Online Financial Services in for a Shakeup

The influx of more mainstream, risk-averse consumers to the online financial services sector will change the landscape to favor firms that focus on gathering assets, not driving transaction fees, according to research by Jupiter Communications.

According to Jupiter, the new online financial services consumer represents a less affluent demographic group that trade less frequently than current users.

“The game has definitely changed for online financial services players,” said Fiona Swerdlow, senior analyst with Jupiter’s Digital Commerce Strategies. “Firms that want to increase revenue from individual investors must look beyond transaction fees and become the primary keepers of client assets.”

Jupiter has advised financial services firms to partner or expand their offerings to offer one-stop financial services management for their clients. To identify future clients, Jupiter advises financial firms to reach out to consumers who have made online purchases. According to a recent Jupiter/NFO Consumer Survey, there is a strong correlation between online shoppers and traders: More than 40 percent of the US households that shop online also bank or trade online.

“Despite this overlap between online shoppers and online traders, financial services players have been slow to target customers who shop online,” Swerdlow said. “However, it is important that firms do so quickly or they risk losing these prospects to competitors battling for their wallet share.”

Jupiter’s research also predicts extensive growth throughout the financial services sector, with the online brokerage sector leading the way. Assets in the online brokerage sector will increase sevenfold from $415 billion at the end of 1998 to more than $3 trillion by the end of 2003.

The number of online trading households is expected to grow from approximately 4 million in 1998 to more than 20 million in 2003, according to Jupiter. The number of trades and commissions per households will drop, but online brokerage revenues from interest, fees, and non-transaction services will increase to represent 80 percent of total online brokerage revenues by 2003, up from 36 percent of the total in 1998.

Jupiter analysts also expect 41 percent of the US households holding stocks either directly or indirectly to have online trading accounts in 2003. Thirty percent of US banking households will manage their bank accounts online in 2003, up from just under 4 million in 1998 to 26 million by 2003. At the same time, revenues directly derived from online banking services through monthly fees will see more modest growth due to competitive pressures, cementing online banking as a driver of cost savings, customer retention, and geographic expansion, rather than revenue.

According to Jupiter, the success of online mortgage lending has enjoyed relied as much as on a favorable refinancing climate as on borrowers’ acceptance of the concept. Depending on interest rate levels, the number of online mortgages could pass 1 million in 2003, with a total value of more than $155 billion, up from just over $4 billion in 1998. This will represent approximately 16 percent of all US mortgage origination in 2003.

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