Schwab's Uphill Battle Down Under
Charles Schwab has been all over Sydney the past few months -- on bus shelters, billboards, and full-page ads in major Australian newspapers. The world's biggest broker is trying to muscle in on this market, and no wonder: More than half the adults here own stock, and the economic literacy rate is so high that a recent drop in the Australian dollar prompted banner headlines the next day. Plus, funds under management will surpass US$500 billion within 10 years, plumped up by mandatory employer-pension payments.
But the firm's timing couldn't be worse. Everywhere, trading volumes are slumping, losses are mounting. And Down Under, competition from the leading domestic banks will be almost impossible for foreigners, no matter who they are, to fend off. Brokerage powerhouse TD Waterhouse HAS managed to reach fifth place here, but it leapfrogged by buying two Australian discount brokers four years ago. Although Schwab Australia also has taken over an online-trading operation -- a fledging broker with 39,000 customers -- it hasn't cracked the top 10. The stakes are high. The U.S. behemoth started here late, with no name recognition and in a market crowded with more than 30 competitors.
NOT CHEAP OR QUICK.
When launching Charles Schwab Australia late last year, Lynnda Sarinske crowed that the broker would compete on service, not price. Relying on its now-familiar formula, Schwab would educate investors and offer a wide range of research and products, building its business as its customers' experience and assets grew. "There are plenty of firms out there that do cheap, quick trades," Sarinske said then. "We're not one of them, and we won't be."
That was before the 16-year veteran of Schwab's army battled an all-out price war, Aussie-style. Per-trade prices had already fallen to $15, roughly one-third what online brokers initially charged. In February, market leader Commonwealth Securities knocked trades as low as $4. According to Internet research firm www.consult, more than 6 in 10 online traders have accounts with ComSec, a unit of Commonwealth Bank. But Sarinske didn't stand back -- or by the pledge to hold the line on prices. The affable CEO from Oklahoma, who admits to watching ComSec's statistics almost as closely as Schwab's, led the charge lower, offering totally free trading for one month. But at the end of the first month of the deal, available through June, Schwab still had less than 1% of the market, Sarinske says. Starting Apr. 16, she slashed existing customer trades to $8.
Pricing aside, things for the world's biggest broker still look brutal. "Schwab is going to have a tough time here," says Mara Bun, an analyst at Macquarie Equities. The amazingly concentrated Australian financial-services industry offers formidable homegrown competition. For instance, almost 90% of online traders already have a primary banking relationship with one of five domestic banks, www.consult's data show. These banks virtually control financial-product distribution. In the fight for online traders, says Andrew Dyer, a director of The Boston Consulting Group in Sydney, "[those banks] start advantaged." Westpac Bank, especially, has deftly drawn customers who bank online to its brokerage site. It began offering online trading only last year but has roared into third place.
Schwab touts its business, a 50/50 joint venture with ecorp, one of the operations of Australian media magnate Kerry Packer, as more than just an online brokerage. The swanky Sydney office, with a glass-enclosed investor-seminar room and Internet kiosks scattered every few paces, looks out onto a major pedestrian mall in the city's central business district. A stone staircase leads to a lounge for top-tier customers. The broker has scaled-down versions in a few other major Australian cities. Ubiquitous ads feature namesake Chuck reminding potential investors that Schwab's Internet domain name is only one of its addresses. Yet 80% of transactions executed by new discount traders are done over the Web.
"So, it's a pretty important channel," says Mark Johnston, an analyst with www.consult. And Schwab's Australian Web site is a shell of its U.S. site -- offering analysis on about 300 stocks, so far, compared with 9,000 in the U.S. "That's not good enough," Bun says, "when no one knows who Chuck is."
Schwab hasn't entered a market it didn't lead eventually, including Canada, Hong Kong, and England. Sarinske clearly hopes to notch similar gains in Australia. To get there, Schwab might partner with the fifth-largest bank in Australia, St. George Bank, run by former Bank of Boston Vice-Chairman Ed O'Neal. St. George already processes Schwab customers' banking transactions, such as checking accounts that nonbank brokers can't handle in Australia. The goal is clear: Schwab wants to wow customers with empathetic service and ultimately claim the top spot. "There's no real time frame or an amount of money that once that's gone, that's it, we go home," Sarinske says. Her resolve remains. "We stick."
But until trading conditions globally improve, Schwab will trim costs and scale back expansion plans here. Already lean -- the brokerage lacks investment advisers and fee-rich products such as managed funds to offer -- local operations must still absorb a share of cuts the parent announced last month, totaling 13% of staff.
"Schwab is really still trying to figure out what strategic value Australia has," Sarinske admits. Only a few brokerages with the best technology and fattest chunk of customers will reach economies of scale required to make this lucrative market work. Schwab executives first contemplated entering this market three years ago. Now that they're here, they know there's no time to waste. In another year, Dyer says, "there will definitely be far fewer players."
By Becky Gaylord in Sydney
Edited by Beth Belton