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Online Brokerage Space Should Remain Rich Source Of M&A

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Online Brokerage Space Should Remain Rich Source Of M&A

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The online brokerage arena will likely remain fertile ground for mergers in the years ahead, according to S&P Global Market Intelligence's 2020 U.S. Digital Investing Market Report.

Future M&A activity should be driven by an ongoing urge to consolidate among incumbents, the rapid growth of Robinhood Markets Inc., and the burgeoning interest that some large banks and fintech companies have in the space.

Deals announced in the last year or so raise questions about the fate of incumbent Interactive Brokers Group Inc., now that TD Ameritrade Holding Corp. has sold to Charles Schwab Corp. and E*TRADE Financial LLC has been acquired by Morgan Stanley. In addition to full-company acquisitions, we foresee buyers continuing to scoop up assets. For instance, Charles Schwab acquired brokerage accounts from United Services Automobile Association in May and the technology and intellectual property of now-defunct fintech startup Motif Investing Inc. in June.

The desire to build scale is likely even greater now due to competitive pressure from Robinhood, a startup that has quickly become a legitimate threat to incumbents. As of December 2019, Robinhood boasted more than 10 million accounts, roughly five years after the launch of its iOS app. This was nearly double the 5.2 million retail accounts reported by well-established incumbent E*TRADE at the end of 2019.

Given how fast it is growing, an acquirer might want to purchase Robinhood now, before it becomes even more expensive. The company went from a $1.3 billion valuation in April 2017 to an $11.7 billion valuation in August 2020.

Morgan Stanley's purchase of E*TRADE underscored the interest that some big banks have in the retail investing arena of late. We wonder if Goldman Sachs Group Inc. will follow suit, particularly given its efforts to build out Marcus, its retail-focused banking brand. JPMorgan Chase & Co., which launched a self-directed trading service called You Invest, might be keen to grow retail trading through acquisitions as well.

Conversely, some banks might do deals to exit the market. Capital One Financial Corp. sold its accounts to E*TRADE in 2018, for instance, after failing to achieve sufficient scale.

Some well-capitalized fintech companies such as Square Inc.Social Finance Inc., or SoFi; and Robinhood might themselves be on the prowl for acquisitions, either to fortify existing operations or add new capabilities. All three have applied for bank charters, and SoFi on Oct. 28 received conditional approval from the OCC to form a national bank. But if those charters do not come to fruition, they could conceivably follow LendingClub Corp.'s lead and try to purchase a bank.

Square and Robinhood might look to add advisory services to their arsenals as well. Personal Capital Corp., one of the leading U.S. robo-advisory startups, was acquired in August by a subsidiary of Great-West Lifeco Inc., and we think other robo-advisers might be open to selling. A tie-up between a self-directed trading startup and a robo-advisory startup would make strategic sense as a way to stay competitive with incumbents that already have giant wealth advisory operations.

SoFi is probably still best known as a digital lender and Square as a payments company, but they offer trading apps called SoFi Invest and Cash App Investing, respectively. The pair illustrate how a fintech company that started in one line of business can jump headfirst into the trading app realm. We think PayPal Holdings Inc. could be another candidate to do so, given its partnership with investing-app maker Acorns Grow Inc. We would not be surprised if PayPal acquired Acorns, since PayPal is already an investor in the startup; if it did, building or buying a self-directed trading service would form a natural complement to Acorns. We would classify Acorns as a robo-adviser, since its app rounds up a user's card transactions and automatically invests the difference in securities such as exchange-traded funds.

In addition to the online brokers, we foresee continued M&A interest in the companies that provide infrastructure and white-label technology to the online brokers. Goldman Sachs closed a deal for Folio Financial Inc. in September, and SoFi was reportedly interested in acquiring Apex Clearing Corp., the latter according to a Business Insider article from February 2019. DriveWealth LLC and AlpacaDB Inc. strike us as other potential acquisition targets in that space.

With such robust potential for M&A and tech disruption, the makeup of the online brokers and the vendors that fuel their technology could look considerably different in the years to come.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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