Money Magazine
April, 2000
Roundtable:
Brokerages' Brave New World
Who'll win the online finance wars? A panel of experts sorts it out.
At a recent conference hosted by the Securities Industry Association, MONEY managing editor Robert Safian moderated a discussion with four online brokerage authorities (see bios below). Here are excerpts from their comments about the opportunities and threats that the Internet presents to financial services companies.
Q: Which firm is best handling the balance between waiting to see how the online market develops and racing to stay up with the most innovative player of the moment?
Burnham: If you look at the top 10 online brokers, five are brand-new Internet brokers....For me E*trade epitomizes those five; it has aggressively gone out and staked its claim. You can question whether their tactics are sound or financially responsible, but I think they have become an incredibly important force.
Swerdlow: I think that the traditional players such as Schwab and Merrill are incredibly well-positioned. Merrill was very slow out of the gate but is moving a lot more quickly now.
Marks: I would say all and none are doing things well. One thing that all online brokers deserve credit for is how well they've handled the surge in volume over the last three or four months....[But] we don't see the most basic product, online bill payment, which should be the linchpin financial relationship. To me that's inexcusable.
Gomez: The three firms that have really distinguished themselves are E*trade, DLJ Direct and Schwab. Schwab...attacked the new market without stopping to think about whether this would be a threat to its existing business. As a result, they devoted all the resources required to get to the top of the heap.
Q: To what extent should the business model be about generating transactions and to what extent about gathering assets?
Swerdlow: It's all about asset gathering. It is impossible to expect that the online consumer today will be the online consumer in the future. We project that occasional traders, people who trade on average less than 10 times per year, are going to be much more the norm, about two-thirds of all traders in 2003.
Burnham: Catering to active traders is a great business. They are wildly profitable. A firm like Schwab talks about asset-gathering, yet they have to cut prices to hold onto their active traders....Going blindly after asset growth doesn't generate revenues - you have to find asset productivity....At the big firms that have gone after asset growth, Schwab and Fidelity, asset productivity is very low.
Q: So the folks at E*trade are going after a different consumer than the folks at Merrill?
Burnham: Sometimes it's the same person...a fairly conservative...investor, [who makes] four to eight trades a year, who [takes] a little bit of money and is trading it actively.
Q: Why is bill payment taking so long to get in place?
Marks: The biggest problem...is that it's no fun. Online trading is fun. You can make money. It's great. People enjoy it....Bill payment takes something you hate doing and makes it a little less painful, and that's a tough sale.
Q: Is the future customer a one-stop shopper or someone who is going to jump around from specialty shop to specialty shop?
Burnham: When Citibank and Traveler's merged, this was the great vision, right? The world's biggest supermarket. Well, what it really was is the world's biggest communist supermarket. Sure, they had bread and milk and butter, but it was one brand of bread, one brand of milk, one brand of butter.....The most successful firms will create an environment where [people can] consolidate their information and analyses at a particular site, but do not [have] to consolidate their assets at one point. That's the toughest thing for an organization to let go of, to say I can control the customer relationship without controlling all of the assets or liabilities associated with that relationship.
Q: What's the future of the old-style broker or financial consultant?
Burnham: There will always be...people that are too rich, too lazy, or lack the confidence to manage their own money. However, that will be a smaller slice of the overall market....You're going to see technology increasingly provide a higher level of personalized financial advice, which erodes the mass market financial adviser. [Full service brokers] make a great argument. We give you this financial planning advice. Well, it's a software program that they use to produce this advice, and an online broker with that same software could produce the exact same advice, and deliver far better follow-through monitoring.
Marks: Then why are all these retail firms reporting record profits quarter after quarter, year after year?...The impact of the Internet has not been to decimate the traditional industry, it's been to create additional investors, additional traders, and to take a segment of the industry that never existed before. For the the traditional firms...the challenge is going to be to move to a fee-based system that reflects the value being created, which is advice rather than transactions.
Q: Today there are over 160 online brokers. Do you foresee that number increasing? Or will consolidation kick in?
Swerdlow: Every financial institution is looking to be everything to their customer so that number will probably grow, you just have to expand the definition of who's an online broker.
Burnham: There could be thousands of brokers and it doesn't really matter. It's a capital and brand game today.
Marks: Why really haven't we seen consolidation? Simple economics. Right now the public players are trading between $3,000 to $5,000 an account, yet they can acquire an account through marketing at $200 to $500. So no one is interested in paying 10 times more in an acquisition....I believe that most of the independent online brokers will end up being acquired by banks.
Q: E*trade bought Telebank and has alliances with E-loan and Insweb. That looks like a one-stop financial stop. So what is the difference between the traditional players and online players?
Marks: E*trade probably has gone further than anyone in terms of trying to integrate all their products. I give them an A or A-minus for effort...but probably a C-minus for execution. Yes, they have access to E-loan and Insweb....But try to find them on E*trade's site. Those are two potential, huge fee-generating relationships that aren't being promoted within the site. As for the purchase of Telebank, for me, there is a pot of lead at the end of the online banking rainbow. After paying up on the deposit side, you don't save enough through remote operations to offset that cost. Meanwhile, you have no asset-generation capabilities.
Burnham: [There's] a critical difference between, say, a bank offering its mortgages and E*trade offering E-loan, with 100 different mortgage lenders.
Marks: How do you square that with Telebank?
Burnham: In Telebank's case, the idea is you have certain commodity financial assets - interest checking, CDs - where consumers have shown very little interest in differentiation, other than price and potentially some fees....Offering basic deposit products as an online broker can be a great way to absorb excess liquidity that might go outside the account. Now whether you pay the right amount of money for that...is another thing.
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Bill Burnham General Partner, Softbank Capital Partners
Burnham directs the research efforts of Softbank Capital Partners, a venture capital company focused exclusively on investments in the Internet and electronic commerce companies. He is also the author of How to Invest in Electronic Commerce Stocks, published by McGraw-Hill
Julio Gomez President, Gomez Advisors
Best known for its quarterly rankings of the top online brokerages, banks, travel and shopping sites, Gomez Advisors is consulting firm specializing in online financial services.
James Marks Director, CS First Boston
Among the most influential e-commerce analysts on Wall Street, Marks covers Internet financial and travel stocks for investment bank CS First Boston.
Fiona Swerdlow Director, Digital Commerce Strategies
Swerdlow leads the research and analysis of commercial websites' strategies and business models for Jupiter Communications, an Internet research firm. |
