Consolidations and stock market chaos are causing upheaval among online trading companies, and the ripple effects could continue for some time. Analysts said more mergers and exits from the sector could be in the offing, along with major shifts in the importance that financial firms place on online trading.
In recent months, established brokers like Morgan Stanley have phased out or repositioned their self-service online trading offerings. In addition, E*Trade announced earlier this year that it was purchasing Tradescape, just days after rival Ameritrade won a bidding war for Datek Online.
More of the same could be on the way, according to GartnerG2 vice president and research director David Furlonger.
“I would not be surprised if you saw some of the minnows merge or get swallowed up by some of the bigger players,” Furlonger told the E-Commerce Times.
The sector has been hit hard lately by two realities: Online trading has become commoditized, with few differences in technology and pricing among many players, and activity on trading sites has dropped significantly as the economic slump continues.
“Trading is down considerably from this time last year,” Furlonger said, noting that transaction volume has declined for all the major players.
Reacting to the turbulent climate, Morgan Stanley announced in May that it would sell its self-directed online trading accounts to Bank of Montreal’s HarrisDirect. John H. Schaefer, president of Morgan Stanley’s individual investor group, said the move would not affect the company’s full-service clients, who would retain access to “premier Web-based services for the long term.”
Also in May, Merrill Lynch announced plans to phase out some non-client Internet trading services. For example, a joint venture called MLHSBC, formed in 2000 with London-based HSBC Group to provide Internet investment services outside the United States, will be integrated fully into HSBC.
Merrill’s involvement with the service will cease after a 30-month transition period.
At the time of the announcement, ML executive vice president Michael Marks said the move “resulted from a strategic review of all our business operations in the light of changed market conditions.”
Other big players are moving to lessen dependence on online trading as a revenue source. At E*Trade, officials are moving forward on a strategy that was put in place well before the current stock market troubles began.
According to E*Trade senior communications officer Connie Dotson, the company established a diversification strategy in 1996 and has since made 18 acquisitions of financial services firms, including a 1999 purchase of Telebank.
The company now offers online access to bank products like CDs, money markets and checking accounts, and it has established a presence in mortgage lending. It also offers debit cards for use at ATMs and has set up offline service centers at Target stores.
The key to E*Trade’s strategy is to protect itself against times when investors get spooked by stock price drops, or when something else happens to jolt specific financial sectors.
“We don’t lose the client,” Dotson told the E-Commerce Times. “People can move their money over to another part of our business.”
Diversified Money Streams
While stock trade transaction revenue accounted for 85 to 95 percent of E*Trade’s revenue in 1996 and 1997, Dotson said that figure now stands at 32 percent. The company’s long-term goal is to have one-third of revenue come from stock transactions, one-third from interest rate spreads and one-third from fees related to loans and other services.
In fact, analysts say E*Trade has recently been the most visible example of an online player de-emphasizing stock trading in an effort to cushion its bottom line against stock market shocks.
According to Giga Information Group senior analyst Penny Gillespie, E*Trade earned one-third of its revenue from online banking operations in the third quarter of 2001. During the fourth quarter, E*Trade added about 54,000 online banking accounts, and the company took significant steps to improve its profile in the mortgage arena last year.
Although none of its major online rivals have announced similar banking moves, Gillespie told the E-Commerce Times that several firms have placed “value-added services” on their sites — such as portfolio tracking and management — to retain customers who remain active traders.
Emphasizing Personal Touch
Furlonger said circumstances are forcing brokerages to move beyond their dependence on trade commissions in order to attract and keep customers.
With the boom days of online trading over, companies will need to do a better job of dispensing services and advice that are relevant to users’ individual investing and financial circumstances and long-term priorities.
“Firms need to understand what clients are looking for and what they are doing on a daily basis,” Furlonger said, rather than pitching products that have been prepackaged to appeal to certain age or income groups.
Indeed, while most online brokerages understand the niceties of customer retention, this month’s stock market plunge has put things in a new, more immediate perspective.
If it once was about customer retention and profitability, now it is about sheer survival in the most hostile market environment both online and offline brokerages have seen in a generation.