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How Does Zecco Make Money?

Written by Nickel - 26 Comments

Have you ever wondered how a free online broker like Zecco makes money? In case you’re not familiar with them, Zecco offers free online stocks trades — up to ten per month as long as you maintain a minimum account balance of $2500. Gone are the days of paying “discount” brokers anywhere from $10-$30/trade.

I’m particularly intrigued by the possibility of using Zecco to invest in Vanguard ETFs, which are a good bit cheaper than their index funds once you get past the commissions.

So how does Zecco manage to offer free trades while still staying in business? They are a business, after all…

According to their FAQs, Zecco makes money from: (1) interest on margin balances, and (2) commissions on “premium” brokerage products like options trading. They also recently starting requiring a minimum account balance of $2500 in order to get the free trades, so I’d imagine that they also make money from holding your uninvested funds. Finally, they claim to keep costs down by minimizing their marketing efforts. Thus, instead of spending hundreds of dollars trying to attract customers, they simply let their fee structure do the talking, stating that they “attract customers by having the best deal in the market.”

This really is an interesting business model, and it’ll be interesting to see what sort of an effect their approach has on the rest of the industry.

If you’re interested in trying them out, click here for more info

Published on November 12th, 2007
Modified on July 23rd, 2008 - 26 Comments
Filed under: Online, Saving & Investing

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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26 Responses to “How Does Zecco Make Money?”

  1. 1
    The Saving Freak Says:

    I love Zecco. I have had no problems with them at all and, of course, the price is right.

  2. 2
    adam Says:

    I love them as well. I’ve been using them for exactly the same way you are thinking about – buying Vanguard ETF’s. Its been very easy and straightforward so far. The zecco website still has some quirks, but it is definitely useable. And as The Savings Freak said, the price is definitely right.

  3. 3
    Eric Says:

    They also have some ads on their site. If trading is as cheap on their end as they claim I would imagine they could make a decent amount off of that seeing how often people check their online accounts.

  4. 4
    mbhunter Says:

    I had thought that the ads were supposed to be a big source of their income. Not seeing those numbers pan out, they added the extra restrictions on the accounts to get the free trades.

  5. 5
    Colin McConnell Says:

    From what I’m seeing on their website, mutual funds ARE NOT included as part of the 10 free trades per month … please see http://www.zecco.com/trading/F.....atsNotFree for details. I’d like to build a portfolio of mutual funds as well, but this doesn’t seem to be a free way to do it. Please let me know if I’m missing something.

  6. 6
    Flexo Says:

    I’ve never gotten around to opening an account with Zecco. The idea of using their system to buy the cheaper Vanguard ETFs without transaction fees is certainly inviting.

    The thing about companies that offer services for free — even if they claim they are recovering it somewhere else — is that eventually those services are no longer free. You can see this starting to happen with their new $2,500 minimum balance requirement for free transactions. I expect a few years down the road, none of their trades will be commission-free… and they’ll be hoping that most of their customers will be too lazy to complain or move their money out.

  7. 7
    Rick Says:

    Colin, most mutual fund companies yet in invest directly in them through their companies. For instance, if you wish to buy Vanguard funds, just go to Vanguard’s website, and you can open an account there.

    As far as Zecco is concerned, I also have had no negative experiences. I like the being able to lose money for free, rather than having to pay a commission to do so :-)

    As far as how they make money, they are currently during a promotion where you may 7.45% on margin balances over $25000 and 7.95% on margin balances less than $25000. This is an obvious attempt to increase the amount of money people are borrowing from Zecco and thus pay interest to them.

  8. 8
    nickel Says:

    Colin: I can get Vanguard mutual funds for free from Vanguard, so there’s no need for Zecco. But ETFs are a different story… These are exchange-traded, and result in commissions. Thus, the Zecco model is a great deal for ETF investing (and ETFs otherwise have lower fees than equivalent index funds).

  9. 9
    FinanceAndFat Says:

    This is interesting. I saw Zecco’s offer of free trades, but avoided it because assumed there had to be a catch (or would be some day). From what the other commenters have said so far, they seem to be offering a legitimate service and I may be wrong, but I would still have some reservations.

    I’m curious to hear more about them.

    I would also wonder if Zecco takes a larger portion of the bid/ask spread, though if you are using limit orders and not trading constantly that shouldn’t matter much anyway.

  10. 10
    dong Says:

    I opened up Zecco account, though I never funded it. I’m still intrigued, but they keep changing their rules. I’m going to hold off until they stabilize and then I can decide given whatever rules they do have what the best use of the account will be.

  11. 11
    nickel Says:

    FinanceAndFat: They explicitly state that they do not to inflate the bid/ask spread, but I guess nobody knows for certain.

  12. 12
    Michael Says:

    Has anyone tried OptionsHouse as an inexpensive alternative?

  13. 13
    gcturp Says:

    I had an account with zecco a while ago. I had no troubles trading common stocks. However, I couldn’t get an order for an OTC stock (PLLVF) executed for a period of roughly 6 days. My bid price was HIGHER than ask price numerous times based on the charts. I emailed my concerns/questions to their customer service office twice; but I got a generic, copy-n-paste email response the first time and no response the second time. After that I liquidated my money and transferred it back to tdameritrade.com – where the OTC stock was purchased quickly and without issues.

    So if you are trading common stocks and ETFs, I would recommend zecco. However, if you are trading low volume securities such as some OTCs and even some ETFs – beware.

  14. 14
    James Bogosian Says:

    I signed up for Zecco a few months back using a “throw away” e-mail address from spamgourmet.com. With this address I can track where e-mails are coming from and I’ve seen a fair amount of spam come through to the e-mail address I specifically created for Zecco use only.

    I’m not saying that Zecco is selling e-mail addresses, but I can’t figure another way that I’m getting spam from an e-mail address I provided to only them…

  15. 15
    Creative Investor Says:

    From what I’ve read so far about Zecco on other sites and blogs is that their site isn’t very user friendly, paperwork needed to open an account is more extensive and customer service is fairly bad. I’m actually considering TradeKing.com at $4.95/trade or Firstrade.com which is $6.95/trade but currently has a 100 free trades promotion until the end of 2007 (Choosing an Online Brokerage: What’s Right for Me?).

  16. 16
    Phil Says:

    It’s also worth looking at Wellstrade, the online brokerage offered by Wells Fargo. If you keep $25,000 or more in funds across all accounts, you get 100 free trades per year. The extra bonus is that not only do you pay no commissions on stock trades, you also pay no commissions on the entire range of mutual funds they offer, including many funds that Fidelity, Schwab or other brokerages charge as much as $75 to buy.

  17. 17
    Gabriel Says:

    Hi, thanks for the review and all the responses. In terms of how Zecco makes money, it’s pretty straightforward. Brokerages make most of their money off of interest and commission income. There are a lot of smaller revenue streams, but these are the biggest and Zecco Trading is no different. Think of it this way. Some brokerage customers leave some cash in their accounts. Others trade on margin. A typical brokerage will lend a portion of that cash to the margin traders (secured against the equity in their account) and books the difference (i.e., net interest = margin rate – rate paid on cash). This has been a tried and true business model for decades, and there are very stringent rules in place that ensure brokerages and their customers are protected. As for the commission income, Zecco Trading makes revenue from options trading plus the customers that execute more than 10 trades a month. It’s not rocket science making money in this business. We just think most of the other brokerages are taking too big a slice of the pie from their customers.

    As for the trading experience, one of the major reasons we raised so much money was so we could accelerate enhancements to the trading platform and customer service. And our customers are already seeing the benefits. In fact, I’ll give your readers a little preview. In the next couple days the options trading capabilities and analysis tools are getting a major upgrade, the stock screener is going to be much improved, and we’re launching tax planning and performance tools powered by Gainskeeper. And in the coming months, there is a whole lot more coming. So it’s a pretty exciting time at Zecco Trading. Come check it out.

    Best,

    Gabriel Dalporto
    Zecco Holdings, Inc

  18. 18
    Blain Reinkensmeyer Says:

    I don’t buy the above, sorry Gabriel. I interviewed and almost took a job to manage your online community, I have seen first hand how things are managed and run and I’ve already called Zecco for bankruptcy. You guys say that you don’t spend tons on online advertising, I cry wolf. I’ve seen you guys on the top search results for competitive key words right next to E-Trade, Scottrade, etc. Your customer experience is subpar at best, you are burning through cash, and your ZeccoShare community which is supposed to be the “other half” your business is horrendous. No way it is going to make it big and compete with the likes of a site like Covestor.com. Sorry to be the party pooper, but it is very obvious unless you either A. raise more cash or B. get bought for your client base you will hit the dead pool!

  19. 19
    chadpatrick Says:

    Zecco has lost any goodwill it once had. They keep claiming business is great, but after their “bait and switch” and deciding not to honor the “not an introductory offer” that tricked alot of users into signing up, they have had to resort to paying for customers now. If you notice on their site, you will see a “we will pay you $50 to sign up your friends”. This used to be something zecco didnt have to pay for. Sad to see they had to raise their rates to “improve customer service” but it looks like that money is being spent elsewhere. They still dont have the streaming tickers or gainskeeper services that they (including the CEO on the message boards) kept touting. They poured all their resources into this zecco share deal, which inst all that great in my opinion because the privacy agreement is like selling your soul.

    Either way, check out my blog. Zecco isnt as great as you may think. SUre you get 10 free trades, but this company has an F rating with the Better Business Bureau. Buyer Beware. Free isnt always good.

  20. 20
    Nick Jensen Says:

    I researched Zecco and decided it was a bait and switch. I signed up with scottrade.com.

  21. 21
    Creative Investor Says:

    I’ve actually signed up w/ Firstrade, they’re giving away 100 free trades if you sign up before 12/31/07 and fund the account with $2,000 within 30 days. They seem to have pretty good research resources through S&P.

  22. 22
    sam Says:

    I opened an account 3 months ago, but I can’t get the funding work so I decided to give up and use TD Amertirade instead. 2 days ago I got a letter from a law firm, suiting me owning Zecco 200 USD. And if I don’t pay my debt with in 4 weeks, it will goes to my credit history. I called Zecco to clarify this, but none of the customer representative can give me a good answer to explain why I own 200 to Zecco. So now I am forced to pay 200 for no reason. I didn’t even use Zecco to trade stock or anything, and now I am in 200 USD debt. I think this is one way that Zecco makes money ( since they declare they have 0 commission) by charing random account random fees for no reasons. I also find a lot of people posting on their blogs about how they can deposit money easily in to zecco but have a hard time or even can’t withdrawal it at all from Zecco. So if you are still using Zecco trading, you might want to be careful about taking your money out, since it won’t be easy.

  23. 23
    tom Says:

    I got a very bad experience, I made a deposit through ACH and find my bank account has been closed. Their web site has no way to cancel the transaction and the phone are holding too long that I am able to talk to the customer serive after trading hour. There’s no way to cancel the deposit request and they charge $25 with magin calls on my account. Now I have to paid the interest on negative balance. That’s the first time I heard that no way to cancel the ACH transaction during business hours. Now I know “no free lunch”. I have confident that some day you lost your money and they have something coming up for it.
    p.s. you couldn’t find the way to cash out from you account too. check their web, I spend 45 min and just couldn’t find one

  24. 24
    owen Says:

    I’ve been using zecco almost a year now. I am up 23% this year mostly because I can get in and out of stocks easily and at no cost. This makes it much easier to capture a 3-5% swing in a stock each week as I find swing trading my favorite trading style. Before this my broker fidelity was charging $20 a trade which really starts to add up and eats into my percentages, plus it feels like I’m giving money away for a service I can get free… I have also went over 10 trades a month and was never charged additional from zecco don’t know why and never researched it. Zecco trading is usually pretty quick once in a while they won’t make a trade when the stock dipped or rose and hit a trade limit for a brief period (seconds), but this was also the case with fidelity, I would say zecco trades are a bit quicker then fidelity at hitting limits. I have also used phone support 3x and received answers to my questions in a reasonable time frame. Overall if you trade a lot zecco is the way to go. Hang in there for the account opening process and you’ll be pleased with them.

  25. 25
    StayAwayFromZecco Says:

    Zecco trading is such a dishonest system/group.

    I believe that they are commiting crimes against the laws.

    They give you EXECUTED transactions history,
    but do ghost tweaking on your shares/fund.
    The next morning you wake up, the fund or your shares are gone.

    If you contact them, they’ll say, there is nothing wrong doing and the case is CLOSED.
    They refuse to give you any proof or do any furthur investigation.
    Plus, the customer service is the worst in the world. They don’t usually reply to your questions or have you waiting for more than 30 minutes on the phone.

    They even threat to close out your account, if you keep asking and tracking. If you call, they’ll just hang-up on you.

    What’s the worst it can be ?
    You lose everything you have in you account!

    Because they secretly take away my shares/fund with NO explaination whatsoever, I’ve lost 5,000 dollars with them.

    BE ALERT! DO NOT USE ZECCO.

  26. 26
    me Says:

    There is no 10 free trades anymore…. they just changed the rules you need to have 25000$ balance to be able to get 10 free monthly trades …WTF ….

    don’t use them

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