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According to the Boston Consulting Group, the business to consumer financial service market totalled to $3,4bn in the USA in 1998 growing of 80% compared to 1997. The Web is becoming a mainstream channel for broker. Indeed, 40% of the deals brokered in the US in 1998 took place via the Web. They represented 25% of the total transaction in 1998.
Online brokers have processed 7.4 MMF of transactions in 1998. This market will increase to 29 MMF in 2002. Online trading has boomed in 1998 as 4.4 million people has invested online in 1998.
Online brokers saw their business skyrocket in the fourth quarter of 1998, amassing record amounts of accounts, assets, and trades. The online brokerage industry as a whole accumulated 3.6 million accounts in 1998 to conclude the year with 7.3 million accounts, according to a report by Piper Jaffray Inc. These accounts represent $420 billion in assets, the report said.
Online brokers logged 336,700 average daily trades in the fourth quarter of 1998, up 32 percent over the third quarter and 125 % over the previous year. An estimated 27 % of individual investor trades were conducted online.
"Without a doubt, in 1998 individual investors discovered and realised the power of trading online," said Stephen Franco, senior research analyst of electronic commerce at Piper Jaffray. "Looking ahead, the successful online brokerages will attract laggard accounts and assets by empowering investing online, as we look forward to new advances in online asset management beyond the resurgent equity trade."
Top 10 Online Brokers
| Broker | Trades/Day | Market Share |
| Schwab | 93,000 |
27.60% |
| Waterhouse | 42,003 |
12.50% |
| E*Trade | 39,990 |
11.90% |
| Fidelity | 33,100 |
9.80% |
| Datek | 33,695 |
10.00% |
| Ameritrade | 25,725 |
7.60% |
| DLJ Direct | 13,366 |
4.00% |
| Discover | 11,531 |
3.40% |
| Suretrade | 9,600 |
2.90% |
| NDB | 4,420 |
1.30% |
| Others | 30,306 |
9.00% |
| Total | 336,736 |
Source: Piper Jaffray
It is very high compared to France. Indeed, Cortal offers online brokerage service which processed 420,000 orders in 1997 – a 100% increase over 1996, which represent only one day of transactions in the USA in 1998.
To come back to the USA, excluding mutual funds, online trading generated an estimated 37 percent of all individual investor equity trades during 1998, and 40 percent during the second half of the year, the report found.
Due to multiple accounts by some investors, the Piper Jaffray report estimates that the 7.3 million accounts represent approximately 4.4 million individual investors.
As for the brokerages, the report found online upstarts Datek and E*Trade both made sizeable gains in market share in the fourth quarter of 1998 at the expense of Schwab and Fidelity, which both lost ground. Waterhouse Securities climbed to the No. 2 spot in market share in the latest report.
The number of online trades executed in the first quarter of 1999 is expected to show an increase of 25 percent on the fourth quarter of 1998, according to CS First Boston.
The total number of online trades is expected to reach a record average of 425,000 per day, up from an average of 340,000 per day in the fourth quarter of 1998, according to Bill Burnham of CS First Boston, widely recognised as the leading expert in the field of online trading measurement. However, while the 25 percent increase expected this quarter is more than healthy, this compares to an increase of 34 percent between the third and fourth quarters of 1998.
Trading in Internet stocks is growing at an exponential rate, with a 62 percent increase in online trades so far this year from first two quarters of 1998. This is due to the spate of mega-mergers that took place in the last number of months.
However, the increasing popularity of online trading has caused technical difficulties at online brokerages sites, unable to cope with the volume of traffic. A number of law suits have been initiated as a result with the New York State Attorney General Eliot Spitzer leading an inquiry into the online trading industry.
Internet users (in million)
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
|
| UK | 4,8 |
7,2 |
9,4 |
12,4 |
15,5 |
19 |
| France | 1,4 |
1,9 |
2,9 |
4,7 |
6,4 |
8,3 |
| Germany | 5 |
7,5 |
11 |
4,7 |
22,4 |
27,4 |
Source: Jupiter communications survey - June 1998
The Internet market clearly is underdeveloped in France and lags behind UK especially.
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
|
| UK | 14% |
17% |
21% |
26% |
32% |
35% |
| France | 9% |
12% |
16% |
21% |
27% |
35% |
| Germany | 11% |
14% |
19% |
24% |
31% |
40% |
| USA | 21% |
25% |
30% |
38% |
46% |
52% |
Source: Jupiter communications survey - June 1998
The % of online buyer represents the proportion of the Internet users buying online.
Here, we can see that French online buyers almost are as numerous as in the UK or in Germany in %, even so it still lags behind in term of volume (230,000 online buyer in France compared to 1.22m in the UK.
10 millions European will use online financial service in 2002 (Switzerland, Germany, France and the UK)
At last Europeans are taking finances Online. 35% of European banks offers online advice. The introduction of the Euro is one reason that close to 10 million Europeans will seek financial advice online by the year 2002, according to a report by Forrester Research.
Switzerland and Germany are expected to take the lead in online financial advice because of their speedy adoption of the Internet. On the contrary, the UK and France will be followers as opposed to leaders because UK citizens have high expectations for interactive TV and the French will be slow to abandon the comfort they have developed with Minitel.
Forrester says it will take time for European financial institutions to fully develop the service to match customer demands both technologically and culturally. The report also says companies that move beyond the basic transaction service will develop the most successful online business.
A survey of 62 financial institutions across Europe by Forrester found that presently 65 percent offer basic transaction service online, 35 percent offer personal finance advice, and 15 percent plan to provide product recommendations access to financial experts online.
Small European banks with a focus on added-value service provide the most advanced Internet banking service, according to a study by Bluesky International Marketing.
The study, "Internet Banking in Europe" rated banks in the US and Europe according to how well they use Internet technology to improve customer service relationships, build an international market, increase domestic productivity and enhance marketing campaigns.
Bluesky surveyed 863 Internet retail bank sites across the UK, Ireland, Holland, Belgium, France, Germany, Italy, and Spain and 1676 sites in the US. Bank ratings ranged from "brochure-ware" sites to "advanced cyber-banks," and the study awarded points for the availability of calculators, e-mail, account statements, and the ability to carry out online transactions including bill payment.
The study categorised 476 European bank sites (55 percent) as intermediate and advanced cyber-banks compared to 249 US banks. Germany had the highest number of online bank sites, 533 of the 863 surveyed in Europe.
Bluesky found that France and Spain had six times as many advanced cyber-banks as the UK, even though those countries have half the number of Internet users. Nearly all of the Internet bank sites in Holland are classified as advanced, 40 percent are available in English as well as Dutch as they use the Internet to expand beyond their domestic borders.
According to a survey of Ipsos-NFO ordered by Cortal, Europeans are very interested by investment products commercialised online. France, Germany and UK offer the biggest potential. In the long run, Internet will become the main channel to get information about the sock exchange and the investment products. The phone will become secondary! It will be only be used as a help line!!!
Surveyed people see many advantages of using Internet:
 | Real-time quotation of any stock exchange in the world, information about finance and investment products (40% of the answers) |
| Direct access 24 H /day (33% of the answers) |
| Real-time transactions (31% of the answers) |
However, they are worried of 2 points:
| No human contact (37%) |
| Transaction security risk (34%) |
1.9 millions people or 3.2% of the total population use Internet. An Internet user is a person, which uses Internet at least once a week (Source: Jupiter Communications (06/98)).
| Date | Number of Internet users( in millions) | Source |
| Feb-99 | 2,79 | Computer Industry Almanac |
| Feb-99 | 3,7* | Médiamétrie |
| Jan-99 | 2,4 | Publimétrie |
* (includes 1,5m users using Internet once a month or less)
| Date | Number of Internet users( in millions) | Source |
| 2000 | 4,7 | Jupiter Communications (06/98) |
Male / female split-up:
69% are male according to the Motivaction's survey (12/98).
Average age:
30 years according to Internet Track 2 (10/98)
Split-up per age according to Motivaction’s survey (12/98):
| Less of 18 years | 6% |
| From 18 to 25 years | 26% |
| From 26 to 30 years | 16% |
| From 31 to 35 years | 12% |
| From 36 to 40 years | 10% |
| From 41 to 45 years | 9% |
| From 46 to 50 years | 7% |
| From 51 to 55 years | 7% |
| More than 55 years | 7% |
Average revenues:
202 KF per households according to Internet Track 2 (10/98)
The profile of the French Internet users is very skewed. He is a man of 30 years old and having high revenues. However, the profile is getting less and less skewed. More and more female, young and low-income households are getting online. Several factors such as price cuts, increase of Internet awareness might explain these changes.
100,000 French Internet users use online banking facilities, according to a study by the Benchmark Group. This represents a fourfold increase on the number of people banking online in the country at the start of 1998.
However, overall this represents just 4 percent of the active online population in France. In comparison an estimated 7.8 million people are currently using Minitel or the phone for banking service.
The report rated the banks according to their subscriber base. Top of the list was BNP with 35,000 subscribers, followed by Credit Lyonnais, Credit Mutuel, Banque Directe, Credit Mutuel de Bretagne, Bred and CCF.
According to BNP (Claire d'Herbrail, March 1999), it now has 45,000 subscribers. The Web site is accessed by 72,000 visitors per month.
Decentralised banks, including France's largest banking group Credit Agricole, have been slower to offer online service. This is due to the lack of uniformity in the computer systems used, according to the report.
According to Cap Gemini (1997) Internet will be the most used direct sales’ channel by financial service in 2002. Indeed, more than 90% of the distributors plan to use it compared to 40% in 1997.
On the other hand, telephone channel will decrease slowly from 90% (1997) to 75% (2002). It means that new direct channels such as Internet and the electronic mail will become the key component of the financial service strategy.
In France, Internet is almost only used for communication purposes. On the contrary, Internet channel in the USA already represents 20% of the stock exchange transactions
A few French companies are proactive in this field. For example, Maaf Assurances sells online school insurance contracts related, for one year.
To sum up, the French online financial services’ market is still immature compared to the USA and lags between 2 to 3 years behind. Even so, it still offer opportunities and it would be foolish to ignore this channel, which will definitely become a key component of the distribution of financial services in the future.
Ferri (www.ferri.fr)
Ferri is the biggest broker focusing into the private investors only. It belongs to ING Group. It sells SICAV / FCP as well as Life Insurance of others companies. It targets high income customers as the minimal investment to open an account is 100,000 F!
It has 25,000 customers. 8,000 use electronic methods to pass their orders by:
| Minitel2,000(25%) |
| PC4,400(55%) |
| Internet1,600 (20%) |
Ferri has spent 20 MF for the development of its Web site in partnership with Digital. It can handle 1,000 enquiries at the same time and processed between 50 to 100 orders per minutes. In 3 months, its customers will even be able to pass orders to US stock exchange (partnership with an American online broker).
Source: Le Journal du Net (http://www.journaldunet.com/)
Fimatex (http://www.fimatex.fr/)
Fimatex is a broker solely focusing into the private investors only, which was created in October 1995. It sells / buys shares, UCITS, warrants, option,… over the phone, Minitel and Internet.
It has a capital of 46.8 MF and is owned at 100% by Société Générale, and has 2 subsidiary in Frankfurt and in Honk-Kong.
Staff
| Date | Staff |
| October 1995 | 6 |
| January 1999 | 40 |
Clients
Date |
Number of clients |
End of 95 |
400 |
| End of 96 | 1,500 |
End of 97 |
3,000 |
End of 98 |
5,700 |
January 99 |
6,000 |
| Date | Monthly share transactions |
End of 95 |
200 |
| End of 96 2 | 2,200 |
End of 97 |
10,000 |
Sept. 98 |
20,000 |
January 99 |
22,600* |
* (60,000 for all products: options and securities)
Customer profile
 | 38 years old |
| Urban |
| 100% use either Minitel or Internet service |
| 60% own a PC |
Fimatex’s clients are very proactive. They pass 5 orders per months in average.
Comments
Fimatex even so is still small compared to Ferri is growing fast. However, it lacks the dimension of Ferri, which is 4 times bigger!
Source: Fimatex and Figaro Economie
New entrant
CPR-E-Trade (www.cpr-etrade.fr)
US brokers are now entering the European market such as E-Trade. E-Trade is expanding by making partnership with local broker. In France, it has lauched a joint-venture with CPR in January of this year.
Its customers can buy securities (including UCITS) through several channels:
| Phone |
| Minitel |
| PC + Modem |
| Internet |
It offers limited discount on UCITS. Thus, it is cheaper to buy from them UCITS than from the owner of the UCITS (Axa, Baring, Fidelity,…). Like most of the brokers, it offers the possibility to buy shares and UCITS through a Life insurance products (multi-support).
What can be the advantages of Internet for online financial service?
For the new technologies:
Standardisation of Internet technology allowing to tap the international market
User-friendliness
Multimedia content (Soon Data/voice integration)
Simplified navigation
Seamless Integration between the operation system and the browser
For the private investors:
Improvement of the traditional PC banking service:
| Account consultation, balance |
| Bank transfer |
| Cheque order |
| Check cancellation |
| Appointment enquiry |
Completely new services allowed by Internet technologies:
| Loan or assets’ return calculation simulation |
| Real-time security quotation |
| Discounted online purchases / sales of securities |
| Traveller cheque ordering |
| Foreign currency ordering |
| Email communication |
For the banks:
Important competitive factor versus direct banks
Target a very interesting population with high-income (see Internet users profile previously)
Cost reduction on transaction costs as the client will do himself the operation
Cost reduction on documentation / mail by the use of email, online bank statement,…
For the financial service providers:
| Use of an additional direct channel increasing their competitiveness |
| Online enquiry and quotation (ex: personal loan or mortgage) |
| Additional stream of revenue |
| Cost saving for back-office operation |
| Reduction of processing time (ex: for stock exchange brokers) |
In the short-tern, direct financial service especially through Internet are clearly emerging but is staying marginal. Indeed, 5 to 7% of the current bank customers says that they might be interested by using online service compared to 20% for direct service (source: CFPB / Banque magazine 12-1997)
Beyond Internet, new channels are appearing such as interactive television. For example, Credit Agricole offers banking service though interactive television for one year (source: L’Essentiel du Management – April 1998).
Existing channels are performing well such as PC proprietary software which s used by a large customer based. However, it will be quickly phased out by online service.
The most attractive and / or current segments of the population are:
| Young people (18-35 years old) who are open to new technologies. This segment is decreasing in size but represents the clients of the future. Thus, it is a strategic segment |
| Senior people are less interested but will manifest a high desire of contact when they will retire. They increase in number and have high-income |
| Very active private investors, who have no time, have higher income and are attracted by direct financial services |
However, in reality, the most susceptible population to use direct service is not always composed of the youngest, the most urban or high income people
All the experts agree that the females will partially catch up with the males for the use of direct service at the end of the year 2000 (Source: Banque n587 magazine & Centre de formation de la profession bancaire (CFPB))
Direct service makes it easier to expand internationally. Thus, it offers new opportunities but new threats as well by increasing the industry rivalry. The expansion of the US discount traders (ex: e-trade) in Europe would be a good example.
The objective is not only to offer the same service in direct but as well to offer new service. A good example would be the very recent development of digital signature, which allows to sign contract and pay for products or service. A digital signature will as legally valid as a traditional signature on a "paper contract".
Online or direct financial service to be successful should go for a differentiation strategy based on 3 factors:
Price
| Direct service allow to compare easily prices |
| For the same service, it has a lower operating cost and selling price. Thus, it can offer discounted service such as online brokerage. |
Quality of service
| The quality of service can be improved on some aspects by direct service (availability, flexibility,…) |
Innovation
| Direct financial service has a modern image, which can favourably influence the prospect’s purchasing process. |
Published in April 1999