Creating a winning combo: investing tech and brokerage permissions
May 17, 2022. Stefan Willebrand.
Today, we formally announced that Bricknode has started the application process for a brokerage/securities license in Sweden. Ever since Bricknode started in 2010, we have had the ambition to add a subsidiary to the company group where we can be the primary broker and custodian for our software users. This will boost our own scalability and help deliver a complete service to many customers.
In order to understand the benefits that acquiring a brokerage license will bring our different customer groups, it is helpful to know how we work with them today.
Distinct customer groups
Within the brokerage product division today, we see two groups of customers. The first group are customers who have their own full regulatory permissions to carry customer accounts. These companies can be rather complex and relative to our other customer groups, there are fewer of these around.
In terms of Bricknode solutions, these companies consume pure software, and they can also outsource their back-office operations to Bricknode if they do not want to manage this themselves.
Today, these companies must also establish their own relationships with banks, brokers, exchanges, fund companies etc. to access financial instruments that they would like to distribute.
This means that each customer needs to have their own relationships which can be less cost effective and take a lot of time to cut through red tape. This is bad from a few standpoints.
First, even if Bricknode delivers the software solution on the same day that it is ordered by the customer, it could still take months before the customer gets approval by institutional brokers and fund networks that it might need to access. In addition, it can take years before relationships are set up to manage international tax withholding and other administrative things that should just simply work.
Second, time to market for new valuable products is greatly increased and companies can go out of business even before getting to first base.
The second customer group is characterized by firms that lack full regulatory permissions for carrying or operating their client accounts in their own firm. Some are simply not interested in having the administrative overhead that is required for those accounts like tax reporting, corporate actions, MiFID II reporting and so on. These can be financial advisors or various types of FinTech companies.
There are many of these companies around but today they need to find an external party that holds the required licenses and that has relationships with various trading venues. This third party might already have a different software provider to Bricknode, so the deals are ultimately lost if the third party does not want to go through the process of switching core systems.
The problem is that Bricknode cannot supply the full plug and play brokerage solution for this group of customers, since we must go through a third party which can introduce more costs for the potential customer and make the whole setup less attractive.
Acquiring a license: benefits for our customers
By setting up a subsidiary of Bricknode with a brokerage license we can merge our administrative services into the brokerage division, and we become a one-stop-shop for customers that do not have their own regulatory permissions.
Bricknode is then the only party that must set up and maintain the relationships with trading venues and issuers of financial products and we can obtain economy of scale.
When it comes to the other customer group that has full permissions, we can now present them with a choice where they could either maintain their own external relationships or switch to Bricknode as their primary brokerage firm. The latter would enable them to participate in the cost savings that this would generate both from shrinking the administrative overhead and from lower trading fees.
Acquiring a license: benefits for Bricknode
From a revenue perspective, obtaining a license would greatly increase the market opportunity for Bricknode in the short and long term. It will help create higher margins and shorten sales cycles in general.
As the provider of accounts, Bricknode would have a direct legal relationship to each account holder. This would enable us to apply all our internal tools and knowledge to optimize processes and the end customer experience.
Not that long ago, big UK-based fintech Revolut decided against setting up their own regulated securities firm when they launched equities investments on their app. Instead they made a partnership with another company that is providing and carrying those accounts and making the trading facilities available. It makes a lot more sense for our prospective customers to let Bricknode take care of everything under the hood too, so they can just focus on the end customer.
There are still very few alternatives today for this sort of service and no one is in control of the full back-office software like Bricknode is with Bricknode Broker. By controlling all technology, Bricknode can be agile and quick in ways that other companies who rent their back-office systems for this purpose can only dream about.
Bricknode will provide these accounts and facilities as a pure back-end service and will not have its own B2C offering that could compete with the services of our customers. During the years Bricknode has established technology and the required facilities to provide a wide array of financial instruments like global equities, funds, bonds and more. We see no technical limitations with regards to the products that we can provide, and we think that this complete service bundle will be revolutionary.
Together with front-end partners like Additiv we will be able to provide financial advisors with stellar tools to manage their customers and a full suite of financial products to distribute. This is all the while making sure that the financial advisor builds their own brand and customer loyalty. This is something that is not being done today when financial advisors are forced to place their customer accounts with standard retail brokers that compete for the same customers.
The time is now
Why now, you might ask. Simple, it’s because we have not been ready for this in the organization. Thanks to the IPO we have been able to onboard the right team members for this and we now have the necessary resources to do this with great quality. We have also been able to conduct the full administration for current software customers which has enabled us to build up the required internal routines and learn everything first-hand.
Getting a license to perform regulated activities will not do any harm to the current pure Software-as-a-Service offering where business is expanding aggressively over multiple product lines based on Bricknode Core. It will, however, add a whole new dimension to Bricknode and unleash us from many limitations impacting customer acquisition today.
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