Luxembourg-based broker Internaxx examines what the future holds for European-based online brokers and finds potential for rapid growth
By the end of the year 2000, 10 out of the 25 largest European banks had launched or were planning to implement their own internet initiative, with the ultimate aim of putting the entire banking sector online. It seemed nothing could stand in the way of this development. Why this sudden trend? Ten years of personal computing had prepared Europe for internet banking. And this was encouraged by the spectacular success of some brokers.
But this period was followed by two years marked by gloomy financial markets, the events of 11 September 2001 and scandals in the financial world.
What is the current state of play for online investments in Europe? More specifically, what are the trends and potential for growth for online brokers in Europe?
a popular topic
Thirty million European consumers are already handling their finances online. Finance, after sex and sport, is the third most popular topic among European web pages, with some 43% of European internet users searching the web for finance-related subjects: enquiries about accounts and financial information, share price searches and online brokerage transactions.
According to the Forrester Research Centre, about 20% of European internet users are already using the net to carry out online banking or online brokerage transactions. This percentage puts them more or less on an equal basis with their American counterparts ' who, it should be said, have had a two-year head start in this field.
According to predictions by Forrester, the number of Europeans using online brokerage services is set to rise from four million in 2002 to nearly 10 million by 2007. Many European markets are already seeing a sharp rise this year. In England, according to Nielsen/Netratings, the number of unique visitors to these financial sites (online banking and brokerage sites) rose by nearly 60% between October 2001 and September 2002. Germany, according to Forrester, is the largest market in Europe. The number of users saw a spectacular rise of 50% between April and September 2002, according to Nielsen/Netratings).
We would like to highlight two key trends in the online brokerage market. The first is a move towards consolidation. Over the last two years, we have seen a shift towards concentration and consolidation among the main European players. In other words, there have been mergers at both national and international level. DAB Bak and Selftrade are examples of this. This change consequently saw the disappearance of brokers who were fully independent of financial institutions. The former were effectively taken into the bosom of the major banking groups, for example, Consors and Cortal.
The second trend is the emergence of a market for specialised brokers; online brokerage is aimed at 'self-directed' investors, in other words those who make their investment decisions for themselves.
We are also seeing the emergence of online brokers who are targeting active and autonomous investors. These brokers do not give advice, concentrating instead on the rapid handling of transactions at competitive prices and providing specific tools and products.
In fact, these brokers, such as Internaxx, are targeting a wide customer base of 'self-directed' investors. According to a study carried out by JP Morgan, the self-directed customer base accounts for 6.5% of European households, but holds only 5% of the assets. It is characterised by a significant brokerage activity. These customers are not prepared to pay the 'normal' bank rates and are looking to the online brokers.
Factors for success
The majority of Europeans who do not, at present, use online accounting, do not do so primarily for a number of reasons relating to confidence. Even if they are fairly convinced of the practical, economic and efficient nature of having an account that can be accessed via the internet, many are not totally reassured.
Common concerns include: Where is my money going? Am I going to get the rates shown for my transaction? Am I going to be the victim of a hacker? A survey conducted by Forrester at the end of last year showed more than one-third of online consumers do not use online banking services for reasons relating to confidence.
What measures can be taken by the online players to assuage these fears? To begin with, reputation is definitely the surest remedy. So if the broker has a high international reputation or is part of a sound group, the internet user will immediately feel reassured.
Moreover, it is definitely in the broker's interests to clearly communicate the procedures they have introduced to ensure maximum security.
Lastly and above all, to build a relationship based on confidence, it is crucial for the customer to be able to contact their broker through a communication channel other than the internet. Humanising the relationship is essential. Therefore, it is important that customers have the opportunity to meet a representative or, at least, to have someone at the end of a telephone if a problem arises.
Various European studies have shown that the businesses, all sectors being considered, who were able to be on top of the game this year and who will see growth in the years to come are those who know how to focus on their core skills. Consequently, brokers should concentrate on the following elements; carry out transactions efficiently, offer attractive rates, focus on particular products and services and address a specific market.
The internet has radically transformed our means of gaining access to financial products and services. It is at the base of an irreversible change. Therefore, the internet is not only an additional channel of communication and does not only allow an improvement in services to customers or the building of loyalty within the existing customer base. The internet has radically changed the way in which financial services and products are made available to private individuals. Private individuals can now have direct access to products and services without having to visit a bank in person.
Even though the time when all the banks were launching their own initiatives is well and truly over, the specialised online brokers who are targeting a self-directed customer base and placing the emphasis on the quality of service to customers have a great future ahead of them. A market exists for online brokers who know how to focus on their core skills: a rapid handling of transactions at the best prices and with the best possible service.
The number of Europeans using online brokerage services is set to rise from four million in 2002 to nearly 10 million by 2007.
To build a relationship based on confidence it is crucial for the customer to be able to contact their broker through a communication channel other than the internet.
To succeed, online brokers must focus on their core skills, delivering top quality, efficient service at reasonable rates.
£300bn of liabilities
View from the front row
Transfer from occupational scheme
Appointed by FCA and PSR boards