World Telecommunication Day 1999 |
The Internet is providing what users want in banking, stock trading and other financial services: the fast, convenient movement of information. What's faster than a mouse click from a desktop in the spare bedroom?
Financial services, in turn, are perfect for the Internet because there is no storage, no shipping and very little overhead involved.
It is little wonder, then, that banks, brokerages and other financial companies are offering more and more services on the Internet - and that their customers are clamoring to use them.
International Data Corp., a technology research and consulting company, predicts a 250 percent increase this year in the more than $93 million spent on on-line banking applications in the United States last year.
Perhaps the biggest boom in Internet financial services, however, has been in on-line stock trading. The research company Gomez Advisors Inc. estimates that in the third quarter of this year, there were 150 U.S. on-line brokerages, up from 27 in 1997.
In all, the number of investors with on-line accounts has grown from 3 million in 1997 to more than 5 million this year, and it is expected to keep growing at about 30 percent a year, to reach more than 12 million by 2002, according to the technology consulting company Forrester Research Inc.
The Securities Industry Association estimates that one in every six stock trades is now made through an on-line brokerage - close to 100,000 trades on a typical day. By 2001, according to Piper Jaffray Inc., a Minneapolis-based investment house, on-line trading will account for 60 percent of the so-called discount market.
Deep discounts
Price, of course, is the aspect of on-line trading that appeals to many retail customers. Typically, an on-line brokerage may charge only $10 or $20 to execute a trade for which a traditional stockbroker would ordinarily collect several hundred dollars in commissions. By some estimates, traditional brokers are already losing $7 million a day in commissions to on-line brokerages.
The competition appears to be driving down average on-line trade commissions even more; according to a recent study, the typical on-line trade cost $50 three years ago and now costs an average of $15.75
Beyond price, the vast amount of information available quickly through the Internet has given many small investors new control over their portfolios.
They can have just as much information - company news, market research, technical charts, graphs of stock movements, related news stories, analysts' reports - just as quickly as a professional broker on Wall Street.
Some on-line brokerages are sweetening the pot for small investors with other services, such as offering shares in initial public offerings that their former brokers had always told them were reserved for insiders and institutions.
In the face of booming on-line competition, even the most traditional brokerage houses - including those that dismissed on-line trading as little more than a fad - are now scrambling to offer customers on-line accounts in order to keep them from defecting to the competition.
In essence, virtually every brokerage house is becoming an on-line brokerage.
A few traditional stockbrokers continue to insist that on-line trading is a fad that will fall apart with the first signs of a serious bear market. They anticipate that panicked investors will flock back to traditional brokerages seeking advice. They vow to continue to operate in the traditional manner, even if that means presiding over a shrinking roster of mostly aging, mostly conservative clients.
Most brokers, however, concede that on-line trading is here to stay, no matter what the market does. There is wide agreement that the trend is going to continue because it is cheaper, easier, more efficient and, most of all, investors like it. Faced with becoming dinosaurs, most brokers are offering bigger discounts to clients with large portfolios and clients who call them with unsolicited trades.
Many of them admit that they may have to work longer hours, especially when the major exchanges follow through with their announced intentions to extend trading hours.
They are also emphasizing that they can offer more and better service than the typical on-line trading house. They can educate their customers and provide discipline for portfolio management - something that many novice traders find a very expensive lesson.
Some brokers are already repositioning themselves away from an emphasis on volume business - doing lots of trades for lots of clients - and toward more specialized products and services for fewer clients who are willing to pay higher margins.
Finally, there is a shift by some brokers away from peddling stocks and toward becoming personal financial advisers or asset managers who charge their clients an annual fee, usually 1 percent to 3 percent of the value of the portfolio, instead of making a living by collecting a Tim Harper