The GameStop short squeeze: why open banking matters in trading

Last week, we saw a huge surge in open banking payments going through our platform, as the Reddit GameStop short squeeze swept the globe and our wealthtech customers experienced four times their typical usage. In this blog, we’ll look at why open banking matters in trading — and how it gave platforms like Freetrade and Revolut the advantage.

Open banking, open trading

Stock trading was once reserved for Wall Street, but thanks to the rise of free online apps like Trading 212, Freetrade and Robinhood, anyone with a smartphone can get involved. Individual investors, also known as retail investors, are now thought to make up around 25% of the stock market, up from 10% in 2019.

In the same way that trading apps have opened up access to the stock market, open banking is making finance more accessible, increasing convenience for consumers and enabling businesses everywhere to build powerful financial products.

Open banking gives businesses a new way to take payments from consumers — safer, faster and less manual than card payments, and much more convenient than traditional bank transfers.

That’s why millions of investors in the UK and Europe now use open banking via TrueLayer to fund their investment accounts through platforms like Trading 212, Freetrade, Stake, Nutmeg, Revolut and Plum.

So why does open banking matter in trading?

We’ve talked in the past about the benefits of open banking for wealthtech, but there are three very specific reasons why open banking gave online trading platform the advantage last week:

1. Deposits made through open banking were immediate

2. New customers could be onboarded quickly and at scale

3. Instant settlement reduced liquidity risk

Let’s look at these in detail.

1. Deposits made through open banking were immediate

Our data shows that around 40–70% of investors choose to make a deposit using open banking. Those investors also typically deposit 30% more in value, and three times more often than investors using other payment methods.

A key reason that investors are opting to pay this way is speed. We surveyed 1,800+ users of online wealth management platforms across Europe last year and found that one in four had missed out on investment opportunities because funds didn’t appear in their accounts quickly enough, causing them to miss trading cycles. We also found that two thirds of investors are more likely to trust a wealth manager that offers instant payments.

In the case of GameStop, open banking allowed millions of investors to make timely trades. While cards can take up to three days to settle, open banking-powered payments are immediate. They are also highly secure, authenticating directly with the bank.

Speed also matters when it comes to withdrawals. Almost half of the investors we surveyed were likely to switch providers to get instant withdrawals, and 37% would consider depositing more money if they could withdraw earnings instantly.

2. New customers could be onboarded quickly and at scale

2020 saw record numbers of investors signing up to online wealth management platforms. Trading platform Hargreaves Lansdown added over 84,000 new customers during the second half of 2020, while Plum saw a 180% increase in investors between June and September 2020.

Last week, digital wealth managers saw another surge in sign-ups as the GameStop short squeeze became a global media sensation. Freetrade, for example, saw daily sign-ups rise 10x, from an average of 4,000 a day to 40,000 a day on Wednesday and Thursday last week.

Signing up to financial services can be notoriously slow, and while users might tolerate a longer process for making longterm investments, those signing up to ride a trading wave like GameStop are likely to be less patient. Our research with YouGov last year shows that 61% of investors won’t tolerate a signup process lasting more than 10 minutes.

Here, open banking can help: allowing businesses to verify account ownership and authenticate payments directly with the bank, speeding up AML processes and meaning that users don’t need to manually upload bank statements. It also improves efficiency and automation for wealth managers, creating less pressure on operational teams.

3. Instant settlement reduced liquidity risk

We saw the importance of liquidity during the GameStop trend last week, as US digital wealth manager Robinhood was forced to raise $1bn for its clearing bank to underwrite its daily transactions.

In order to settle customers’ trades, wealth managers need to hold a certain amount of money in their account to manage with a clearing house. When an investor makes a deposit by card, it’s authorised immediately but can take 1–3 days to settle. This means operators have to hold a sizeable float and can make scaling investments difficult.

Open banking has instant authorisation and instant settlement. Wealth managers who take a significant proportion of their payments via open banking don’t need to hold as much money in order to scale deposits (since they’re getting deposits in real time), reducing their liquidity risk.

Powering retail investors

We’re proud to power payments and open banking infrastructure for the UK and Europe’s retail investor market, including Trading 212, Freetrade, Plum, Stake, Nutmeg and Revolut. For more information on how we do that, visit our website.

To hear more about how Freetrade and Revolut are building better payment experiences with open banking, join our webinar on 24 February with Freetrade’s Damon Roberts and Revolut’s Joshua Fernandes.