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Study: Online brokers to see big gains, customer service lags

The online brokerage market will lead the financial services sector in growth, but lag in customer service, according to a new report from Jupiter Communications.

Jupiter's research predicted the online brokerage sector will see the biggest gains, with assets increasing sevenfold from $415 billion at the end of 1998 to more than $3 trillion by the end of 2003, but the financial services sector lags behind other businesses in customer service. The research found that less than 40 percent of financial services Web sites responded to customer inquiries within one day.

Jupiter's latest quarterly customer service survey, which reviews customer service response rates on 125 leading Web sites from five business sectors, found that only 39 percent of financial services sites responded to customers' inquiries in one day compared with 64 percent of retail shopping sites. While this is an improvement from first quarter 1999 results, when financial services sites had a 24 percent one-day response rate and retail shopping sites had a 26 percent one-day response rate, it is still too low for companies that control consumer online finances, the report said.

"Key players are going to have to think more like retailers and invest in the infrastructure to help support a more mainstream customer base," said Rob Sterling, an analyst with Jupiter's Digital Commerce Strategies.

Online trading households are expected to grow from 4.3 million in 1998 to more than 20.3 million in 2003. The number of trades and commissions per household will drop, but online brokerage revenues from interest, fees, and non-transaction services will increase, to about 80 percent of total online brokerage revenues by 2003, up from 36 percent of the total in 1998.

Jupiter analysts expect 41 percent of the US households holding stocks either directly or indirectly to have online trading accounts in 2003. Thirty percent of US banking households are also expected to manage their bank accounts online in 2003, growing from just under 4 million in 1998 to 26 million by 2003. Revenue that comes directly from online banking services through monthly fees will grow more modestly due to competitive pressures.

The report added that, depending on interest rate levels, the number of online-originated mortgages could increase, in the best case, to 1.1 million in 2003, representing about 16 percent of all US mortgage origination in 2003.

The Jupiter report comes on the heels of bearish outlooks for online brokerages such as E*Trade Group Inc. (Nasdaq: EGRP) and Ameritrade Holding Corp. (Nasdaq:AMTD) this August.

BancBoston Robertson Stephens senior eFinance analyst Scott Appleby lowered his estimates on AmeriTrade Holding (Nasdaq: AMTD) and Knight/Trimark (Nasdaq: NITE) August 18 based on: discussions with industry sources, and market-volume weakness. Appleby also lowered our calendar-third-quarter sequential-transaction-growth estimate for the eBroker industry from 3 to 5 percent growth to a flat to (5) percent decline."

Ameritrade was also lowered, along with E*Trade, by Lehman Brothers on August 27.