Here’s a question few people get asked in their day: what would it take to join a club that let’s DIY investors pay $9.99 in commission per trade? Well, if that ‘club’ is online broker Scotia iTrade, the answer is $50,000. At first blush the number may seem steep, however because of how that $50,000 threshold gets calculated, Scotia iTrade’s new loyalty pricing program has actually made qualifying for discounted trading slightly easier.
Getting Creative with Pricing
Without question, 2014 has been the year of falling commission prices. Many of Canada’s largest online brokerages, especially the bank-owned brokerages, have cut their standard equity trading commission prices from just under $30 to under $10.
Scotia iTrade, also a bank-owned brokerage, has opted to take a slightly different path. Instead of lowering their standard commission prices (currently $24.99 per trade) for all of their clients they have lowered commission pricing for certain segments. Earlier this year iTrade lowered the online trading commissions for active traders (defined as those who place at least 150 trades per quarter), to as low as $4.99 per trade.
With their newest plan, called the “loyalty pricing” program, Scotia iTrade is now offering up $9.99 per trade commissions. While they already have that commission as part of their existing pricing structure, they have changed the threshold of qualification for $9.99 commission pricing from $50,000 in assets with Scotia iTrade to $50,000 of accounts or products with Scotiabank and/or Scotia iTrade.
The Details on Scotia iTrade’s Loyalty Pricing
So, how exactly does Scotia iTrade define ‘loyalty pricing’? According to their website Scotia iTrade clients are eligible for the $9.99 commission as soon as the total balance across eligible Scotiabank (and/or Scotia iTrade) accounts/products reaches $50,000.
The list of eligible accounts is significant and includes:
- Mortgages
- Lines of Credit
- Credit Cards (Visa / American Express)
- Chequing and Savings Accounts
- Personal Loans
- Investment Accounts (TFSA, RRSP, Non-Registered Accounts)
- GICs
- Mutual Funds
- Non-Corporate Business Accounts
Another requirement to qualify for the loyalty pricing commission price is registration for paperless documentation. Scotia iTrade also has a requirement for mobile and iPad app users to log onto Scotia Online each quarter in order to confirm eligibility.
What Loyalty Pricing Means for DIY Investors
Having improved access to better commission rates is always a good thing for self-directed investors. The model picked by Scotia iTrade and Scotiabank means that the “convenience” factor of managing one’s personal finances with a bank-owned brokerage just got a lot more valuable.
Not only does doing everything in one place save time and reduce complexity (often big sticking points with investors juggling multiple accounts) but there is now actually financial incentive for doing so. Also, there is no “minimum number of trades” required to get the preferred pricing but rather just a maintenance or growth of business with Scotiabank.
If there is a downside for investors, it is that those who are looking to get started with investing may not meet the threshold for low pricing or, for whatever reason, may not be able to maintain it at which point they would be subject to standard commission fees.
Banking on Loyalty
The loyalty pricing strategy is not necessarily unique to Scotia iTrade. CIBC Investor’s Edge, for example, has had it in place for a number of years. While the commission-pricing given to CIBC Investor’s Edge clients via the loyalty pricing program is lower ($6.95 per trade vs $9.99 per trade) there are some offsetting factors, such as the higher dollar threshold ($100,000 vs $50,000) to qualify.
With the CIBC program the threshold for best pricing ($6.95 per trade) is set at $100,000 per household whereas with Scotia iTrade the third best commission discount is available (the $9.99 per trade) for $50,000 per client.
Building a Moat
Competing on price and being able to stand out from their competitors have been challenges for the Canadian bank-owned brokerages. Strategically, however, loyalty pricing is the kind of program that bank-owned brokerages can offer far more effectively than their independent brokerage counterparts can.
Whether the online brokerage side of the business helps grow banking or banking helps grow online brokerage, one side of the company can help the other. Thanks to the banking-side relationship, major bank-owned brokerages are able to provide a broader package of services and bundle them into an offer that independents are hard pressed to compete against.
For independent brokerages, the temptation to move into banking services is already apparent in the US. As US online brokerage E*trade has shown, however, wading too far into traditional banking can go horribly wrong if done at the expense of prudence and so winning market share without taking undue risk will be a challenge.
The Bottom Line
The move by Scotia iTrade to introduce loyalty pricing directly pits big-bank convenience against independent brokerage pricing. While $9.99 per trade isn’t necessarily the best price per trade, it is far better than the standard commission price that Scotia iTrade currently charges. Ironically, because of the options to qualify for the discount loyalty pricing, those not already with Scotiabank or Scotia iTrade will be starting to think about the benefits of being disloyal to their current provider.