Thursday, April 27, 2006
Revised Letter to CEO - E*Trade
As the world transitions from an industrialized based economy to a networked one, how is E*Trade position to compete? Consumers are beginning to demand customized experiences that meet their specific financial needs and there is massive consolidation in financial services industry and in discount brokerage, in particular. With your firm’s failed attempt to purchase Ameritrade the stakes of the game have increased.
According to TDAmeritrade’s CEO, Joe Moglia, in a recent interview the number of online brokerage firms has gone from over 200 to 80 and the number of true players in the industry had been reduced to around five. Will your management team be able to hear and properly read the weak signals that consumers are broadcasting and if so will you be able to successfully react to the changing demands of customers to have unlimited access to financial information and their accounts? Are you listening? Will E*Trade be one of the last one’s standing or will it be pushed aside or swallowed up by a multinational financial services conglomerate?
I understand, from yesterday’s press release, that E*Trade produced record profits and earnings in the first quarter of 2006, but the competition is not standing still and in the networked economy it does not take long before the industry has shifted and tipped in another direction. This is why I think my message is so important for you to hear.
In fact your rival TD Ameritrade announced yesterday its Independent Spirit program where the company has promised to provide customized financial solutions for its clients through:
-Comprehensive products and support that allow clients to easily change investments as needed
-Straightforward pricing so clients know what they can expect to pay every time
-Independent research, products and support that allow clients to make decisions in their best interest.
TD Ameritrade is also partnering with Palm to distribute its Palm Treo 650 Smartphone to its customers who open a new account. (See add http://www.ameritrade.com/offer/flat/spotseize_flash.html?start_content=offer&a=omo )
Ameritrade gets it! They realize that they will win if they can provide their customers with customized financial solutions, drive new traffic to their website, and give their members the ability to not only access the financial information they need, but also eventually trade 24 hours a day from a communications device any where in the world!
The scenario of a man walking up to a vending machine and realizing that he doesn’t have any change, but does have his portable communication device to purchase a soda is almost here. Soon customers will be able to remotely connect to their brokerage account, trade stocks, shift money into their online payment account and wireless connect to the vending machine to process their payment and purchase a soda. This is important to E*Trade in many ways but primarily because more trades means more revenues and more profit. A customer who demands these types of services and gets them will remain a satisfied customer of that firm and will share his experiences with others drawing more customers to this firm and further enhancing both the top and bottom lines of the companies that provides these services and customer experiences.
So how do you get in the game? It is important to realize that you don’t have to own all of the technology to pull this off; you just have to form the right partnerships. (See stack below) But remember, it will be these relationships that will determine your success or failure. I recommend beginning to talk to the mobile phone/devices manufacturers and begin to understand which players can provide you with the technology solution that you need. Then you need to consider partnering with an online payment processor, a web/software developer, a data security firm and finally an online advertising group that can drive traffic to your sight. You may already have relationships with some of the vendors in each of these layers, but it is important to assess early in this process whether you have the talent in-house to manage this type of project or whether you need to out source the majority of the tasks necessary to complete this project.
Best Case: You, E*Trade, wake up tomorrow and start thinking about the threat that mobile technology poses to the online trading business model. Then you get your act together and recognize that a major shift is occurring. This gives E*Trade an opportunity to develop a proactive response instead of a reactive one. As the consumer demands to have 24-7 access to her “mobile portfolio”, the companies with the technology and relationships in place to react win a significant portion of the online trading business. These companies not only win the online trading business but they also have access to a large number of new customers that provide them with new opportunities to cross-sell and bundle other basic banking services to these clients and further expand their market share of all financial service products.
Worst Case: E*Trade does nothing. The “mobile portfolio” takes off due to the Millennium Generations demands to trade stocks and access their accounts 24-7. TD Ameritrade has expanded its alliances with the mobile device manufacturers and is positioned to win all of the business. E*Trade loses not only the online trading accounts, but everything that goes with them including: mortgages, home equity loans, money market accounts and credit cards. E*Trade quickly fades away as a viable long-term player in financial services.
Most Likely Scenario: This change will be a little slower to take place and E*Trade is given an opportunity to wait and see a little before it jumps in. The world is changing and financial services is going to be a sector where the strong survive and the weak are quickly pushed to the side. Your competition includes not just the online brokers: TD Ameritrade, Charles Schwab, and Scottrade, but the major financial service power houses like Fidelity and Bank of America as well. These competitors don’t sit back and watch what others, but drive change by listening to customers and quickly responding to their needs. E*Trade had a great quarter, but it still has a lot of work to do.
Boston University Graduate School of Management
MBA Class of 2006
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