| Identifying your customers is the key to creating a successful online trading business |
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| Online trading is making Irish stockbrokers rethink their business strategy. Richard O’Reilly says it is time for brokerage firms to decide what type of investors they are targeting and tailor their services based on the needs of those investors. |
On my way to catch the train to work one morning in the early summer, a leaflet was thrust into my hand exhorting me to attend a course called ‘Investing on the Internet’. Initially this struck me as odd given that, in Ireland, online broking is very much in its infancy. In fact, at the time I received the leaflet, a service to buy and sell Irish shares was only just becoming feasible as the Irish Stock Exchange was moving to an electronic trading platform. But the leaflet provided graphic testimony that online trading is a phenomenon waiting to happen. Already there is a growing number of Irish investors dealing in foreign shares using a foreign (predominantly US or UK) online broker and it is only a matter of time before online investing in a range of shares - both Irish and foreign - becomes a feature of the Irish marketplace.
Ireland
Irish interest in share ownership is now widespread. The current newspaper headlines about stock price volatility are testimony to that fact that the topic now matters to many people. The growing share owning population is a by-product of our economic resurgence and it has been kick-started by a number of privatisations. In fact, our embracing of the share owning culture has been so vigorous that some brokers have had to recently decline to take on new customers as they struggled to cope with the volume of business from their existing customer base.
In parallel, familiarity with technology continues to grow as Ireland embraces the Information Society. So, all the omens are that online share dealing is potentially a huge growth area in Ireland. This means that Ireland could quickly catch up with developed markets in which online trading today comprises 25 per cent of all brokerage transactions. At ‘e-speed’ (the pace that everything moves at nowadays) the global online trading marketplace has become crowded. The number of firms offering online retail brokerage systems jumped from 12 in 1995 to 100 by 1998.
Cherry picking
This presents a serious challenge to traditional full-service brokers who, by and large, rely on a pricing approach that reflects a bundling of services that customers are deemed to value. US and UK experience suggests that new entrants will grow market share by ‘cherry picking’ services that they will offer to customers. Online trading allows customers, in turn, to integrate services from disparate providers like getting research from a full service firm and then trading with a low cost competitor. It will also drive down prices.
As online trading grows and matures, how will traditional retail brokers, and new entrants, position themselves to survive the shakeout? Well, the key to success in the online market will be to understand the true nature of the new online marketplace. Gomez Advisors in the US, which publishes quarterly rankings and reviews of online brokerages, has classified individual investors into four types:
• Hyperactive traders trade very frequently and are highly independent in making investment decisions. They value low commissions, ease of order entry and reliability of execution.
• Serious investors trade larger balances less frequently. They are self-directed but undertake significant research before investing. They most value depth of research sources and good portfolio information for monitoring investments and ideas.
• One-stop shoppers seek convenience in managing all personal financial matters and seek co-ordination of investing, bill payment, credit, and other financial services.
• Life goal planners maintain smaller balances and are more likely to invest in mutual funds for medium term goals. They most highly value broad financial planning tools, general education regarding various investment alternatives, asset allocation tools and mutual fund screening tools.
Successful online brokers of the future must decide which customer segments they will serve. It is nearly impossible to meet the variety of demands across the board. It is quite likely that they will organise around investor categories resulting in four types of successful brokerages.
The first (most likely to be largely made up of non-traditional brokers or new entrants) will provide a narrow group of services that cater for the needs of the hyperactive traders. These will offer efficient order processing and trading at low cost. The primary source of revenue for these entities will be trading commission and net interest income.
The online service broker will focus on the serious investor providing a range of advisory services in addition to a means of trading. Revenues will be made up of commissions, net interest income, supplier commissions, investment recommendations and asset management fees.
Financial portal
Another type of model will be the financial portal and it will seek to satisfy the needs of the one-stop shopper. It will bring together an integrated and appropriately priced mix of consumer financial services from a variety of sources. Revenues will include commissions on transactions, fees for buyer agency services and advertising. Portals will differentiate themselves on the basis of price across the entire product range, on the breadth of products on offer, the integration of customer information and the design of the customer interface. The critical success factor will be the portal’s ability to aggregate an attractive bundle of goods for its clients ? including non-financial services.
Goal planners will require a higher level of service than portals can provide. Savings banks or insurance companies can serve this segment which is really looking for a ‘financial guide’ to help them meet their financial goals in life. Competition in this sector will be based on brand name recognition, trust and service levels. Because customers generally will be less self-directed and accumulate lower account balances, financial planning services will have to be offered on a fee-for-service basis or be subsidised through the sale of other services such as mortgages.
So, organisations looking to offer online trading capability to their customers, face some significant and stark choices about what their business model is going to look like. Irish brokerages will need to rethink their business in the light of the fundamental shift that is about to take place. Different types of investor are about to emerge and a homogeneous, ‘one-for-all’ approach is very unlikely to succeed. Brokerage firms must decide what type of investor they are trying to provide value for and then they must tailor their offering based on the needs of that investor.
It will be a brave new world and the only certainty is that it will be different from the one that Irish brokerages have grown up in. They need to get ready for it.
Richard O’Reilly is an associate partner and global marketing director for Andersen Consulting’s Financial Services practice. |
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| Article appeared in the September 2000 issue.
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