Online Brokers Must Diversify, Analysts Say
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By Nora Macaluso
www.EcommerceTimes.com,
Part of the NewsFactor Network
January 4, 2002
'It's about understanding the market overall, the specific market that your competencies target, and aligning your products and services toward those segments,' TowerGroup's Dennis J. Ceru told the E-Commerce Times.
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Online brokerages that can broaden their product offerings, maintain links with the brick-and-mortar world, and effectively target their clients are the companies that will make it through the economic downturn relatively unscathed, analysts said.
Now that the stock market boom has turned to bust, "all of the online and discount brokerage firms have had to re-think their value proposition," Dennis J. Ceru, director of retail brokerage and investing at TowerGroup, a sister company of Yankee Group, told the E-Commerce Times. With trading volumes at relatively anemic levels, "it's more difficult to earn your keep on just simply discount commissions," he said.
E*Trade Expands
That has been the thinking at E*Trade (NYSE: ET), which has gotten into the mortgage, consumer loan and ATM businesses, in addition to expanding its geographic reach. In December, E*Trade raised its earnings forecast for 2002, saying branching beyond its roots in trading was helping lift revenues.
E*Trade "did pretty well, in terms of diversifying and preparing for hard times," Jupiter Media Metrix senior analyst Robert Sterling told the E-Commerce Times.
Fees from ATM transactions and "E*Trade zones" established within Target (NYSE: TGT) retail stores resulted in results for the last fiscal quarter that "weren't nearly so negative as most of the other online brokers," Sterling said.
Pure Plays Lag
Overall, companies such as Charles Schwab (NYSE: SCH) and Canada's TD Waterhouse that got into online banking as a side business to traditional brokerage operations are in "pretty good positions," while "pure-plays" like Datek Online "aren't doing that well," Sterling said.
Others are allying themselves with partners to strengthen operations. CSFB Direct, the former DLJ Direct, is in the process of being bought out by Bank of Montreal, and National Discount Brokers was purchased by online broker Ameritrade (Nasdaq: AMTD).
Analysts expect to see further consolidation in the industry in 2002. "There are a lot of little guys out there -- dozens, if not hundreds," said Jupiter's Sterling. "I wouldn't be surprised to see a lot of them being acquired."
Customers also like to see a brick-and-mortar façade to an online brokerage, analyst said. E*Trade's alliance with Target is an example of that, and is helping to gain the brokerage familiarity and trust with consumers, Sterling said.
Segmentation Key
Tower Group's Ceru said "market segmentation" is key to survival for online brokers. "It's about understanding the market overall, the specific market that your competencies target, and aligning your products and services toward those segments," he said.
Offering different levels of customer service -- for example, allowing investors with more money access to higher-level service representatives -- is one way of tailoring products to different customers, said Ceru. Fidelity Investments, he said, is one broker that uses different commission structures, and different levels of customer service for different types of investors.
Technology makes it possible for brokers to offer a whole range of services online, Ceru said. The trick, he said, is to look at the investor as a target customer for a variety of services, including mortgages, bank accounts and other financial services that can be tailored to meet each person's needs.
Broader Offerings
"What we're going to see more of is what's occurring in Europe," with companies like Woolwich offering wealth management services to investors with net worth levels below the stratosphere.
"What we're seeing is institutions shaping programs beginning to look more like what the private banks offer to the very high net worth individual," he said, "using technology to apply those programs at the broader reach level."
Jupiter's Sterling also likes investment providers that charge monthly fees for allowing investors to trade. ShareBuilder, for example, charges $12 a month for an unlimited number of trades in any of a number of stocks.
By aggregating trades, "they're able to offer that at an extremely low cost to their subscribers," Sterling said |
