiro will mark the real beginning of. The financial services industry has been a bit like a country where the population puts up with a ruling class that is no better than in other countries where there has already been a revolution. Why? Because the rulers have placated the desire for change and progress by dripping enough money down the chain to make provoking change to the status quo seem much more of a risk than in the other countries where the rulers were rich and everyone else dirt poor. I love the concept of Degiro and from what I saw and heard I think they are doing things in a way that gives them every chance of being the sledgehammer that takes the first bricks out of the establishment’s wall. I might be wrong, there might be something I don’t see that means their model isn’t the right one. But I don’t think so. Instead of asking how Degiro are able to offer retail investors share dealing and other investment services so cheaply, maybe we should be turning to our existing online execution only share dealing providers and asking them why they have been charging so much? We’ve all said many times ‘but all you do is press a button, why does that cost so much’? The same answers have been trotted out for years. ‘You don’t understand how much it costs us, we make very little money, we only make any profit at all from a small percentage of our clients’. It will be interesting to see how these arguments stand up now against Degiro’s ‘it doesn’t cost that much, that’s why we aren’t charging much’. That’s why I’m gushing. Let the battle commence.