Intelligent Enterprise

Online Brokerages Branch Out

E-traders, banks, and securities firms compete on- and offline

The Web-based securities trading business has taken a hit along with the rest of the stock market, leading e-investment firms to adopt the time-tested strategies of their more traditional counterparts, such as opening branch offices, to survive fluctuating market forces. However, brick-based trading firms and banks have retaliated with e-commerce initiatives of their own, resulting in more competition and a greater variety of financial services.

A Fall 2000 Jupiter Media Metrix research report revealed that traffic to online trading sites declined by 20 percent following the initial Q2 2000 market reversals, even while activity at general business and finance sites grew by 11 percent and consumer banking sites saw 37 percent growth in unique visitors. A February 2001 Extraprise report, The E-Financial Services Shakeout, concluded that banks have taken the lead in adopting the "click-and-mortar" business model and offering integrated financial services online and offline.

E-Trade Group Inc. was one of the first online-only brokerages to step into the real world when it announced in Fall 2000 that it was opening an E-Trade Zone financial service center at a SuperTarget store in Georgia. Based on the success of the first E-Trade Zone, the company recently said that it will open an additional 20 branches during 2001, including one in Manhattan. The zones will be stocked with customer service staff, E-Trade Web site workstations, and E-Trade-Bank One Corp. ATM machines.

Other e-brokers are following E-Trade's lead, as noted by the Wall Street Journal at WSJ.com Web Street Inc. has click-and-mortar locations in Boston, Denver, and Beverly Hills, Calif., while Credit Suisse First Boston's CSFBdirect company has a Florida outlet.

At the same time, mainline brokerages such as Charles Schwab & Co. Inc., TD Waterhouse Investor Services Inc., and Merrill-Lynch & Co. Inc., already well-represented in the physical world, have increased their Web business substantially by offering new services and free information via their financial portals. The established trading houses clearly have the customer-facing edge; Waterhouse alone has more than 170 branches.

Jaime Punishill, a senior analyst at Forrester Research Inc., said in the Forrester brief, Internet Brokerages: Let's Get Physical, that Schwab and Waterhouse get more than 50 percent of their new account business from branch activity. Punishill added that trading transactions increase in areas where branches open, bringing in more of the transaction-based fees that have been the lifeblood of online brokerages.

In addition to expanding their physical presence, online traders will have to alter their Web presence to capture more market share, according to Punishill, who predicted in another Forrester brief, Sizing Online Brokerages, that more than 21 million U.S. households, or about two-thirds of U.S. retail investors, will trade online by 2005, nearly double the number doing so in 2001. Extraprise estimated that online trading assets will reach $3 trillion by 2003. However, in order to attract the type of conservative customers that will account for 89 percent of these new investors, e-traders will have to tailor their Web sites and content to suit people who are not technology-savvy or sophisticated about investing.

As they retool their business models, e-brokers will face continued competition, not only from traditional securities firms, but from banks as well. Merrill Lynch recently topped two lists in Financial NetNews' annual survey of the best financial services Web sites, earning the "Best Institutional Brokerage" Web site for its MLX e-commerce portal and "Best Full-Service Broker" Web site for its Merrill Lynch OnLine portal for individual clients.

Banks will also be contenders. For example, PNC Financial Services Group Inc. recently launched a PNC Bank branding effort that includes sponsorship of the new PNCPark baseball stadium, which houses not only the Pittsburgh Pirates team, but a PNC Bank branch with free Internet access to stocks, PirateBall.com, and other services. When even banks are marketing financial services in such creative ways, upstart e-brokers have their work cut out for them in the real world. (Also see "Breaking the Bank,").

Claudia Willen