International -- Finance: Markets
Trade Online? Not Me, Guv (int'l edition)
It's proving tough to sell the British on cyber-stockbuying
Among European investors from Stockholm to Spain, there is no doubt where the future of stock trading lies--on the Internet. In the past six months, the number of online accounts in Europe has more than doubled, to 2.9 million, and it's expected to double again by next year. One would think, then, that Britain, with its long tradition of equity ownership and one of Europe's most wired populations, would be first in line to join the online trading revolution. Instead, it's the laggard of Europe.
Britain is home to one-third of all European shareholders but accounts for just 7% of the European e-brokerage market. The number of online investors is growing, but at a rate much slower than elsewhere. Forrester Research predicts that it will take Britain four years to close the gap. In the meantime, the country's relatively small retail investor base could make it difficult for local tech startups to raise the money they need in the market.
Online accounts in Britain total just 200,000 and are expected to reach 1.8 million by 2003. Germany, by contrast, boasts 1.5 million online investors--54% of the major European markets' total--and should have 5.2 million within three years, says Huw van Steenis, J.P. Morgan & Co.'s vice-president for financial services strategy in London.BRITISH RESISTANCE. No one is more chagrined by Britain's slow adoption of point-and-click investing than the online brokerage firms, including U.S.-based outfits like E*Trade, Charles Schwab, and TD Waterhouse, that have been trying at great expense to sell consumers on the idea. "It's much more difficult to get people online in Britain than many of these brokers thought," says van Steenis. Doesn't Nigel Reynolds, director of Charles Schwab Europe, know it. "When we look at what is happening on the Continent, [we would expect] online trading to be growing a lot faster here in Britain," he says. Schwab is now offering Brits a 30-day, commission-free trial run.
Paradoxically, it's Britain's longstanding equity culture that is hindering the growth of online trading. An arcane and expensive clearing and settlement system is to blame. Many of the newer European exchanges moved to cheaper, more efficient electronic systems years ago. Britain, which has the oldest exchange system in Europe, hasn't.
Meanwhile, during the privatizations of the 1980s, the government gave shareholders old-fashioned stock certificates. Even today, nearly 80% of all stock trades in Britain involve buying and selling real paper. Converting the 13 million certificate shareholders into online investors is complicated, time-consuming, and expensive for brokerage firms. At the end of the day, the entire antiquated infrastructure, plus a stamp tax of 0.5% of the value of every trade, means that British investors pay three times more than the Germans to trade online, says van Steenis.HIGH-TECH CONTINENT. Not only is converting old portfolios into online accounts expensive, but attracting new investors is proving difficult. The number of first-time investors in Britain is much smaller than elsewhere in Europe, where stock market newbies are driving the online brokerage boom. The constant flow of high-profile tech issues on the Continent has attracted young investors to Germany's Neuer Markt and France's Nouveau Marche. There is less excitement about the offerings on London's secondary market, which in any case shows a comparatively poor performance.
Creating new investors is also made difficult by Britain's low savings rate--just 4% compared to an average of 12% elsewhere in Europe. That is because the cost of housing in Britain is among the highest in Europe; many Brits have most of their wealth tied up in mortgages.
It doesn't help that many of the online brokers operating in Britain offer nothing more than basic service. Germans and Swedes, for example, usually have a choice of investing in mutual funds and other products as well as equities. And in the U.S., Schwab recently began offering online customers personalized investing advice for a fee. Some of the British brokers still don't offer even a straightforward cash-management account.
With some 25 online brokers battling in the British market and 120 e-brokers operating throughout Europe, that could soon change. They are competing on a combination of price, choice, and service. But if they aren't able soon to ease Britons' reservations about trading online, the brokers--and the investing public--may have lost their moment.By Kerry Capell in LondonReturn to top