Brokers in the US have increasingly defied the odds. Some 100 years ago, 85 per cent of Americans' deposits were held in commercial banks. By next year, this figure will have fallen to 20 per cent.
As a result, Americans are now holding multiple accounts at multiple institutions which means good news for online brokers competing for business.
One of the most successful of the bunch is the E*Trade Group. In fact, a recent study ranked the consumer awareness of it among the top four electronic commerce brands, along with Amazon.com, eBay and Priceline. "Our following is 20 times greater than the next nine e-commerce brands," Mr Christos Cotsakos, president and chief executive officer of E*Trade, said last week at Faulkner & Gray's BankNet/InvestNet conference in Las Vegas.
But, then E*Trade spends about $80 million (€74 million) advertising its charge of $14.95 a trade. It has changed its advertising agency three times in three years and that's because its message keeps changing. It is no longer a discount brokerage on the Internet, it is an "online investing company", Mr Cotsakos said. And that means it is going after everyone's business including banks, brokerages and insurance companies.
Mr Cotsakos said he has moved beyond Destination E-Trade "which is one of the most successful financial sites ever launched" and he isn't wasting any time predicting the future.
In the early days, he said, his competition was Microsoft, America Online and Yahoo. Now, it has shifted to cable companies like Comcast and TeleCommunications Inc. "If you don't control the distribution, you can be held hostage on the distribution platform," he said.
This will mean forming partnerships. "We have learnt from Microsoft that we should partner with people in industries we don't really understand," he said.
With a can-do attitude, he even implied his company may well go into television broadcasting. "We're working now with some media companies," he said. "We feel so good, there could be an E*Trade channel in the next 36 months." ETV, perhaps? He expects that within three years, consumers will be able to watch the cable news channel, CNBC, while getting ticker symbols across the bottom of their television screens and being able to immediately transact trades "when they feel good or bad about a company", he said. A transaction engine would be built into the TV set.
Important aspects of the new delivery, Mr Cotsakos said, are speed, "getting control of the wired household and getting them to feel good about your brand".
E*Trade has confounded the sceptics and gone from strength to strength. It now handles $1.2 billion of securities each day and processes one billion page views of financial information. Trades carried out on its platform comprise 18 per cent of the total volume of trades on the Nasdaq stock market and 7 per cent of the volume on the New York Stock Exchange.
Recent reported system disruptions have "embarrassed the company" but also been blown out of proportion, Mr Cotsakos said. "We take a lot of heat by being number one." He likened E*Trade's seamless architecture at the front-end to a football stadium. "Rather than have people queuing up at the gates to get in to see a game, everyone can walk through the stadium at the same time," he said.
The company is now working on the fourth tier of its multi-tiered, multi-directional architecture. It has already spent $350 million on technology and expects to spend $500 million more particularly on the complicated back-end. Each morning, the management at E*Trade meets at 5 a.m. to dummy test the systems before the markets open at 6:30 a.m. on the West coast.
Mr Cotsakos believes it is more secure now to trade online than it is to write a cheque. E*Trade, he said, also spent $1 million to become the first financial institution to gain the WebTrust CPA seal of assurance that guarantees "`success, security and speed" when conducting commerce online.
He believes banks should be buying up Web companies "whatever the price" because Web applications as "an afterthought are way too costly". Three years from now, he asked the audience, "where will you be standing when the Internet becomes the pre-dominant means of communication?"
E*Trade and another market leader, Charles Schwab "are moving targets", said Mr Christopher Musto, senior analyst at Gomez Advisors Inc. "They're climbing toward the summit while everyone else is surrounding the base camp, the gear has all gone and the fires are still smouldering."
Mr Musto claims E*Trade's advantage is its people "with excellent skill-sets from a wide variety of industries that don't hold financial services as sacrosanct".
E*Trade employs 1,200 and on average they work a 65-hour week. In recent years, these employees have been given stock options to entice them to stay. The company will try to make their lives easier by bringing in a masseuse, lunches or dry cleaning service when needed. "You have to deliver the lifestyle not just the product or service," Mr Cotsakos said. "They need to have an emotional connection to where they work."
Yet, the battle between brokers and banks is likely to continue. It has "a lot to do with attitude and politics", Mr Bill Burnham, senior research analyst at Credit Suisse First Boston said. "The primary focus in online banking is on cost and improvement rather than on how to get incremental growth." Credit Suisse First Boston estimates that online trading grew 35 per cent in the fourth quarter and volumes were 40 per cent higher in April than in January.
Online brokers have made such headway because "in the banking space we have seen a lot of distractions", Mr Burnham said. "Essentially banks wasted 18 months in a pointless fight over standards." In that time, companies like Microsoft and Intuit have "gone from being the bogey-man to becoming a partner". While he admitted he was "painting a pretty grim picture for banks", Mr Burnham said, it was entirely warranted by the numbers and the attitude. "They now have to seize the initiative or they'll be run over by the online brokers."
