Three-quarters of Europe’s 160 separately branded online-only brokerage Web sites will disappear by 2007. According to a new report by Forrester Research (Nasdaq: FORR), they will be either integrated into parent banks, sold, or wound up.
“Europe’s online stockbrokers delude themselves that sites pared down by budget cuts can profitably attract new investors,” said Forrester Analyst Charlotte Hamilton. “Nearly 200 European online broker sites proliferated over the past three years — with leaders like Consors Discount Broker in Germany capturing 500,000 customers and €5 billion in assets within two years. But the equity market fall that has sent the top European indexes down 25% since January has undermined business plans based on continued growth. With consumers trading half as often as a year ago, Net brokers have slid from enviable near-profitability in 2000 to staggering losses. To survive, firms must abandon the mirage of a profitable compromise between aggressive customer growth and tough cost cutting. Break-even can only be achieved if brokers choose between either a high-cost, high-revenue strategy justified by only serving frequent traders or a low-cost, low-revenue strategy to serve the growing ranks of infrequent traders.”
To have a chance of survival, Forrester advises brokers that already serve a critical mass of frequent traders should focus their investment efforts on maintaining and nurturing this high-end, risk-friendly customer base. But only a handful of separately branded brokerage sites will survive in each major European market. These happy few, which Forrester terms “elite brokers,” will come from firms that already count more than two-thirds of frequent traders among their customers. Only these sites will be able to optimize their offering to serve the frequent traders who are few in number, expensive to recruit, difficult to keep, but trade 10 times more often than other investors. To do so, they must each spend around €220 per user to break even in one year.
Conversely, large banks should fold their brokerage sites into multichannel banking offerings to cut servicing costs by half and serve infrequent traders with a simpler offering — one that these users can digest. The resulting integrated brokerage service will earn 10 euros per customer in 2005 while doubling its investor base. Owning banks must cater to infrequent traders’ needs, adopt right-channeling — getting consumers to use the right channels for the right transactions and interactions — and cut infrastructure and service costs.
“Banks’ brokerage sites must tempt risk-averse infrequent traders to trade up to three times per year by helping them to lower portfolio risk through limit orders and stop losses,” Hamilton added. “Firms should offset infrequent stock-trading by cross-selling other products targeted at less active traders. Integrated brokers must follow the right-channeling approach and use incentives to migrate online only those customers who are ready for the Net — getting the best tradeoff between cost advantage and customers’ satisfaction. Finally, today’s aggressive customer acquisition strategy brings unbearable costs per user. In contrast, bank-integrated brokers should start cutting costs in 2003 and maintaining cost-savings through 2005, while still doubling user numbers. To do this, they must streamline their brokerage technology platforms down to basic tools and leverage existing infrastructure like cross-channel CRM. Firms must grow organically to lower recruitment costs, migrating banking users to investments at only €100 per user.”
For the report “Surviving The Investment Downturn,” Forrester interviewed 27 of the largest European online stockbrokers.