FROM CNBC
Sep 3 1999 6:02AM ET
More on Nuthin But Net...
Online Trading Firms Betting on Europe
by Frances Hong
Technology Reporter
"They can diversify their revenue stream geographically and
become less dependent on the cyclical U.S. trading markets."
-- Pacific Crest Securities analyst Tim Butler
As Wall Street cautions investors about the slowdown of online trading and the risks these
companies face should the market collapse, Charles Schwab Corp. {SCH}, E*Trade Group Inc.
{EGRP} and other firms remain bullish as they charge into uncharted territory.
That territory is Europe.
Online Brokerages: Grow or Wither? by Sandeep Junnarkar
According to Jupiter Communications, about 10 percent of the total population,
or 14.6 million European households, were online in 1998. By 2003, the
research firm estimates that 67.6 million households, or 63 percent, of the
population will be online.
European Users of Online Financial Services
(in millions)
By country:
1998
1999*
2000*
2001*
2002*
Germany
0.24
0.53
1.15
2.02
3.81
Scandinavia
0.53
0.46
0.83
1.53
2.70
United Kingdom
0.10
0.26
0.41
0.74
1.24
France
0.09
0.12
0.24
0.46
0.75
Other
0.19
0.23
0.46
0.81
1.39
Total
0.83
1.60
3.09
5.56
9.89
Source: Forrester Research, Inc.
Adding to the growing frenzy overseas is a report by Forrester Research that
projects that 3.1 million Europeans will use the Net for financial services by
2000. By 2002, that figure is expected to grow to 10 million Europeans seeking
financial guidance online.
European Users of Online Financial Services
It's a far cry from the droves of American consumers flocking to the Internet.
Jupiter's figures for U.S. households online in 1998 and 2003: 37.3 percent and
63.4 percent, respectively.
"Obviously the U.S. is out in front," says Jupiter analyst Robert Sterling. "It
would be a mistake to expect online trading to evolve in Europe the same way it
evolved here. But Donaldson Lufkin & Jenrette {DLJ}, E*Trade {EGRP}, and
Schwab have been very aggressive with Web offerings in Europe; certainly, you
don't have to be the first to succeed there, but you don't want to be the last."
To be sure, with online-trading volume increasing at an ever-slower rate it is
imperative that firms expand and diversify. After all, going into untapped markets
makes sense.
One-Year Comparison Chart: SCH, DLJ, EGRP
Making inroads through Europe, however, won't be easy.
Why? Europeans have a different cultural attitude. "There is a much lower rate of
equity ownership in Europe," Sterling says. "After World War II, Americans were
sold into equity ownership while Europe was busy rebuilding."
Forrester's latest figures show that only 6 percent of Europeans own equities
compared with 19 percent of Americans. Since the evolution of the Internet will
take years, the research firm says Europeans can only stand to gain and
improve their financial investments.
Asia, for that matter, will be no easier. That culture focuses on long-term
investing and saving.
European Users of Online Financial Services
(percent of all European users)
By activity:
1998
1999*
2000*
2001*
2002*
Banking only
83%
79%
77%
73%
69%
Investing only
9%
10%
9%
8%
7%
Banking and investing
4%
6%
8%
12%
15%
Banking and insurance
4%
4%
5%
5%
6%
Banking, investing and insurance
0%
1%
1%
2%
3%
Source: Forrester Research, Inc.
How can Europeans take advantage of the Net? Price comparison, for one.
French consumers, for instance, pay 17 times more for stock trades than Irish
consumers, Forrester reports.
A financial executive polled by Forrester had this to say about the future of
online financing: "[Customers] are more assertive about their financial
requirements. Nowadays, they change their financial institutions like they
change their underwear."
According to Web site the Internet Analyst (www.theinternetanalyst.com), J.P.
Morgan & Co. {JPM} expects its online brokerage accounts in Europe will
increase from 400,000 to 2.5 million in the next two years. J.P. Morgan declined
to comment.
J.P. Morgan & Co. Inc. (JPM)
JPM 52-week stock performance Chart
Detailed Quote
Financial Statement
Analyst Ratings
Recent Events
Company Snapshot
Quarterly Earnings
Banks, telecoms drag
European shares lower
To be fair, the slowdown in online trading in the U.S. can also be attributed to
summer doldrums and interest rate fears. Interestingly, most online trading firms
experienced similar declines.
The worrywarts are concerned about another interest rate increase, says Pacific
Crest Securities analyst Tim Butler. Rate hikes don't bode well for high-P/E and
richly valued stocks such as online brokerages.
Six-Month Comparison Chart: SCH, EGRP, AMTD, DLJ
What is helpful to the industry, however, is the slowing trading trend, Butler
says. "It encourages them to diversify their revenue stream geographically and
become less dependent on the cyclical U.S. trading markets."
But diversifying geographically is only one part of the equation.
One of the areas rarely focused on is revenue mix. The following figures from
Pacific Crest Securities represent the percentage of total revenue that are
trading-related:
Total Revenue from Trading
(percentage of total revenue)
Charles Schwab
61%
Ameritrade
72%
E*Trade
70%
TD Waterhouse
71%
National Discount Brokers
93%
Source: Pacific Crest Securities
"With many of the larger international markets in their [infancy], online brokers
should do what they do best and export that business model overseas," says
Putnam Lovell & Thornton analyst Russell Keene, who estimates the
international market to be at the stage the U.S. was about one-and-a-half years
ago.
Keene favors Schwab as Europe's market leader because of its flexible model
and the advantage of having brick and mortars. "The average person likes to
know there's a branch down the street, even if they do most of their finances
online."
From an earnings and revenue standpoint, Keene says Schwab is a step above.
The Charles Schwab Corp. (SCH)
SCH 2-year stock performance Chart
Detailed Quote
Financial Statement
Analyst Ratings
Recent Events
Company Snapshot
Quarterly Earnings
Banks, telecoms drag
European shares lower
In 1998, Keene says Schwab's total international assets increased 65 percent
from the year-ago period and he expects the same for this year.
In the end, Butler says, the one-stop financial supermarkets will be the business
models that win. "We'll start to see more convergence in financial services as
online brokers add mortgage, insurance, and banking to their content," he adds.
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