November, 1999

What next for online trading?

Online trading is getting a great deal of coverage these days as major US entrants begin muscling into Europe - eager to tap a piece of this nascent but growing market. New entrants to the domain also include local stockbrokers, major high street banks, and new European start-ups. You have to wonder about the market economics of this business, though. Countries like the UK and Germany are about to see massive customer acquisition spending by these entrants, in a market where a growing number of companies are fighting for a still relatively small base of online investors. Customer acquisition costs have risen from $100-$200 a few years ago to $300 recently, and DLJ Direct is now spending almost $700 per new subscriber in the US. Set this against a backdrop of fierce price competition that is bringing commissions to the £5-£10 range, and you have a picture of margins that are not just razor thin, but perhaps non existent! Throw into this mix the possibility of new pricing structures that will see annually capped, or even free commissions. So, why the hullabaloo as online trading firms fight for these scraps?

The answer lies in taking a different view of the value of the customer. Aside from the argument that capturing market share today builds leadership for when the market explodes, there is another dimension to the equation. Online trading firms are getting increasingly cosy with banks, and are shaping up to become full scale financial institutions. E*Trade recently acquired Telebanc for $1.8 billion, and Merrill Lynch is now moving into the online trading space. The online broker of the future will not just be a broker - it will provide a broad array of financial (and non-financial) services, including current accounts, credit cards, bill payment, bill presentment, tax assistance, and e-commerce. Aggregating these services adds value - as customers can now easily transfer funds between accounts, get a single annual financial report and manage their taxes more efficiently. In addition, Customers only have to overcome one trust barrier to buy into a full range of services. In such a market, online trading could even be viewed as a loss leader, a sticky application that encourages the customer to deposit their savings and buy in to the brand, while the e-commerce services on the side begin to make the real money.