Senior managers from Europe's top three online discount brokerages were all in New York this week. While they had come to promote Germany's Neuer Markt, on which all three are listed, their visit also served to underscore key differences between the American and European online brokerage industries. What's most compelling is that all three were founded by traditional banking companies - and all are staying ahead of competitors in part because they can deliver a range a financial services through their platforms.
In the past six months this trio has experienced phenomenal growth, fueled by factors including the growing acceptance of the Internet, a rise in initial public offerings by the Neuer Markt (Germany's equivalent of Nasdaq), and the European public's growing enthusiasm about mutual fund investment. All three are German. The Commerzbank-founded Comdirect is No.1 in accounts; No. 2-ranked ConSors Discount-Broker AG is 75% owned by $3.8 billion-asset SchmidtBank, a family-run private bank based in Hof, Bavaria; and Direkt Anlage Bank was founded by HypoVereinsbank Group.
"Five or six years ago, no one would have said Germany would be the center of Europe's discount brokerage industry," said Roland Folz, joint chief executive officer of Direkt Anlage. "Now, out of the seven largest in Europe, five are German."
Explaining why most of these companies' accounts have doubled in the last six months, Mr. Folz said, "There has been a shift in the population away from savings and toward mutual funds."
The huge opportunity that has opened up in Europe has not been lost on American companies seeking a piece of the action, but the Europeans are running away with the game, even if some are modeling their businesses on Charles Schwab & Co.
Now that the Continental European market has taken off, U.S. brokers are seen as "late entrants," Mr. Folz said. "They need deep pockets to succeed."
Domestic companies are doing so well, he maintained, because banks and insurance companies lead the market, not independent brokers along the lines of Schwab, E-Trade Group, and Fidelity Investments. "This is something that is strange for Americans," Mr. Folz said. "Companies don't need to be a bank; they just need to have a banking status. Banks are weak in securities distribution in the United States and the United Kingdom compared with Continental Europe."
Until recently U.S. banks were prevented from getting heavily involved in brokerage by the Depression-era Glass-Steagall Act, which was repealed by the Gramm-Leach-Bliley Act of 1999. For many years in Germany, banks have dominated the brokerage market, and six years ago many of them set up stand-alone firms.
"Many U.S. brokerages provide U.S. equities trading and nothing more," said Octavio Marenzi, managing director of the research firm Celent Communications in Cambridge, Mass. In contrast, German discount brokerages are "doing interesting stuff" and offer a more comprehensive set of products than banks and brokerages in the United States, he said.
Mr. Marenzi said it will be interesting to see how Deutsche Bank's acquisition of National Discount Brokers Group Inc., announced this week, pans out, since "Deutsche Bank knows how to combine banking and brokerage." He said U.S. brokers have been caught off guard by the way online investing has swept Continental Europe.
Comdirect, which has 505,252 accounts, has operations in Germany, the United Kingdom, and France. They include T-Online, a proprietary trading system that was more popular before Internet trading came along. Now, 85% of Comdirect's trades come through the Web. Comdirect has a 30% market share in Germany and offers securities listed in Germany; direct trading at 42 stock exchanges; more than 2,600 funds; after-hours and intraday trading; IPO access; securities loans; and foreign-currency bonds. It will launch an insurance platform with Censio AG this quarter and is developing a mortgage broker platform with a German partner.
"Our growth is based on supplementing our current line of products," said Bernt Weber, chief executive officer of Comdirect. "Our goal is to create a portal for European online financial services."
ConSors Discount Broker, which has 449,000 accounts, entered France, Switzerland, and Spain in 1999 and a joint venture in Italy this year with OnBanca. Now it plans to set up a retail electronic communications network and an investment bank, said Kay Dapper, managing director. "Local management is needed to treat your customers the right way," he said. "We decide to go in local in each market using local IT."
ConSors does its own processing, "because we want to control quality and cost," Mr. Dapper said. It also processes for SchmidtBank and two other banks in Germany, whose names he would not reveal. It receives more than 98% of orders electronically.
Unlike ConSors and Comdirect, Direkt Anlage Bank has eight investment centers, or branches; it is more like Schwab, which has more than 360 branches. In the next few months Direkt Anlage will open eight more centers.
Mr. Folz said the centers' main function is to help people open accounts rather than do trades. Direkt Anlage has opened 200,000 new accounts this year, bringing its total to 330,000. About 85% of its trades come through the Internet and the remainder by phone.
When it was founded, in 1994, Direkt Anlage was 100% owned by HypoVereinsbank. It made an IPO in November last year and is now 55%-owned by HypoVereinsbank.
In another recent deal, Direkt Anlage struck a partnership with Goldman Sachs to offer its customers preferred access to IPOs; Direkt Anlage will be the offerings' underwriter.
Also, Direkt Anlage is acquiring Self-Trade, a French brokerage that has operations in the United Kingdom, Spain, and Italy. Adding that to Direkt Anlage's presence in Germany and Switzerland will position his company to capture a good share of Europe's 300 million potential online brokerage customers, Mr. Folz says. J.P. Morgan estimates there are 1.8 million online brokerage customers in Germany and that there will be eight million by 2003. It says there will be about 17 million such customers in Europe within three years, mostly in Germany, the U.K., France, Spain, and Italy.
German, French, Italian, and Spanish Web sites dominate the top 15 in this quarter's BlueSky Ratings from BlueSky International Marketing Inc., Paris. None of the American brokers that have come into Europe, nor any of the United Kingdom's Internet brokers figure.
The ratings, first issued in March this year, cover brokers in nine countries in Europe as well as the best U.S. brokers for European investors. At yearend there were about 1.3 million online investment accounts in Europe, mostly in the United Kingdom, France, Germany, Spain and Italy, according to BlueSky estimates. The figures rose to three million in June with electronic brokers in every country reporting record enrollments.
Leading the way were Germany's four largest electronic brokers: Comdirect, ConSors, Direkt Anlage Bank, and Brokerage24. EBankinter of Spain claimed the fifth spot, leapfrogging over Switzerland's banking behemoth UBS and e-banking.com from Fortis Bank Luxembourg. Suzan Nolan, president and lead market analyst for BlueSky, said, "Since June, there have been a number of improvements to e-broker sites, particularly in Spain, Italy and France."
"Our wholly comparable crossborder ratings show that when it comes to multicountry online broker sites in Europe, the continental Europeans are showing the way to expand across borders," Ms. Nolan said. "In particular, Self-Trade and Deutsche Bank have been successful in exporting their know-how into multiple markets."
BlueSky says the doubling of online trading accounts in Europe was driven by a second wave of novices pulled in by advertising campaigns. The leaders responded adeptly to the changing investor profile by adding products and services tailored to people less sophisticated than the first wave of frequent traders who had fuelled initial growth, BlueSky concluded.
In the first quarter the main e-brokers focused on advanced charting and filtering tools, real-time trading, and products like IPOs, warrants, and options for the seasoned trader. By June the leading online brokers expanded, adding mutual fund centers and fund selection tools, investor education programs, better-segmented community forums, and personalization options for newcomers and experienced investors alike.
"The benchmark by which we measure leading e-brokers is dynamic and varies each quarter in order to accommodate new developments such as WAP [Wireless Application Protocol] trading and the changing needs of the online investor in Europe," Ms. Nolan said.
BlueSky's statistics show how quickly Europe's competitive environment shifts. It says that in November 1999 there were only two sites with fund supermarkets, those offering hundreds of mutual funds for sale. Between January and June, the number of Web sites claiming to sell funds online doubled, to 135, and fund supermarkets sprang up in nearly every country.