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SSSB reports recovery in internet traffic and assesses challenge from new entrants Back  
Jeremy Sigee, a speaker at the Finance Dublin Conference last March on the theme of internet banking, has led the Schroder Salomon Smith Barney in London team updating their continuing analysis of internet banking trends in Europe. In September, SSSB released data on internet traffic at websites of retail financial services providers. Earlier, a conference heard from ceos of leading internet banks and the conclusions of the conference were analysed by the SSSB team. The following are some extract from the latest analysis by Sigee and the SSSB analysts.
Internet traffic
In July 2000, virtual traffic to e-finance sites showed signs of a sustained recovery following the April 2000 plunge. This recovery has been helped by the surge in traffic to e-finance media and portals. Despite this improvement in traffic, and the fact that total European e-finance traffic has recovered past its previous all-time high (March 2000), e-finance traffic market share within the internet universe slipped 300bp to 3.3 per cent.

Virtual traffic to e-finance sites in July 2000 showed signs of a continued recovery from the April plunge: total unique visits increased by 15 per cent French traffic rose 6 per cent month on month, German traffic jumped 15 per cent and UK traffic 18 per cent. The main driver was a substantial improvement in traffic to e-finance media and portals (+38 per cent), despite a drop in traffic for e-brokers (-10 per cent).

Traditional banks in France have maintained their virtual traffic market share at 57 per cent in July 2000, while e-brokers saw their traffic and market share slide (traffic almost halved in July, as did market share - to 3 per cent).

The July 2000 improvement in Germany e-finance traffic was driven primarily by the 37 per cent surge in media and portals traffic. E-banks have sustained below-average growth rates (+15 per cent) and traffic to e-brokers fell 9 per cent.

Traditional banks in the UK maintain their dominance in e-finance traffic. However, their market share has slipped marginally for the first time from 59 per cent to 58 per cent, as their traffic rose 15 per cent, while online media and portals’ traffic gained 53 per cent.

MMXI Europe collects and estimates a number of internet traffic-related variables for France, Germany and the UK. These numbers are extrapolated for the whole of each country using a limited number of panellists surveyed by MMXI - approximately 10,000 across the three countries - which obviously limits their statistical reliability and accuracy. Nonetheless, we believe this source offers the best available perspective on website activity in Europe, and represents an invaluable leading indicator for investors evaluating online businesses - whether of incumbent players or new entrants. We focus on (1) unique visitors, as defined by visitors who access a website at least once during a specified month; (2) average minutes spent per day per visitor; and (3) unique pages per visitor per day.

Challenge from new entrants
The first day of the [SSSB] conference focused purely on the new entrants that are challenging the existing order in European financial services - including online mortgages, payments, brokerage, IPO distribution and personal financial services portals, as well as a smaller number of B2B sites focusing on financing and services for corporates. The opportunities to improve customer offerings, and thus grow valuable franchises and earnings streams, are genuinely tremendous.

However, the competitive reaction from incumbent players will be fierce: while new players benefit from greater agility, innovation and lower cost bases, they face challenges in terms of brand, infrastructure and capital backing. Financing and partnering appear the key success factors at this point.

The conference provided further evidence of the negative implications of the internet for incumbent banks: recognition of the new entrant threat; evidence of increasing competition between banks, with aggressive market share targets, and plans for cross-border offensives; and details of major expenditure programmes.

However, we were impressed by the strategic responses from the incumbent banks presenting at the conference. All speakers recognised the importance of the internet for their businesses (and share prices), and the strategic challenges that confront them. More importantly, the presentations detailed wide-ranging and extensive efforts to change existing businesses, build new activities, and transform organisations. Obviously the banks presenting at the conference were and explicit selection of ‘winners’, so these positives are by no means sector-wide. Nonetheless, the presentations did reinforce our positive view of these leading players and the possibility that they will emerge as overall beneficiaries from the internet, with less exposure to the most at-risk business lines, and potentially considerable upside from new growth projects.

Independent finance
We believe that one of the internet’s most profound influences on the financial services industry is the redefinition of the value chain. The internet will allow new players to enter the value chain of different activities in different places, sometimes where specialisation could not be achieved before. Furthermore, these players would conceivably move along the value chain or migrate to other activities. In the end, one company, thanks to the internet, could cost effectively aggregate several points in different value chains.

Independent e-finance companies should have good growth prospects, given the combination of starting from a low or even nonexistent base, and the potential penetration of the internet into the financial services industry.

Judging from the impressions given by the traditional banks who presented their internet strategies on the second and third days of this conference, we believe that competition from this camp should intensify. The banks have several tremendous competitive advantages: a large and relatively sticky customer base, well-recognised brand names and a large and supportive capital base. Small independent companies can therefore only hope to take advantages of some of their weaknesses.

Weaknesses that independent companies can exploit include legacy systems, possibly heavy cost structures, sluggishness of processing and inability to provide third-party products and services (albeit fading), and lack of price transparency. In addition, these independent internet companies also have important competitive advantages, among them the ability to offer customer-friendly solutions, encompassing agility, price comparison (as some of them can sell third-party products), and generally low prices from a low fixed-cost base.

However, easy access to capital is not something that most independent companies benefit from. While large companies can easily fund projects, eg HSBC and Merrill Lynch for their e-finance joint venture, most smaller and independent ones still need to tap the capital markets.

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