What is the Revenue Model of ETrade?

ETrade is a well-known zero-commission financial institution in the United States. However, with no trading commissions, how does ETrade make money? Create an account, fund it, and begin trading. Sounds simple enough, but what is going on behind the scenes, and what is the business model of the company?

Revenue Model of ETrade

E-Trade earns money in two ways: through order flow and through interest on the free float. Etrade earns interest on customer funds by investing them in money market funds. Additionally, they profit when users borrow margin from Etrade to buy or short stocks.

Revenue Model of ETrade

Let’s take a closer look at Etrade’s business, its products, and the pricing structure for each of those products.

What Products and Services Does Etrade Offer?

Etrade generates revenue through a variety of products and services, and their day trading platform for retail investors is only the tip of the iceberg. Let us quickly review the company’s services.

Revenue Model of ETrade

Brokerage Account – This is the platform that Etrade uses to offer retail investors zero-commission US stock trading. Additionally, they offer low-cost trading of futures and options contracts, as well as bonds.

Portfolio Management Service – A service provided to retail and institutional investors with varying risk tolerances. Portfolios can be managed automatically or manually.

Bank Account – E*Trade also offers higher-interest savings and checking accounts for individuals, families, and businesses.

Retirement Accounts – ETrade offers retirement (IRA) accounts for tax savings, minors’ savings, and individuals starting their savings at an age greater than 59.5 years old.

How does ETrade Generate Revenue?

Have you noticed how their advertisements emphasize the importance of “funding your account”? As a trading and investment platform, you might expect their advertisement to read “trading with us is commission-free,” but that is not the case.

Revenue Model of ETrade

Etrade earns the majority of its revenue in three ways:

  • Profits from interest 
  • Trading Commissions
  • Charges for services.

Etrade earns money from the money that is deposited, much as banks do. Let’s examine how Etrade earns money from its operations.

Profits from Interest

Remember how I said Etrade’s advertisement is heavily geared toward funding your brokerage, bank, retirement, or PMS accounts through them? This is because the more money you invest with them, the more interest they earn.

Etrade earned $1.9 billion in net interest income in 2019. That is revenue generated passively, without them having to spend any money. This is precisely why their advertising emphasizes funding your accounts rather than soliciting trades.

Etrade’s business model is based on the interest generated by the millions of users’ float investments. And, because retail investors are less likely to trade actively, offering them “free trading” is an excellent way to boost their float.

Offering free trading to retail investors is akin to giving a fitness freak-free cake. She may pay a visit and consume some of it, costing you a small amount of money. However, if your complimentary cake was any good, she will recommend your brand the next time she mentions cake or any other sweet.

In the case of Etrade, their complimentary offering appears to be quite good. A person who has used their platform once is more likely to use it for an extended period of time for two reasons:

Transferring stocks between brokerage accounts entails a number of steps.

Once a user has invested, there is really no reason for them to leave.

How does Etrade profit from money?

They earn interest on the pooled funds by investing them in money market funds.

Now that we know how much money Etrade earns from interest, let’s look at how they earn money from commissions.

Trading Commissions

Around 10%-20% of the millions of traders are active. Additionally, active traders trade large and regularly. And a sizable portion of them trades futures and options, the most lucrative (and riskiest) segment of the stock market.

This 20% of active traders earn them twenty times (x20) the revenue they lose by providing free trading (more on that later).

For trading stocks, futures, and bonds, Etrade charges the following fees.

Options fees are $0.65 per option. $0.5 per contract if you trade more than 30 contracts per quarter.

Charges for Futures Trading: $1.50 per futures contract

Bond Trading Fees: $1 per bond, with a minimum of $10 and a maximum of $250.

Etrade commissions and fees on futures and options, as well as bonds

Since Etrade is more concerned with volume than with premium pricing, the more successful traders in each of these segments, the higher the commissions created for them.

Etrade received $421 million in net commission income in 2019, according to their financial reports.

How does Etrade generate revenue from fees and service charges? Aren’t you hoping it’s greater than your commission income? Let us investigate.

Charges for services.

Now it’s time to determine the revenue generated by Etrade’s portfolio management, retirement accounts, and other key portfolio services. They receive compensation for these services as well as fees and usage charges.

Do you mind explaining all the charges and fees you are going to give me here?” In the first place, the fee and charge structures for portfolio management are studied.

Portfolio TypeMinimum InvestmentFee
Core Portfolios$5000.30%
Blend Portfolios$25,0000.35% to 0.75%
Dedicated Portfolios$150,0000.95% to 1.25%
Fixed Income Portfolios$250,0000.35% to 0.75%

Etrade charges $25 for premature withdrawals, excess contribution withdrawals, and recharacterizations of retirement accounts (changing from Roth IRA to Traditional IRA).

Additionally, margin lending charges vary from 5.45 percent to 8.95 percent, depending on the available debit balance at the time of trading.

In 2019, Etrade received $588 million in fees and service charges.

After examining Etrade’s earnings, let us examine the losses associated with their free offering.

How much money does Etrade make and how much money does it lose?

Etrade does incur a financial loss for their free bid. However, since nearly 80% of traders are not participating in the markets, they do not suffer a significant loss.

In 2019, Etrade lost $23 million in securities trading fees.

With $421 million in trading fees from active traders, the $23 million in revenue loss is a small price to pay for their business model.

Business Model and Marketing Strategy of ETrade

Etrade’s business model is based on extracting the maximum amount of float possible. Although institutional investors account for a sizable portion of Etrade’s float, they are scarce.

Revenue Model of ETrade

As a result, their marketing strategy is geared toward convincing retail investors to fund their “FREE” trading accounts with them.

Since they provide a relatively low-risk incentive for retailers with $10 minimums, they produce a higher float on retail investments.

Etrade’s business model is very straightforward.

  1. Etrade provides free brokerage and bank accounts to retail investors, reducing the investor’s risk.
  2. Additionally, their advertising focuses on the number of people who finance their investment accounts.
  3. Investors are then upsold on additional trading and saving opportunities, such as automatic index ETF investing fund management software, and retirement accounts.
  4. This provides the organization with an additional stream of income on an already cash flow-generating collection of accounts.

ETrade SWOT Analysis (Use Table)

Strengthening

  • Excellent complimentary offering
  • Broad scope
  • Large customer base
  • Can operate with a small staff

Weaknesses

  • A service-based offering greatly raises the need for additional personnel (though the use of automation has kept their employee count relatively low for the size of their business.)

Opportunities

  • Easily expands into new markets
  • Expands outreach to low-income groups 
  • Can be sold as a green company

Threats

  1. With the advent of discount brokerages, Etrade now competes with firms such as Webull, Aly Invest, and others.

Final Thoughts on Revenue Model of ETrade

That concludes today’s discussion of the Etrade business model! I hope you now understand how Etrade makes money. Don’t forget to take a look at the other business models we’ve discussed previously, such as Sodexo, Nearbuy, and MEGA.

If you enjoyed reading this article, you can also checkout Revenue Model of Discord.

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