Andrew Hosking, Ajit Kambil, and Amanda Lister
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PDF Help Growth in online investing is astounding, enabled by
Internet technologies, changes in investor attitudes, and favorable market
conditions. Today, online trading comprises 25 percent of all brokerage
transactions, while online assets, number of accounts, and trading volume have
all at least doubled in the past three years1. In that amount of time, the
marketplace has become crowded: the number of firms offering online retail
brokerage services jumped from 12 in 1995 to 100 in 1998. This growth in online
trading presents a serious challenge to full-service brokers, who by-and-large
rely on pricing that reflects a traditional bundling of the services customers
value.
New entrants are growing in market share by "cherry picking
" services to offer customers. Customers, in turn, can integrate disparate
services—like getting research from a full-service firm, then trading on a
low-cost platform—thereby undermining traditional industry value propositions.
Trading and interactions online have gotten cheaper: the weighted average
online trading commission dropped from $32 in the first quarter of 1997 to $16
in the fourth quarter of 1997, with average pricing stabilizing near $15
through the end of 19982. This compares to $50 to $100 at a discount broker and
$100 to $150 at a full service broker3.
As online trading matures, how will traditional retail
brokers—and new entrants—position themselves to survive the shakeout? To be
successful, brokers must precision-target their business strategy and
infrastructure to the specific market segments.
Market Segmentation Is Key to Understanding
Customers The key to success in the online market will be
understanding and tailoring value for the variance of investors. Gomez
Advisors, which publishes quarterly rankings and reviews of online brokerages
has classified individual investors into four basic segments:
- Hyperactive traders. These investors trade very frequently
and are highly independent (of their broker)in making investment decisions.
They most value low commissions, ease of order entry, and reliability of
execution.
- Serious investors. These investors trade larger balances less
frequently. They are self-directed, but undertake significant research before
investing. They most value the depth and integration of research sources and
good portfolio information for monitoring investments and ideas.
- One-stop shoppers. One-stop shoppers seek convenience in
managing all personal financial matters and seek coordination of investing,
bill payment, credit, and other financial services. They most value the breadth
and integration of various financial services.
- Life goal planners. These investors maintain smaller
balances, and are more likely to invest in mutual funds for medium-term goals.
They most value broad financial planning tools, general education regarding
various investment alternatives, asset allocation tools, and mutual fund
screening tools.
eCommerce Demands New Brokerage Business
Models Because of the near-impossibility of serving all online
investors' demands, successful online brokers must decide which customer
segments they will serve, and build their service delivery models accordingly.
Accenture predicts brokerages will reconstruct value and organize around
investor categories, resulting in four types of highly successful brokerages:
The trading infrastructure specialist will provide a narrow
group of services that cater to hyperactive traders. It will offer efficient
order processing and trading at low cost. For example, Datek provides efficient
systems to support high volumes of low-cost trading and execution with great
speed and reliability. The trading infrastructure specialist's primary revenue
source will be trading commissions and net interest income. Players will
differentiate themselves based on technology-enabled efficiencies, which limits
the opportunity to develop strong customer loyalty through information.
The online full-service broker will focus on the serious
investor, providing a range of advisory services in addition to a means for
trading. For example, Charles Schwab has established a network of independent
brokers and large-balance clients who have access to advisory services—the cost
of which is subsidized by the net interest income generated by high balances,
as well as higher than average online commission levels. Revenues for this
model can include commissions, net interest income, supplier commissions,
investment recommendations and asset management fees. Players will need
high-quality, well-integrated resources, recommendations, and information
technology support. These features will increase operating costs.
The financial portal will best serve one-stop shoppers by
providing an integrated and appropriately priced mix of consumer finance
services. Today Waterhouse Securities exemplifies this model, although some
traditional financial supermarkets such as Citigroup's already have the range
of services under one organization to implement this model. Revenues will
include commissions on transactions, fee for buyer agency services, and
advertising. Players will differentiate themselves based upon the basis of
price for the entire product range, breadth of products integrated into the
portal, the integration of customer information, and the design of the customer
interface. The critical success factor will be the portal's ability to
aggregate an attractive bundle of goods for its clients—including non-financial
services.
The financial guide will provide a higher level of service
than simple portals to serve the needs of life goal planners. Savings banks or
insurance companies may provide this service, with a plug-in brokerage model
providing mutual funds and screening tools as part of a portal. Competition in
this sector will be based upon brand name recognition, trust and service levels
(including high degrees of personalized, human interaction). Because customers
generally will be less self-directed and accumulate lower account balances,
financial planning services will have to be offered on a fee-for-service basis,
or be subsidized through the sale of other services such as mortgages. The
latter revenue stream assumes that cross- subsidies across services will be
sustainable for a segment of customers seeking higher levels of service and
that customer- switching costs are high. Accenture expects the transparency of
the Internet will make some cross-subsidies less feasible.
Andrew Hosking is an associate partner and a senior research
fellow at the Accenture Institute for Strategic Change. He is based in New
York.
Ajit Kambil is an associate partner and senior research
fellow at the Accenture Institute for Strategic Change. He is based in New
York.
For more information, please
contact us.
Amanda Lister is an independent consultant to the Accenture
Institute for Strategic Change. Her research focuses on the impact of
electronic commerce on the financial services industry.
- According to Piper Jaffray analysis
- Piper Jaffray Equity Research, Online Brokerage Report,
October 1998
- Derived from data in SmartMoney broker ratings
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