Online banks and online brokers still have plenty to look forward to, according to International Data Corp. (IDC), even though the market for Internet stocks isn’t what it used to be.
Interest in online banking has been steadily increasing in the US, which will result in a dramatic rise in user participation over the next two years. According to IDC, the number of US households banking online will skyrocket to 22.8 million in 2004.
As this large banking consumer base moves online, it will bring with it significant implications for banks, ranging from technology support and customer service, to online banking functionality. Banks of all sizes that have resisted creating online services will find themselves competitively disadvantaged over the next 24 months. Banks will have the opportunity to position themselves as either “aggressive” or “defensive” with their online banking strategies, and necessary investment will reflect that positioning. As more “traditional” banks come online, the “virtual” banks will need to adjust their business models to remain relevant.
“Banks of all sizes are acknowledging that consumer demand for online banking is reaching a critical point. The majority of new users will be accessing banks through the Internet, and this has significant implications for those banks that already offer online services, in terms of supporting direct-dial and personal financial software users and executing acceptable customer service,” said Shaw Lively, research manager for IDC’s Online Financial Services program. “As the number of US online banking households grows, banks will need to stop thinking about the Internet as an alternative channel and instead think of it as a mainstream channel every bit as important as branches, call centers, and ATMs.”
On the brokerage front, IDC indicates that more than $1 trillion in new assets will move online over the next four years, which will trigger competition between online firms that will be as intense (and as expensive) as the competition for new accounts in 1998 and 1999. Total online assets will approach $2.6 trillion in 2004.
High-income households (those earning more than $100,000) will continue to represent a significant growth opportunity for online brokers, as this segment contributes the majority of all online assets. By 2004, almost all high-income households will access the Internet, and more than 50 percent will utilize online brokerage services. By 2004, high-income households will comprise 40 percent of all online accounts, but will represent two-thirds of online assets. Meanwhile, moderate to lower income households (those below $50,000) will hold five million online accounts, and make up 24 percent of the market.
“This will introduce the opportunity for segmentation strategies in marketing, pricing, servicing, and even in site design and business models,” Lively said.
As the online investor population becomes more diverse, firms must find competitive differentiation by taking advantage of their strengths, beliefs, and view of online opportunities. The online brokerage business model will evolve from a one-size-fits-all product to encompass at least four distinct business models: the Supermarket (including E*Trade and TD Waterhouse), the Best of Breed (Schwab, Ameritrade), Traditional Brokers with Integrated Online Channels (MSDW, Merrill Lynch), and the Niche Players (such as J.P. Morgan, which targets the affluent segment).
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