Last year, with global stock markets surging and the economies of Latin America back in full swing, the region's financial institutions and Internet firms began offering online trading. Rosy consumer confidence and fattening wallets, coupled with rising Internet use rates, suggested a growing demand for online trading services among Latino banks' affluent customers.
That was then.
Now the thunderous drop of the United State's Nasdaq index, coupled with Argentina's deepening economic crisis, is battering Latin America's volatile markets. The result is the slowing there of middle- class growth, the crippling of young technology companies, and a fear among potential online traders.
But in spite of the downturn and the growing fears, several companies continue pushing new online trading solutions. Those companies are buttressed by trends they believe are immutable, such as continued growth in Internet's user rates, increasing of securities among Latino investors, and the cheaper, quicker trading available online.
As Latin financial institutions refine or reconfigure their online trading offerings, the result has been that trader's optimism, so evident earlier in the year, has not been quelled so much as tempered.
Francisco Montaner, brokerage manager for the Chilean division of Patagon (www.patagon.com), a financial portal with Spain's Banco Santander Central Hispano as its largest partner, says Latin America's online trading "ought to grow in exponential form given the current low level of online operations, the lower prices in the region in terms of Internet connections and the low operating costs relative to traditional methods."
Mexican fervor
Much of the action is taking place in Mexico. This February, Mexican horizontal portal Todito.com, teaming with Grupo Financiero Interacciones, a local brokerage and equity research firm, began offering online stock and mutual funds trading. Within a month the portal had 960 registered users, 100 of whom were actively investing. The company is shooting for 10,000 registered users, with 2,000 to 3,000 active accounts, by year's end.
Monterrey-based Todito (www.todito.com), owned jointly by Grupo Dataflux and TV Azteca, expects to grow by reducing barriers for stock traders.
In Mexico, an average of $30,000 is needed to open an account in a brokerage firm, according to Adrian Gonzalez, Todito's Chief Operating Officer."Not many people have $30,000 in Mexico to do trading. I mean how many Mexicans can do that?" Gonzalez says.
By comparison, Todito requires only $1,000 to open a stock trading account and only $100 for a mutual fund account.
But for many Latinos even $1,000 is unreachable and a critical mass of trading customers is not just over the financial horizon. In Mexico stock trading remains largely confined to financial institutions and the Internet-savvy, and Gonzalez expects it will take another three years before it becomes widespread. Yet, with the region's financial institutions making 80 percent of their profits from 10 percent of their customers, the rationale to offer online trading remains strong.
However, Todito's growth is constrained not only because stock trading remains a limited niche, but also because the firm faces hefty competition in fighting for a slice of the online trading pie. The Web sites of Patagon and Fairfax, VA-based Zona Financiera (www.zonafinanciera.com) host a number of traditional institutions offering stock trading.
Though Zona Financiera earlier this year closed offices in Colombia, Venezuela and Peru, its Latin American customers still include about 20 financial institution, including Citibank and Mexico's Banorte.
Patagon International, headquartered in Miami, requires no minimum to open an online trading account and offers trading in Mexico, Venezuela, Brazil, Argentina, Chile and the U.S.
Mexican banks, such as BBVA-Bancomer, Banamex, and Banorte, which have established relationships with thousands of customers, may also pose a threat to Todito.
Accival, Mexico's largest brokerage house, launched AcciTrade ( www.accitrade.com), an online trading service, last year and already has some 7,500 clients. Accival's director, Adolfo Herrera, says the company, which, like Banamex, is a unit of Grupo Financiero Banamex Accival (Banacci), expects to reach 12,000 online trading clients by year's end.
Herrera says Accival charge to clients of $10 per trade, plus 0.5% of the transaction's amount is approximately 60% to 70% below the average charged by Mexican brokerage houses. Still, in part because of the expense of new equipment, Accival does not expect to break-even until June.
As in many cases, while Latin America's movement toward online trading has been brisk, profits remain scarce. Last year's expectations, sparked by the blossoming of regional markets following 1999's recession and the historic rise of the Nasdaq, have fallen short.
Jose Garcia-Cantera, a Latin American banking analyst for Salomon Smith Barney, says banks are scaling back investments in online trading as investors' appetites wane. "We are entering a period of slower economic growth, both in Latin America and in general," he says. "A slowdown in the U.S. or Europe will affect Latin America. Also, Internet penetration expectations have been curbed recently; PC sales and PC growth have been coming down (and) security issues have not been fully resolved." Latinos, Cantera says, feel even less secure about trading online than do U.S. investors.
Even Brazil, Latin America's leading market both financially and technologically, is not a global leader in online stock trading. Virginia Philipp, an analyst for Latin America and the Caribbean for TowerGroup, a Needham, Massachusetts-based research firm, found that in 1999 online stock trading represented less than 3 percent of the total volume of trades in Brazil's Bovespa stock market. While this figure grew to 6 percent in 2000, in the U.S. 31 percent of all trades were made online in 2000, up from 30 percent in1999.
Branching out
Latin banks, partly due to the less-than-spectacular showing of online trading, have begun placing their bets on associated revenue streams, with mutual funds being among the most popular. "In Mexico, although our stock exchange is a small one, there are very good options for investors-mutual funds or money market funds, for instance," says Accival's Herrera.
The Bogota, Colombia-based financial information site InfoFinanciera (www.infofinanciera.com.co) delayed plans to offer online stock trading in November, moving instead to offering online fixed income services (See sidebar).
Similarly, BBO Servicios Financieros (www.bbo.com.ve), a Caracas, Venezuela-based financial institution with more than $72 million in assets, offers both both online trading and fixed income services. But 18 months after first offering online trading in late 1999 BBO's service had less than 200 clients and a modest goal of increasing that to 500 to 600 by year's end, says Jesus Eduardo Rojas, BBO's systems director. One of the three largest listed companies on Venezuela's stock market, BBO began offering fixed income trading last month.
Brazil's cutting-edge companies are realistic about the limits of online trading. "This is not a profitable business right now, and it probably won't be for a few years," says Marcelo Barboza, COO for InvestShop.com, a Brazilian online financial management service. "To ensure profitability we have a financial portal model. We are exploring advertising, and we sell products such as mutual funds and insurance, and we hope to be cash flow positive by the end of the year. I don't see how the others could be profitably only doing online trading, especially with the small and fragmented market we have."
Since Investshop.com (www.investshop.com.br), part of Grupo Bozano, one of Brazil's largest private companies, became Brazil's first financial portal in March 1999, another 35 brokers, including Agora, Coinvalores, Novacao, Souza Barros and Socopa, have joined the battle for online traders there.
Stock trading is also not Todito's main revenue stream. Most of the company's revenue derives from an online finance section including financial news and featuring a slew of profitable advertising. Todito's Gonzalez says many of Latin America's dotcoms have been brutalized by stock market plunges and that brokerage firms, many of which he criticizes for their "overly luxurious offices," struggle to turn a profit in a limited online trading market.
In contrast, Todito reduces operating costs through being Internet- focused, while working with Grupo Financiero Interacciones, a small, profitable financial boutique with few costs of its own. While Todito brings distribution, branding and marketing to the table, Grupo Financiero Interacciones is registered to do stock trading and has financial knowledge and technology. The two companies plan a major, Mexico-wide advertising campaign in coming months.
"The reputation of these huge institutions is based on having 1,000 branches all across Mexico, hundreds of years of experience and millions of deposits," says Gonzalez. "And you don't need that. You just need a legal institution doing this, a very good system, and a capability of marketing the system nationwide."
Challenges ahead
Convincing Latin American consumers to trade stock online will likely remain a complex challenge for some time. The task is complicated because there are few personal computers in Latin American homes or offices, so the region's Internet-user rates are likely to remain in single digits for the foreseeable future, according to Tower's Philipp. "There is a huge part of the population in Latin America that is not yet banked," she says, putting the number at about 75%.
With global stock markets in decline, Latin America's regional initiatives have been bludgeoned. Scores of the region's Internet technology companies died or saw their fortunes decline.
For example, Boca Raton, FL-based iBolsa Inc., which launched in September 2000, allowing clients to trade U.S. stocks online, estimated earlier this year it would have 25,000 accounts by September. However, in March the company, which provides a site in Spanish, Portuguese and English chiefly for Latinos in the U.S. and in Latin America, revised it projection of new accounts downward to 7,000.
Still, Alvaro Catao, iBolsa's CEO, remains undiscouraged. "I have lived through many bear markets, I have been around long enough, and these bear markets bounce back," he says. "We have not wavered in our enthusiasm."
For now, iBolsa strictly provides for the trading of some 10,000 different stocks in the U.S., claiming this country's markets offer greater opportunity than trading in Latin American stocks. Approximately 60 percent of iBolsa's traffic is from the U.S., with the remaining coming primarily from Brazil, Mexico, Venezuela and Colombia. "We always thought the big opportunity was going to be in bringing Latin customers to the U.S. market. Local markets in Latin America are much smaller and are dominated by institutions," says Catao.
Another advantage is more stringent U.S. regulations protect small investors, he says.
Size also makes the U.S. market more alluring. Brazil's stock market, Latin America's largest, is double the size of Mexico's, which is four times larger than Argentina's, which has Latin America's third largest economy. But the daily trades in Brazil's market represent only a small fraction of the trades in the U.S. market.
Latin banks realize that in order to make online trading more attractive they need to educate consumers
The largest barrier to stock trading in Brazil is its novelty for individual investors.
InvestShop.com's Barboza says the largest barrier to stock trading in Brazil is its novelty. "We didn't even have a retail stock market in Brazil. The traditional brokers only used to explore the institutional market (large investors, pension funds, etc.). Just now, with the Internet, is the average consumer able to reach the stock market," he says. InvestShop.com is making major efforts to educate consumers to help the culture of stock trading take hold in Brazil. "The market is still in its infancy and the most important thing is to educate users now, so we want to make it accessible to people who are just trying out the market."
To that end, part of InvestShop.com's strategy is to waive charges on opening an account. The company also offers after-hours online trading in Brazil, charging $3 per trade during the period. This differs from the $15 average fee consumers pay Brazilian brokers during the day to make a trade. InvestShop.com, however, charges $20 per trade during the working day. "We don't want to be the Ameritrade of Brazil," says Barboza. "We want to be the Charles Schwab. We provide the best service in Brazil in terms of toll free numbers and online chats, we answer emails in less than an hour, and we have the best platform with its speed and design for trading."
For its part, Accival has begun a three-pronged strategy to attract online trading customers. In 1999 it launched AcciNet, which Herrera says was the first service to put financial information from the Mexican and international stock markets on the Internet. The company then introduced the training tool AcciGame, simulating what stock trading is like in the real world. The game caught on with Mexico's university students, which are attractive prospective customers for Accival's third prong: AcciTrade. Herrera says 60% of the bank's online traders came from its AcciGame clientele.
