PayPal will transition into the realm of neobroker services.

PayPal Enters Neo-Broker Sector Amidst Controversial PFOF Practice

In a move that could shake up the online brokerage industry, PayPal has announced its entry into the neo-broker space. The financial technology giant has appointed Rich Hagen, co-founder of TradeKing and an experienced brokerage specialist, as the CEO of its new investment division, Invest at PayPal.

The neo-broker sector, also known as online brokers, has seen a surge in popularity in recent months, particularly during the COVID-19 pandemic. With lockdowns and increased free time, many consumers, especially young people, tried their hand at the stock market through neo-brokers for the first time. US broker Robinhood, for instance, added 22.5 million customers and doubled its revenue during this period.

However, the neo-broker industry is not without its controversies. The practice of Payment for Order Flow (PFOF) has come under fire for suspected conflicts of interest. This practice, where neo-brokers receive payments from market makers with exclusive partnerships, has been a subject of debate. Critics argue that it could potentially lead to unfavorable trading conditions, incentivize neo-brokers to encourage users to engage in more trading activities, and risky investment behaviors.

The US financial regulator, the Securities and Exchange Commission (SEC), under the leadership of chairman Gary Gensler, has suggested that it is considering banning the PFOF practice. If the SEC were to implement this ban, it could affect the neo-broker industry as a whole. Berlin-based Trade Republic and the US-based Robinhood are among the neo-brokers that could be impacted.

PayPal's potential entry into the neo-broker space could be influenced by the SEC's stance on the PFOF practice. PayPal declined to comment on its plans, but referred to its long-term plans to expand into financial services, including investment services. Recent reports suggest that PayPal is in talks with an existing broker about a potential collaboration.

If PayPal were to implement its brokerage plans, the PFOF practice could also impact PayPal. The practice has been a key revenue source for many neo-brokers, but its ethical implications have been questioned. The SEC's decision on the PFOF practice could shape the future of the neo-broker industry, including PayPal's entry into the space.

Scalable Capital, initially a pure robo-advisor, has made a significant impact in the neo-broker sector. The company's success underscores the potential for innovation and growth in the industry. As PayPal enters the neo-broker space, it will be interesting to see how it navigates the challenges and opportunities presented by the PFOF practice and the SEC's regulations.

In conclusion, PayPal's entry into the neo-broker sector is a significant development that could reshape the online brokerage industry. The company's approach to the PFOF practice and the SEC's regulations will be closely watched by industry observers. The future of the neo-broker industry, and PayPal's role within it, remains to be seen.