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Those notoriously conservative investors across the pond are beginning to experiment with playing the market over the Internet. But don't push them too hard
Europeans aren't known for being avid stock traders. With limited control of their pension plans, strong government-backed retirement programs, and a certain mistrust of financial markets, they have tended instead to invest in safer vehicles such as real estate, insurance, and even bank savings accounts.
This conservatism helps explain why online trading—an obsessive pastime for some CNBC-addicted Americans—hasn't taken off as much in Europe. According to market researcher IDC, only about 14% of the 318 million people in Germany, Britain, France, Italy, Spain, and Sweden combined are shareholders. In the U.S., by comparison, nearly 55% of the population of 300 million owns stock.
Now, attitudes are beginning to change. Thanks to increased use of employee-directed pension plans and a shift in responsibility for retirement from governments to individuals, Europeans are paying more attention to investing. And with the continent's high personal computer and Internet penetration, a growing number of investors are forgoing traditional brokers for online alternatives.
Making it Easy to Make Your Trades
That's helping spur Europe's online brokerage sector, which is now adding customer accounts at a 7% annual growth rate, vs. 4% in the U.S. "Customers are gradually becoming aware of the benefits of electronic trading," says Simona Macellari, a research and consulting manager with IDC in Milan. "People didn't have the same financial knowledge as in the U.S., but that's quickly changing."
Jumping in to take advantage of the opportunity are online trading outfits such as Boursorama (SOGN.PA) in France, Maxblue in Germany, and the British unit of TD Waterhouse (AMTD). But perhaps no firm is moving faster than Europe's largest online brokerage, Cortal Consors, a subsidiary of French bank BNP Paribas (BNPP.PA) formed through the 2002 merger of French e-trader Cortal and German rival Consors. Now in six Western European countries, the company is expanding into new regions and rolling out such services as wealth management and financial advising.
The evolution is welcome news for an industry that until recently was still licking its wounds from the dot-com bust. During the bubble, some 120 brokerages, including U.S. heavyweights Charles Schwab (SCHW) and E*Trade (ETFC), poured into the European market looking to cash in on growing stock ownership after the privatization in the 1990s of many former state-owned monopolies.
Moving Away From Real Estate
After the 2001 downturn, though, many individual investors were left holding damaged portfolios, while brokerages lost out on their multimillion dollar gamble that Europeans would embrace online trading. "There are a number of examples of U.S. firms coming over to Europe and getting their fingers burned," says Bruce Weber, professor of financial management at the London Business School. Most Europeans, he says, preferred to stay with low-risk investments like property than roll the dice on the stock market.
In recent years, that preference has started to change, especially now that the real estate market has begun to cool. At the same time, the liberalization of Europe's financial-services sector is bringing down transaction costs for institutional and retail investors alike.
Lower fees alone won't turn Europeans into stock trading fiends overnight, but Cortal Consors is convinced the time has arrived for online brokerages to take off. "For the big players in the market, there's still a lot of room for organic growth across Europe," says Chief Executive Olivier Le Grand. Last year the company booked revenues of $498 million, up 29%, and now counts more than 1.1 million customers. It also manages some $50 billion in assets.
A More Unified Market
One recent policy change could be especially helpful to brokerages such as Cortal Consors. Called the Markets in Financial Instruments Directive, or MiFID, it's a new set of rules governing transparency and trading practices (BusinessWeek.com, 11/16/07) that should help turn Europe into more of a single market for financial services. MiFID also ought to help lower stock trading fees by requiring brokers to settle transactions at the lowest rate they can find in Europe.
Already, Cortal Consors is taking advantage of MiFID, which went into effect Nov. 1, to lower its rates. French clients, for instance, now can trade on an alternative trading platform for €4.45 ($6.54) per transaction, compared to €5.45 ($8.00) on France's main bourse, Euronext.
"More competition between [trading] venues will add quality and reduce overall costs," says Vincent Lecomte, the deputy CEO of Cortal Consors. "That will help to spread the idea of online brokerages to a larger audience." Also on deck: Cortal Consors is expanding to India, Saudi Arabia, and the United Arab Emirates, and is probing opportunities in Eastern Europe.
All told, there were about 17.5 million online trading accounts in Western Europe as of the end of last year, says researcher IDC. By 2010, the firm figures, that could jump to 23.5 million accounts, and online trading will represent nearly a quarter of all retail transactions.
Even some U.S. online brokerages looking to diversify from the cutthroat U.S. market could be tempted to give Europe another go, says Ed Kountz, a senior analyst with JupiterResearch in Atlanta. But, he cautions, offering alternative trading platforms and cut-rate transaction fees isn't enough for European customers still coming to grips with financial markets. "Consumers want a low [trading] price and financial advice," Kountz says. "If firms can grasp that concept, then the current environment in Europe is extremely attractive."