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Issue 2001-9 Wednesday, Mai 23, 2001








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  Difficulties on the different financial markets, internal problems, which are the strategies that should be used in order to survive in the online brokerage sector?  

From the very beginning, American online brokers have been the most obvious indicator to feel the pulse of the online brokerage market.

And yet, the widespread drop in their revenues has become very worrying lately.

This is how commission and trading revenues for Schwab fell 51% in just one year and its earnings fell 65 percent.

The same thing happened with Etrade, as it saw its transaction revenues plunge 48 percent from a year ago, but also TD Waterhouse, as it noticed that its trading volume plunged 58 percent from a year ago and that this same trading volume was 14 percent lower in March 2001 than it was in February 2001.

Under these conditions, it is hardly surprising to see that big waves of dismissals are being announced and/or have already taken place.

The same need to cut costs was also seen in these companies' media plans: this is how Ameritrade announced it was cutting its advertising budgets by 25 percent when Schwab said it was cutting them by 10 percent, and Etrade said it would go as far as cutting them by 50 percent.


But does it prove enough to cut costs to survive?

Indeed, the biggest problem that has to be solved nowadays concerns the "quality" of customers themselves. This is so true that Ameritrade and Etrade are presently charging extra money to customers whose level of activity happens to be very low.

But, isn't it true that customers happen to represent the main element in all this?

Online brokerage proved successful at the start mainly because the public showed keen interest in this new possibility to make "live" trading transactions at a reduced cost.

If it does no longer prove possible to reduce transaction costs further, one should presently evaluate the service that is being offered, as this usually proves to be a differentiating element.

And yet, such differentiating element is increasingly absent.

The biggest online brokers have got a good grip of technology now, and the eServices provided by the biggest of them prove almost identical.

Their prices and eServices are nearly always identical, but so are their fame, seriousness, and the fact that they all inspire confidence: so what is left that could allow an online broker to attract its competitors' customers? Very few things indeed.

What about new customers? As advertising budgets are being reduced and financial markets prove very uncertain, we can no longer hope and see online brokers' customer base grow massively, as used to be the case.

Could the new "full service" model be a long-term solution?

By this expression, I mean "global financial" offers that go from banking services, loans and other services up to brokerage included. Etrade and some others are convinced that this might have a future.

Does this mean that online brokerage alone might not constitute a self-sufficient business model?

Opinions differ here and in any case, should this hypothesis be confirmed, banks would turn out to be the biggest beneficiaries, not online brokers…

Indeed, as there still are too many online brokers, many traditional banks that are now starting to invest money on the Internet will only have to wait for these brokers to disappear instead of trying to take over the weakest companies.

Traditional banks already have the brand, the trust, the necessary synergies but also the money that is required to become successful online (advertising, for instance). They also have the technical skills owned by online brokers. As a result, they might as well become involved in the eFinance battle all on their own.

What's more, traditional banks do have certain legitimacy for their customers, and a pure Internet broker who wishes to become a brick-and-mortar actor, will find it much harder to get the same legitimacy over a short period of time.

All this to say that unless a bank wishes to expand its customer base (which might justify acquiring an online broker), "full service" eFinance solutions will be accessible to pure-play Internet brokers only with difficulty and should only benefit to banks themselves.

As a result, banks might well capture most potential new customers in the brokerage sector, as they will be the only ones that prove able to offer them a full service.

Does this mean that pure-play Internet brokerage is doomed to fail?

This is not what I think either, as this type of service does correspond to an identified need from customers who already are online.

I even think that this specific type of customer does not hope for a "full" service and that an offer that would go beyond what customers expect might well have the contrary effect to the one expected.

Most of the people who presently use the services provided by online brokers do it because of the specificity they get and might not be ready to "mix" their banking with their trading accounts.

Established brokers could well keep and even enlarge this specific type of customers without having to fear traditional banks too much: these are not the same "customers".

And yet, online and offline differentiation in the brokerage sector no longer applies and the future will probably belong to those who prove able to offer a brick and mortar service, which does not necessarily mean that they will have to provide a banking offer on top of the brokerage one.

But there is no doubt that the future will belong to sites that prove able to understand their visitors and customers' global online behaviour, which goes much beyond the simple analysis of your own log files.

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