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INTERNET BUSINESS: 'Big Three' brokers face online threat
Japanese houses will need to modernise to compete with newcomers bringing with them an electronic world for investors, writes Alexandra Nusbaum
 Most Japanese had not heard of the internet until recently. This summer, however, "intaanetto" has become one of the hottest issues in the Japanese brokerage industry. This month's announcement that Charles Schwab, the largest US discount broker, has set its sights on Japan could be bad news for Nomura, Daiwa, and Nikko, Japan's three leading securities companies.
These former hallmarks of Japan's securities industry face heated competition from new entrants who are scrambling to prepare for the next stage of "Big Bang", the rolling programme of financial deregulation, which calls for liberalisation of trading commissions in October.
Along with Schwab, a number of companies, including Sony - the consumer electronics company - Softbank - the Japanese internet investor - and DLJdirect - the online spin-off of US securities company Donaldson Lufkin and Jenrette - recently announced plans to develop internet brokerage capabilities in Japan.
These companies are betting that Japanese consumers, who are increasingly interested in and knowledgable of the internet and tired of negligible interest rates, will flock to online trading once commissions have fallen.
Schwab says that with Tokio Marine & Fire, Japan's largest property and casualty insurer and the only one with an AAA credit rating, it plans to offer trading in US stocks and Japanese investment trusts through the world wide web and a 24-hour telephone call centre.
Telephone broking could be one of the early beneficiaries of deregulation, according to Paul Heaton, analyst at Deutsche Morgan Grenfell. He notes that in Japan most people who buy stocks are over 40 years old and do not yet use computers. But, he says, the number of internet users will accelerate over the next four years.
| ...but online trading is slow |
| |
Ameritrade |
E*Trade |
Daiwa
Securities
(online trading) |
|
| Number of accounts |
354,000 |
909,000 |
20,300 |
| Account growth (1998/1997)* |
141% |
109% |
nm |
| 1998 revenues (¥bn) |
19.4 |
33.5 |
0.2 |
| Average daily trades** |
33,489 |
70,000 |
1,000 |
|
| *$1 = ¥120 |
**Qtr 4 1998 annualised for Ameritrade,
qtr 1 1999 annualised for E*Trade |
| Sources: Access Media International; Merrill Lynch |
Softbank, the Japanese internet investment company that owns Yahoo! and GeoCities, was one of the first companies to enter Japan's internet trading industry. Softbank launched E*Trade Japan which it hopes will leverage off the success of its US-based brokerage, E*Trade.
Softbank established E*Trade Japan through the acquisition of the failing Osawa Securities last October. This provided E*Trade Japan with a brokerage licence, membership of the Tokyo Stock Exchange, and back-office capabilities. Softbank says it plans to provide financial planning services and research on stocks and mutual funds through two separate web sites - E*Advisors, and Morningstar Japan.
DLJdirect has teamed up with Sumitomo Bank to form DLJdirect SFG Securities, an online brokerage business. The group has start-up capital of ¥3bn. "Sumitomo wanted the US know-how, especially in terms of marketing the network system," says Fumio Kofu, chief marketing officer at DLJdirect SFG.
Sony, the consumer electronics company, has linked up with Oki Matsumoto, a former Goldman Sachs partner, to establish Monex, an internet brokerage focused on investment trusts. With an initial capitalisation of ¥50m, this 50-50 partnership says it plans to raise additional funds.
Fidelity, the Boston-based fund manager, has also announced plans to enter the online market. The company has a strong network of relationships with Japanese banks and brokerage houses, and relies on Japanese brokers to sell the company's funds in face-to-face meetings with customers. Fidelity plans to attract these customers on to the web by providing them with access to high-quality and timely information without having to call their broker.
In spite of their different approaches to Japan's online brokerage industry, Schwab, Softbank, DLJdirect, Sony, and Fidelity seem to agree that the key to success in Japan's brokerage industry will come from providing investors with financial planning services and the opportunity for high returns.
For Japan's established securities companies, which have traditionally encouraged active trading to boost commissions, deregulation and the internet could require a marked shift in strategy. To keep up with changes in the industry, analysts say these companies need to focus on providing financial advice and building assets since they can no longer rely on heavy trading commissions.
"Japanese investors think mutual funds are short-term trading vehicles because brokers urge them to buy and sell so frequently," says Yoshitaka Kitao, executive vice-president of Softbank.
Nomura, Daiwa, and Nikko seem prepared for the changes. The companies have established online operations, and signs have already emerged that they are prepared to cut commissions for retail investors, according to analysts.
One key wild card remains within Japan's burgeoning online brokerage industry: Merrill Lynch, the US investment bank. Merrill gained a foothold in Japan's securities industry last year when it bought Yamaichi Securities' defunct brokerage business. The day before Schwab announced it would enter Japan, Merrill unveiled its plan to enter the US internet brokerage business.
Banking parent provides strength
Opportunities to ease the pain
Outside consultants welcomed
Visitors grab some juicy prizes
Retail defences may start to fall
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