When the Internet lost its luster as a business proposition, so did one of the killer apps of the dot-com boom -- online brokerage.
By Jeffrey Kutler
September 2002
Institutional Investor Magazine
From Charles Schwab Corp. in the U.S. to Comdirect Bank in Germany to Boom.com in Hong Kong, executives are desperately trying to survive the downturn by slashing costs and courting active traders to offset the revenues lost from disaffected mainstream investors.
But desperation doesn’t reign on what had long been regarded as the less glamorous, flip side of e-finance -- e-banking.
People are still logging on to the Internet in huge numbers: an estimated 250 million worldwide, 125 million of them in the U.S. People are also working, getting paid, buying houses and paying bills. They’re just not trading stocks like they used to, and that plays into the hands of ordinary, deposit-taking banks.
At year-end 2001 14 percent of the roughly 100 million U.S. households were active in online banking, versus 5 percent using online brokerages, according to Cambridge, Massachusettsbased consulting firm Forrester Research. (Forrester defines “active” as using the service at least once in a three-month period.) By the end of this year, the firm projects, banking will rise to 19 percent, while brokerage will stay at about 5 percent.
“Trading attracted a lot of people to the online medium. Now that times have changed, they’re much more likely to use it for day-to-day tasks to which they have low emotional attachment, such as bill paying,” says James McQuivey, a group director at Forrester.
That shift toward the mundane is only just starting to take hold, adds McQuivey, but some banks already seem to be benefiting. Bank of America Corp. and Wells Fargo & Co., which operate the two biggest Internet banking programs, with some 4 million customers apiece, are each enrolling more than 100,000 a month. By comparison, E*Trade Group, with 3.6 million e-brokerage customers, added only 50,000 in the second quarter; Ameritrade Holding Corp., with 1.9 million total, added 40,000. Schwab, with about half of its 8 million total clients online, increased its base by 225,000, though that includes off- and online enrollees.
Two years ago Schwab co-CEO David Pottruck and Ameritrade chairman and founder J. Joe Ricketts were on the lecture circuit crowing about their online successes. Now it’s Bank of America chief executive Kenneth Lewis, who at a recent Forrester conference in New York presented a detailed analysis showing that an online customer, over a 31-month period following enrollment, is 21 percent more profitable than a comparable off-line relationship.
The key, said Lewis, is to be “multichannel,” to have branches as well as call centers and an Internet site to deepen the bank’s ties to customers. The low cost of online self-service is one positive factor, but, noted Lewis, “We would have a long way to go to pay for our online investment just with greater efficiency and cost savings. It’s growing relationships that gets us into the black.”
Says Patrick Thomas, senior Internet analyst in New York for Nielsen/NetRatings: “The more [services] customers use, the more loyal they are. Banks are locking them in by offering banking, credit cards, brokerage and bill paying in one place.” That explains why E*Trade has tried to become more banklike with physical offices, automated teller machines and a deposit-taking strategy. “We have the broadest reach of any financial services company -- a model that works in the best and worst of times,” declares E*Trade CEO Christos Cotsakos.
E*Trade Bank, with 500,000 clients, accounted for 32 percent of the company’s $316 million in revenue in the second quarter. But the market still discounts E*Trade like a brokerage; its stock price hit a three-year low of $2.81 before rebounding to $5 in mid-August.
The bank-brokerage rivalry aside, e-finance on the whole has proved to be something of a winner. Nielsen/NetRatings says that Web surfers spend more time on financial sites than any other kind -- an average 21 minutes a month, versus 15 minutes for the No. 2 category, news and information. More active than any institution’s site are information portals Yahoo! Finance (8.1 million visitors per month) and MSN Money (7.4 million).
Add it all up, and it’s a fine time to be in e-finance -- if you’re not a broker.
