As brokerages continue to spring up with offers of rock-bottom commissions, online investing is transforming from a novel option for curious traders into a model e-commerce platform that exemplifies one-to-one marketing.
Charles Schwab, E*Trade and Ameritrade initiated Internet trading in early 1996 — and, by the end of 1997, the industry had 3 million online accounts controlling $120 billion in assets. Forrester Research, Cambridge, MA, predicts the number of accounts will grow to 5.3 million by the end this year and to 14.4 million controlling $688 billion in assets by 2002.
“Everyone knows Amazon.com, but Amazon is not going to make money until maybe 1999, 2000,” said Tim Klein, e-commerce analyst at Piper Jaffray. “Online brokerages are making money now. Financial services is the perfect online business because you're dealing with a nonphysical product. It's gotten so much attention because it's the first definitively successful electronic commerce industry.”
The medium holds such promise that investment companies can't afford to forgo having an Internet presence. Even upper-crust full-service brokerage house Merrill Lynch is giving in and launching an online trading site this fall. Nasdaq is investing heavily in technology that eventually could provide direct Internet trading on its electronic stock exchange.
With full-service brokers charging commissions of $100 or more, it's easy to see why investors are opting to assume control of their finances and make online trades for as little as the $5 commission touted by Brown & Co. Speed is another appeal of the Internet with brokerages such as Ameritrade and Datek offering 60-second trade executions. The lure of rapid, low-price online trades is offered by close to 70 brokerages that are a smattering of online start-ups and discount and full-service brokerages with an Internet presence. As investors become more Internet savvy, however, content and accessibility are expected to supplant price as the main ways of attaining customers and achieving profitability.
Online brokerages are beginning to tailor Web-site orientations to fit the needs of their individual clients. Just as Amazon.com presents lists of recommended titles based on purchase history, brokerages are analyzing trades and click streams to come up with customized stock-watch lists, research and Web-entry points for account holders.
“If you're able to manage customer preferences, you're much more likely to retain that customer over time,” said Peter Seed, director of marketing for discount broker Quick & Reilly. “People simply don't want to take the time to train another company about their preferences.”
Quick & Reilly has gone so far as forming multiple online brokerages to serve its different clients. QuickWay Net (www.quick-reilly.com) was launched in November 1996 and caters to established investors with high asset balances who use the Internet for access and information. Quick & Reilly account holders also can get discounts on broker-assisted online trades at Q&R Online. Suretrade, launched last fall, is geared toward younger, more active online traders with lower asset balances who already are comfortable with the Internet and are seeking low commissions.
QuickWay Net and Q&R Online are marketed as an extension of the Quick & Reilly brand, while Suretrade is a strictly online vehicle that relies solely on Internet marketing. The strategy paid off in 100,000 Suretrade accounts in its first six months. A company survey found that 53 percent of broker-assisted traders went to QuickWay Net for investment information, and the number of trades by QuickWay users increased from 12 percent to 20 percent of the total online trades on both sites.
Content and customization are useless without steady traffic at a brokerage's Web site. The importance of branding was demonstrated earlier this month as E*Trade, Waterhouse Securities and DLJ Direct inked deals with America Online to be featured on its personal finance channel for $12.5 million a year for two years.
Placement of banners and how they link users to sites are crucial to attracting new business. The ease with which first-time users can click from a banner to a Web site is becoming as important as the content and services of the site. Online advertising firm CKS New York constantly monitors and shifts the focus of banner placement to optimize what it calls the banner-to-bridge experience.
“Online advertising gives the potential customer an immediate opportunity to interact with a brokerage service,'' said Renee Flemish, financial services group director at CKS. “The more the consumer feels guided and well received and how easy, responsive, intuitive their experience is a big factor in choosing a broker.''
The proliferation of competitors has caused brokers to use advertising dollars to chase one another's customers in addition to recruiting new investors.
How much competition do online brokerages pose to traditional full-service and institutional traders? By 2002, Forrester Research predicts that online investing will control 4.6 percent of total retail investment assets.
“Online brokers provided a wake-up call to full-service that transactions were not something consumers had to pay much money for,'' said Michael Gazala, senior analyst at Forrester. “Are the full-service brokers threatened? Yes. Are they in danger of extinction? Not if they respond by rolling out online offerings.”
Quick & Reilly's Charles Salmans said, “As far as the amount of investing information available, so much used to be the preserve of institutional investor. Brokerage sites have leveled the playing field for the individual investor.”
Online brokerages will not stop at stock trading. E*Trade has started to offer mortgages, and Piper Jaffray's Klein predicts that many more brokerages will broaden their offerings to provide more banking-like solutions. As they expand, online firms must not lose sight of their ultimate mission.
“At the end of the day, if people don't make money doing this it won't last,” Klein said. “The brokerages have it in their best interest to continue to educate and inform their customers and give them the tools to succeed.”
