Skype backer takes on ETrade with free trades
Morten Lund, the guy who was the earliest backers of Skype is at it again. He has financed Zecco, a start-up that will allow consumers to trade stocks for zero commissions, versus $10 to $20 that many online brokers charge today. Other investors in the company include former Dutch Coca Cola CEO Pier Baarsma and Soren Kenner former chairman of McCann Erickson MRM Europe
CEO Jeroen Veth, a 37 year old entrepreneur and former Merrill Lynch Vice President is heading up the company and contends that most of the old school online brokers spend too heavily on marketing and thus have to charge higher prices. Lund and crew believe that the actual trade costs about $2 and if they can lower the cost of marketing to near zero, they can offer zero commission trading. They will make money with what else – advertising.
Our model is different. We run a lean operation, use the latest technology and rely entirely on word of mouth, guerilla marketing, viral campaigns and public relations to get the message out. As a result we can look at the $2 per trade as the cost of doing business – and still turn a tidy profit
Zecco, in company’s own words is at “the intersection where online brokerage meets Yahoo Finance and Myspace,” and offers tools such as free blogging, forums etc. The big question is can they make it happen? My gut says that there will be some who will be attracted to this service because of its free nature.
Others will show up at the service because of the forums, and the community, and many are already looking for options to Yahoo Forums. In the long run this could cause old school companies to look at their own pricing structures hard and lower their prices. But can Zecco be the next ETrade, well not sure about that. What do you think?
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great idea. house your nest egg with a start-up brokerage with unproven biz model. scandal looking to happen
I think that Zecco answers two needs:
1. Zero commission trading
2. A nich social community for traders, finance guys and consumers interested in trading where they can share tips, get advice from each other and discuss the latest finance rumours.
There is obviously a huge demand for zero commission trading. It gives trading based on technical analysis a whole new dimension – which is why this won’t fly.
You have to be sceptical of any business model that has costs increasing so much in proportion with with new users.
The business model reminds me of the Web 1.0 bubble companies that wanted to pay people to watch ads. When times get tough in advertising, Google can reduce costs. Not so for Zecco.
Hi
Just a quick comment on the financing and ability to follow on through:
Marcel Boekhoorn — Dutch billionaire investor who recently sold Telforth to KNP at a $1,4 profit — has helped finance the venture and will continue doing so … so I have to say we’re in pretty good shape vis-a-vis ability to follow through in the face of competitive onslaught.
They need to be able to deliver top notch execution which as far as I know is not easy. E*TRADE spent over $400M to develop the initial system and I expect still spends a significant amount to keep it up. Many of their tools are not of use except to higher end traders so there is probably a niche for a company like this. However they need to be prepared to offer a high quality system given the nature of the application.
As a pretty active trader with E*Trade I expect to pay about 1% of my asset value per year in commissions. In a lower-return world this would make a difference.
It may also be worth noting that with E*TRADE Visa which I use now my trades are commission free.]
Its all about perception. As the first comment most of the mainstream investors will be very sceptical to park their nestegg with a “internet brokerage” with unproven biz model.
This may attract the smalltime daytraders but they will always be a cost center to Zecco as financial advertisers value them less (its tough to sell a mutual fund to a daytrader vs a regular joe saving for retirement) and also daytraders generate much more trades costing Zecco more.
There are three legs to the revenue model. If you look at Etrade’s 10-K, you can see that of their $1.6 billion in revenue only $600 million came from commission revenue. 49% of their income comes from margin spreads and interest income. The other leg is higher margin products that do cost.
The advertising is just gravy. However, advertising revenue may be more sure than comissions and don’t lock with the market.
Zero commission will be common for both retail and Institutional equity trading in the next years. Trading will be like free envelopes at the post office. Commission income for a large number of second tier banks and old style brokers will go down dramatically and a large number will have to close their equity trading and research operations . Old style investment banking is dead, technology rulezzz!!
They better have a big cluster ready if they don’t want to disappoint potential customers. Glad disruptive thinkers are making a difference. Best!
Check out the “Zecco Preview” link on their home page. Would you trust your money to a company that spells losers: “loosers”?