Europe Develops An Online Brokerage Culture

Further evidence of the development of an online European brokerage culture emerged Monday when German online broker Comdirect AG, which will soon replace LHS Group Inc. on the Neuer Markt’s Nemax 50 Index, announced that it almost doubled its customers in the first half of 2000. Comdirect’s customer head count rose 97%, to 545,000, and customers made about 5.4 million transactions, up from 1.6 million in the first half of 1999.

“Overall, online brokerage is definitely a part of banking life in Germany now,” Alexander Hendricks, Banking Analyst at ABN AMRO Bank, told TORNADO-INVESTOR.com.

But throughout Europe the nature of the online customer is changing. In Germany, public acceptance of retail investing has gotten huge shots in the arm from successful IPOs such as Infineon, T-Online and online broker Comdirect – the last two amidst absolutely horrendous market conditions. But the face of the typical German retail online brokerage customer is changing from the early adopters – more aggressive, sophisticated high-volume traders – to a more staid, middle of the road investor.

“The sophisticated investors were already on board,” said Marc Rubinstein, e-finance analyst for Credit Suisse First Boston, “But in Europe there’s an increasing amount of shareholders.”

“There’s been an explosion of interest in the stock market, in Germany,” said John Glendinning, Managing Director of comdirect.co.uk, “much of which coincided with boom in the market, led by the Deutsche Telekom float, and there is a large expansion of share ownership. “

The trend is widespread, and follows an overall pan-European interest in stockholding that has developed very recently. “Over the year ending May 2000,” said Credit Suisse’s Rubinstein, “there were 400,000 new shareholders in France – and a significant proportion of those investors are going online to manage their own accounts, so you see there’s a huge structural upside, beyond any cyclical factors that the market might bring.”

The problem for online brokers, then – and for those who invest in them – is finding new sources of revenues in order to maintain the growth rate of profitability. While Comdirect lists €11.9 billion in “assets under management”, they make very little for actually “managing” that money: because as an online brokers they are discount brokers, not managers, and do not charge traditional management fees.

The mainstay of the online brokerage bottom line has been transaction fees, but as new customers who trade less than the early adopters come in, and competition increases, analysts agree that transaction fees will be the first to come under attack.

“That’s one of the main reasons we’re not bullish on discount brokers,” said Metehan Sen, Senior Analyst for Financials at Sal.Oppenheim, “the fact that commission income will come under pressure in Germany – per trade you just won’t get the same amount you could two years ago. And then consider that marketing expenses, the costs of getting each customer, are skyrocketing.”

Consors and Comdirect have both begun offering services above and beyond the traditional offerings of a discount broker, and are doing them very cheaply in order to entice more warm bodies and increase that ever-import “assets under management” figure. These services have begun to include allowing customers to buy into mutual funds at reduced or no commissions or holding fees, and Comdirect will soon announce a suite of insurance products in Germany.

The revenue stream is not all fees: analysts estimate that margin lending – where the broker who borrows money at, for example, 5% and lends it to the customer at 8% to effect a transaction – comprised nearly 25% of Consors’ top line in 1999. And “order flow” – gathering up stock orders and flowing them through certain paths thereby getting a payment for diverting orders to a particular market maker – also brings in revenues. In the US, margin lending and order flow payments make up substantial percentages of online brokers’ bottom line. But things move fast – in the US companies such as Datek Online have been competitively forced to pass on their savings, and now rebate their order flow payments to customers.

The increased competition does not mean that some online brokers won’t do well – they will. In a rising market, as the hordes leap on to the bandwagon, online brokers consistently shine. But with the competitive mix of price, additional services and heavy marketing expenses, the shine will have just that much less luster.