Datamonitor Predicts eFinance Industry Will Grow by $30 Billion

As Director of Financial Services/Americas Region for London-based research firm Datamonitor, Andrew Nuttney spends his days tracking ecommerce progress in the financial services industry. We contacted Nuttney to get a bird's eye view of how major industry trends will affect eFinance marketers in the year to come.

Q: What is your take on the merger and acquisition activity underway in the financial services industry? How does it affect the electronic financial services (eFS) space?

Nuttney: In terms of overall consolidation, this will be a major factor for eFS. The e-space in Financial Services currently remains extremely immature. This is because, not only have most of the consumers that will make use of the Net not yet made this transition, but also because many, indeed most, financial services institutions (FSIs) have yet to implement a Web strategy which is coherent with their brick and mortar strategy.

Pure play online players in the insurance aggregation space, and to a degree in the online brokerage space, are achieving some notable results in this environment. This has led others to start up in the space. As dot-bams (dot bricks and mortar) develop more coherent positions, and as more consumers come to value traditional values (brand, fulfillment) in a Web environment, we can expect to see consolidation and take-over of Web-only operations.

Secondly, overall industry M&A is being driven by deregulation and diminishing returns in commodity businesses, so that the customer franchise needs to become more highly leveraged. The Web, as it is forcing firms to reconsider how they present themselves and provide services in a new competitive environment, is intensifying these problems for FSIs, and eFS development can be expected to be stimulated by ongoing consolidation. This, in turn, will fuel eFS consolidation itself.

Q: Will new ownership by foreign institutions change the situation significantly? (i.e., DLJdirect to soon become CSFB Direct)

Nuttney: In terms of foreign ownership, there is little direct influence on the eFS landscape.

Firstly, large European firms are as aware of the opportunities and competitive imperatives offered by the Net as their US peers. Secondly, and even more importantly, the principal foreign takeovers of recent months (UBS, CSFB) have been driven by a race for scale in international markets’ and investment banking activity. Servicing wealthy clients is an additional attraction, but has been a secondary driver. All of the major Wall Street firms, foreign or otherwise, see the Internet as a key element in their strategy to acquire and manage funds.

You are correct, however, to perceive that there will be brand rationalization — and DLJdirect in particular has had a very unclear position in the online brokerage space and could be vulnerable.

Q: Can you discuss the extremes in the target markets for the eFS space? For example, BuyandHold's E-ZVest service charges $2.99 per trade; while MyCFO.com, targets wealthy customers and assigns them an online personal Client Service Director. Is there any value created here?

Nuttney: The two extremes in the marketplace do have room for a limited number of firms. BuyandHold for instance creates value by broadening the scope of individuals that can feasibly invest online. The service works by aggregating all trades placed in a particular security over a week and then executing a single transaction, therefore saving a great deal on transaction fees. This system makes it worthwhile to invest in small increments (i.e. $100) on a periodic basis and has had a great deal of success with custodial accounts (i.e. college savings accounts).

On the other end of the spectrum, MyCFO.com is targeting affluent investors with complex needs. MyCFO.com seeks to simplify the financial dealings of affluent investors by giving them a single site for all their financial needs, with the added component of professional advice. The target audience for this service is far exceeding that of other online brokerage firms in terms of net worth, which limits the number of clients in this space. Currently, MyCFO.com has approximately 275 clients with net worths ranging from $10 million to $2 billion.

Q: What is the potential for eFS in overseas markets? Germany's e-brokerages are popular and competitive, but what about in other countries? And, will loyal European and Asian customers move assets completely online or will traditional financial institutions in Europe and Asia offer 100% online access?

Nuttney: The question here lies in whether pure-play Web brokerage firms will ever succeed in Europe and Asia. The U.S. is currently the leader in online financial services, and even here a limited number of consumers hold all of their assets online.

In examination of U.S. pure-play firms, the size of assets on average is much lower than firms with an established physical presence. Recently pure-play companies have been opening brick and mortar branches to increase credibility. Considering these facts it is unlikely that in Europe or Asia firms with an online-only presence will ever hold 100% of the assets. If the question lies in the clients being able to access 100% of their financial information online, I feel they will soon be able to do this. One of the main factors holding back certain Asian countries is minimum commissions, that due to regulation, have to be charged for online stock trading.

Q: Will conversion/adoption costs rise? Are eFS companies willing to spend these amounts to continue branding themselves and acquiring customers as they did in the past?

Nuttney: Spend by FSIs in the U.S. on e-Technology is presented below:

US$M 1999 2000 2003 CAGR*
e-spend
Banks 1127 1940 3000 27.7%
Insurers 783 1018 1979 26.1%
Fund Managers 824 1450 1700 19.8%
Source: Datamonitor
*Compounded Annual Growth Rate

It can be seen that spend will continue to increase, driven by greater complexity of solution required. Much of this spend is driven by dot-bams, however, not pure play dot-coms. EFS companies will no longer be prepared or able to spend vast sums on customer acquisition. Competition alone will drive these costs down (already to about $275 per customer in the online brokerage space, as estimated in Datamonitor’s "Future of US eBrokerage" report, published November 2000).

Q: If financial services continue to grow online, will some products eventually be phased out?

Nuttney: I do not think that any products will be phased out.

I do think, however, that the value-addition inherent in the Internet’s information exchange facility favors certain product types — commodity products where price rules — and actively stimulates interest in, and increases transactions of, other products—products which thrive upon access to information, such as broking, and other investment services. This explains the phenomenal success of the online brokerage sector. Datamonitor calculates that globally the Internet will actually ADD $30 billion in value to the wealth management industry.

NOTE: Contact Nuttney at anuttney@datamonitor.com.