Paypal Joins the Ranks of Neobroker Platforms

In a move that signals a significant shift in the financial services landscape, PayPal has announced its entry into the neobroker industry. The digital payments giant has hired Rich Hagen, a brokerage specialist, as the CEO of its new investment division, Invest at PayPal. Hagen, known for co-founding the online broker TradeKing, will help execute PayPal's plans in this new venture.

The neobroker industry, characterized by online brokers offering stock trading at low or no fees, has seen a substantial surge in popularity over the past few months. This surge can be attributed to lockdowns and increased free time, which has led many consumers, particularly young people, to try their hand at the stock market through neobrokers.

Notable players in this space include Scalable Capital, which started as a pure robo-advisor but is now making waves in the neobroker industry, and the leading online broker in Germany, Trade Republic. Another notable player, Robinhood, added 22.5 million customers and doubled its revenue during the COVID-19 pandemic.

However, the neobroker industry is not without criticism. Critics argue that exclusive contracts with a limited number of market makers could result in unfavorable trading conditions for users. Furthermore, the practice of Payment for Order Flow (PFOF), which incentivizes neobrokers to encourage users to engage in more trading activities and take on riskier investments, has come under scrutiny.

The U.S. financial regulator, the SEC, led by Gary Gensler, is considering banning the PFOF practice. If implemented, this could fundamentally change the business models of many online brokers, including PayPal. The potential ban could also lead to neobrokers needing to find new revenue streams if they are to continue offering their services at low or no fees.

PayPal, however, has remained tight-lipped about its plans, only referring to its previously announced long-term plans to expand financial services, including investment services. Reports suggest that PayPal is in talks with an existing broker about a potential collaboration, although the identity of the broker has not been explicitly named.

Despite the regulatory challenges and competition, the neobroker industry continues to grow, offering exciting opportunities for innovation and disruption in the financial services sector.

Paypal Joins the Ranks of Neobroker Platforms