Online brokerages around the globe are adopting a convergence strategy that includes adding banking services to their product portfolio, according to a report from Meridien Research, which credits the repeal of the Glass-Steagall act, a volatile market and changing consumer demands for the diversification.
The Depression-era Glass-Steagall laws kept the banking, insurance and securities businesses separate in the United States.
“We believe an expanded product portfolio is imperative for online brokerages to survive,” said Christine Barry and Jennifer Schmidt, authors of Meridien’s report. “This strategy is ideal for them to strengthen customer relationships and improve the stickiness of their sites. It also reflects a consumer preference for convenience and a shift back toward a full-service model.”
Online brokers have three choices to expand services to include banking:
- Merging, allying with or acquiring a bank;
- Creating their own technology in-house; or
- Licensing banking platforms from outside vendors.
Surprisingly, Meridien’s research found suppliers of online banking solutions, not online brokerage solutions, have taken the lead in providing the technology needed to integrate brokerage and banking services.
About 10 million individuals worldwide have online brokerage accounts. Most of them are in the United States, so the greatest growth in accounts should occur in Europe and Asia. In Korea, more than 60 percent of trades are placed online, according to Meridien.
Research by Cyber Dialogue found that online banking and brokerage customers continue to rely on both online and offline channels to conduct transactions, which is not good news for financial institutions that look to the Internet to save on customer service costs.
“To date, the Internet has not displaced offline activity and therefore has not reduced the cost of servicing customers. However, it does enable banks and brokerages to deepen their relationship with high-value customers,” said John Farris, a senior analyst at Cyber Dialogue.
Cyber Dialogue found that those who take advantage of financial services’ multiple channels tend to be the organizations’ most valuable customers. Multichannel traders make fewer trades than online-only traders, but have a net worth that is 29 percent higher than online-only traders. In banking, online customers are more likely to use ATMs or automated phone systems than offline-only customers, but are also more likely to hold high margin products including IRAs, CDs and money market accounts.
“Multichannel bankers and investors tend to be high-value customers who are seeking better service and greater convenience. To financial services organizations, the advantage of the Internet as a touch point is that the medium doubles as an effective marketing channel for targeting customers with additional products and services,” Farris said. “A successful strategy would be to start with a thorough analysis of churn rates among existing accounts, comparing those that do and do not utilize the online channel. This will underpin the proven ROI of your Internet initiative. Further analysis should help optimize your marketing by identifying the best cross-sell and acquisition opportunities.”
What does this mean for brokerages? The option of online service is appealing to and utilized by customers with the greatest assets. By offering this additional channel, the most valuable customers are kept satisfied with their brokerage experience. And with competition for the high investable asset category expected to intensify throughout 2001, retention of high-value investors will become an even more critical brokerage strategy.
The number of consumers planning to use the services offered by brokerages, both online and offline, is also expected to rise. A U.S. financial services study by Harris Interactive surveyed 2,973 brokerage customers and found that 24 percent plan to use their primary brokerage company more in the future. Nearly three-quarters of these respondents plan to buy more products and services in the future.
When brokerage customers were asked which improvements would cause them to consider switching brokerage companies, 47 percent cited overall lower commissions. Other improvements cited include not incurring extra costs for stop/limit orders (35 percent) and better assistance in selecting products (33 percent).
Affluent households (with an income of $100,000 or more) who plan to use their primary brokerage company more in the future (21 percent) cited plans to buy financial products and services more often in the future (61 percent) and reasonable commission and fees (52 percent) as the top two reasons. The affluent are even more likely than the total market to say that lower commissions would likely cause them to consider switching to another brokerage company.
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