Discount brokerages will control more than 50 percent of personal finance activity online by 2002, taking significant market share away from banks, according to a study released today.
Although banks have the advantage of being the "traditional holders of consumer assets," they have not dedicated sufficient financial and other resources to creating Web portal sites and securing tenancy deals on top sites such as Yahoo as many start-up brokerages have, says the study released today by Jupiter Communications.
"Online banking will reach only 18 percent penetration of the entire banking market, whereas online trading will be done by 31 percent of the total investing market in the U.S.," Nicole Vanderbilt, group director of Jupiter's Digital Commerce Strategies group, said in a statement.
"For banks to maintain market and wallet share in the face of competition from discount brokers, they will need to reevaluate their online strategies to include more marketing support, a broader range of integrated products and services, and incentive programs that encourage participation in the medium," she said.
"To date, discount brokerages are the only institutions that have understood the needs of the online consumer, and have reaped the rewards in terms of account and wallet-share growth," she added.
One such brokerage is E*Trade, which last week launched its long-awaited "destination" site--a financial portal the firm is hoping will draw the millions of users who look for financial data online but who have not yet begun to trade on the Net.
Part of E*Trade's strategy involves opening up "90 to 95 percent of the site's functionality to noncustomers," Rebecca Patton, senior vice president of advanced products for E*Trade, said at the time.
In addition, E*Trade, DLJ Direct, and Waterhouse Securities in June agreed to pay America Online $12.5 million per year for two years for prominent placement within the online giant's financial areas.
The importance of traditional portals such as Yahoo and AOL for financial services can't be discounted. A study released in July by researcher Cyber Dialogue found that, of the more than 18 million Net users who currently manage their investments online, most are primarily using AOL, Yahoo, and Quicken as gateways to online financial services. It also found that AOL's financial area enjoys five times more traffic than the nearest "established" brokerage branded Web site.
But the online brokerages face a disadvantage in that they lack the amount of resources traditional financial institutions enjoy. Last month, for example, E*Trade warned that it could post losses through fiscal 1999 due to projected heavy spending on promotion.
The Jupiter study encourages financial institutions to leverage that advantage and add significant marketing investments to their budgets in the online space.
"While customer acquisition costs in the online financial services market remain high, often exceeding approximately $250 for each customer acquired, Jupiter believes it is important for financial institutions to focus significant efforts in this area," the research firm said in a statement.
"Ultimately, it's the brokerages' investment in online and offline marketing and the focus on discounted fees that has helped them get the early foothold in this growing segment of the online marketplace," Vanderbilt stated. "Dollars that banks spend on Web-based applications will be wasted without proper marketing support, and invaluable customer wallet share will be lost."
Some observers say, however, that banks' financial investments in Net services so far have been made blindly. A recent study by management consultancy Ernst & Young predicted that by 2001, banks will spend the same amount of money on Internet technology as they do now on branch networks. But it also found that most of the banks it surveyed lacked a clear Internet strategy.
"Most have no idea which customers, if any, want to use [the Net], but many of the banks surveyed seem compelled to invest now without a definable strategy," Ernst & Young banking partner Jonathan Charley told Reuters when the study was released.
Wells Fargo, for one, disputed the idea that it is not marketing its online services sufficiently, and the notion that it could lose significant market share to discount brokerages.
The firm is in the midst of an advertising campaign for its online financial services that involves print, radio, billboards, and the Web, according to Kim Kellogg, a Wells Fargo spokeswoman.
"We are one of the most aggressive banks out there in terms of our online services," Kellogg said, noting that along with brokerage services, Wells allows customers to "do all your banking online--transferring money, checking on accounts. Brokerage is an added advantage. We as a bank offer a much greater variety of functionality" than the Net's discount brokerages.