Customer engagement in the Dutch online brokerage market
More than a decade ago the traditional stock brokerage market was disrupted by new entrants who provided online-only services; the current situation in this highly competitive market is fairly similar.
After years of market consolidation, currently the online brokerages are facing fierce challenges. New technology-driven entrants, or fintechs, are challenging the more traditional online-only brokerage firms, while consumers’ needs change rapidly. Sustaining customer engagement has never been more difficult than now.
The Dutch brokerage market is characterized by a small amount of brokerage-only players and the retail banks offering investing opportunities. The traditional brokerage market was disrupted by the entrance of BinckBank and Alex in the early ‘00s, who offered their services mainly online and developed advanced brokerage platforms. Since then multiple other players, such as Knab, Lynx or Saxobank, entered the market with the objective to profit from the growing brokerage market. Fierce competition between the online-oriented service providers and the more traditional retail banks caused heavy drops in consumer prices. The market consolidated, however, until recently.
Financial technology startups (fintechs) are entering the retail brokerage market in the Netherlands. Existing business models in this industry are focused on providing customers with a streamlined, realtime platform accessible via desktop or mobile devices, but fintechs show the path to whole new models. With a strong focus on (mobile) technology, these entrants try to attract a wider range of consumers, making investing a more accessible activity.
Especially younger consumers, familiar with mobile devices and the latest technological developments, are attracted to new brokerage products. Although not familiar with financial markets and retail investing, these targeted consumers are tempted with, for instance, single-purpose investment platforms. A perfect example is Bux.
a Dutch mobile application which focuses on CFD trading (Contract for Difference trading – speculating on prices going up or down). New users are allowed to open an account for free, and even trade with virtual, non-valuable money. Not only is it free at first (after a while users can decide to use real money), it is also incredibly easy to use since users are only entitled to speculate on prices going up or down. This makes investing easy to understand and accessible for a wider group of consumers.
Disruptive entrants like these introduce more customer-oriented and more accessible products to the market. Contrarily, platforms of traditional online brokerage firms are still focused on an extensive portfolio of product offerings. The self-directed consumer who is not yet familiar with financial markets is therefore more eager to try these single-purpose applications than to open an account at one of the traditional brokerages.
Not only the self-directed investors are reached by new entrants; other new players on the market try to tempt the investors who want more professional guidance, but are not interested in costly asset management services. These advisor-led investors need more extensive suggestions and guidance when investing, which used to be a costly service since professional advisors were involved. However, nowadays these advisors seem to be replaceable to some extent: new platforms offer the user more automated guidance and advice based on their investment objectives, their risk profile, analysis of their investment history and market information. These so called robo-advisory services, offered by for instance Pritle, are provided without human interference, reducing costs and easing the investment process for clients.
Other entrants, such as DeGiro, do not introduce a new or disruptive business model at the front; they disrupt the market by introducing incredibly low consumer prices. Their platform and organizational structure is mainly focused on cost efficiency, reducing transaction costs for end clients. Thus, while offering access to the same financial markets and products, their overhead costs are significantly lower than those of the traditional online brokerage firms and they are able to set the lowest prices on the market.
In short, the more flexible approach of these technology-driven entrants make it easier for them to adhere to changing customer needs, innovate the customer experience and target new consumers. They are also capable of offering clients more convenient, easy-to-use services. Additionally, their innovative but lean platforms are very cost efficient and make it possible to reduce transaction costs and compete on consumer prices. Contrarily, traditional online brokerages are still bound to robust legacy systems which make it difficult to anticipate changing customer preferences and innovate continuously.
Changing Customer Needs
Consumers are far more technology-oriented than years ago. While access to internet-based platforms used to be sufficient for serving the retail investor market, nowadays the retail investor prefers more mobile access, more efficient and streamlined transactions, more personalized and tailored products and they are usually not bound to just one broker. Thus, customers are increasingly taking control of the relationship between them and the service provider.
Since interest rates are low, investing became more and more interesting for a larger group of consumers. Even the non-knowledgeable consumers are willing to take risks on the financial markets, but they surely require other products and services than the self-directed, well-informed customer. Therefore an increasing group of customers is seeking for hybrid services: do-it-yourself services with complementary professional guidance and advice.
The group of self-directed investors remain transaction-focused: they require efficient, streamlined transactions and access to many trading products, but increasingly require professional tools that support them in analyzing markets and making financial decisions. Since most financial information and historical data is to be found on the internet, online brokerages have to offer these clients a wider range of tools and in-depth information than solely real time stock quotes, for example portfolio risk assessments or backtesting tools.
Moreover self-directed investors tend to prefer mobile trading platforms, instead of the traditional platforms that are only compatible with computer browsers. Although a majority of the brokerage firms already developed mobile versions of their trading platforms, often they lack the same features or experience non-desirable downtime. Contrary to earlier mentioned technology-driven entrants who focus on mobile applications, the Dutch online brokerage firms are falling behind and need to accelerate the development of new channels.