Without a doubt, the Internet is creating sweeping changes in the stock brokerage and trading landscape. To begin with, the cost of making a trade has plummeted. Many on-line brokers offer trades for less than $10, and even stalwart traditional brokers like Merrill Lynch and Morgan Stanley Dean Witter & Co. have found themselves forced, during 1999, to announce on-line trades for as little as $29.95.

As solid proof that the cost of creating an additional on-line line trade is next to nothing, and support to the theory that on-line trading fees will continue to plummet, American Express has announced that customers keeping at least $100,000 in their brokerage accounts will be able to execute trades on-line for free via Amex’s on-line brokerage. At the same time, American Express’s aggressive new reach into no-cost trading proves up another irrefutable trend: the most viable way for stock brokerage firms to make money is through the control of substantial assets in their customers’ accounts, not through fees charged for executing trades.

While there has always been a somewhat limited number of individual investors who trade stocks over the very short term, buying and selling a security in the same day or even in the same hour, the Internet has created an entirely new category of investors who attempt to make their fortunes through extremely rapid buying and selling: the daytraders. This has not only increased the total volume of stocks traded on U.S. exchanges, it has also vastly decreased the average amount of time that a typical common stock is held by an investor. Over 75% of the shares of the average U.S.-based firm listed on the NYSE changed hands last year. That is, if a company has 10 million shares outstanding, 7.5 million of them were bought and sold last year alone, on average. That percentage has soared from 46% in 1990, and 12% in 1960. While the average time that a share of stock is owned in traditional, old-line companies remains relatively long, the time line for the average ownership of a new Internet company is amazingly short. For example, the average investment in General Electric, Exxon or Johnson & Johnson is held for about 30 to 33 months. The average investment in Wal-Mart is held about 18 months. In contrast, the average investment in Microsoft is held only 6 months, and the average investment in Yahoo, Amazon.com, Doubleclick or Priceline.com is held for eight days or less.

Simply put, the Internet is an absolutely revolutionary catalyst in the financial services arena. It lowers the cost of saving, borrowing and processing funds transfers. It enables individuals working at their PCs at home to act like global financiers. The Internet has put so much money into action from so many new players that it is directly responsible for an immense increase in the pool of investment capital and the availability of venture capital. That venture capital is fueling the creation of new products, new services and new technologies that further fuel the investment fire. The Internet provides near-perfect, real-time market data and research to those willing to go to the trouble to dig it out of the hundreds of millions of web pages posted to the World Wide Web. The Internet is rapidly making markets of all types much more liquid and efficient.

On-line investors are using the Internet to their advantage, and the entire structure of Wall Street is changing as a result. The cost of trading stocks on-line has plummeted since the practice's inception, thanks to the low overhead achieved when an Internet-enabled brokerage cuts the amount of costly office space and support staff required to execute trades. Most on-line investors are not seeking personal investment advice — they know what they want, when they want it and how much of it they want. Consequently, they do not need to interact with an individual stock broker. Furthermore, an increasing number of investors are turning to the Internet to make an entrance into the investment community. Advisory material is readily available and easily located on the Internet (see Chapter 2 for useful sites).

One in every three individual investors' equity trades is now being made on-line, and nearly 15% of all individual investor brokerage accounts are Internet-based. By 2005, nearly all investors with access to personal computers will use the Internet for their stock and mutual fund investments — if not to enter trades and orders, then at least to gather information about the status of their accounts. As the Internet becomes a required distribution channel, the distinction between "on-line" and "regular" trading will disappear. Analysts at Jupiter Communications expect on-line trading at home to grow from fewer than 5 million households in the U.S. to 20 million households with $3 trillion in assets by 2003.

Like any revolutionary practice, on-line trading's rapidly growing popularity requires the industry to constantly implement change. Firms must consistently upgrade computer systems in order to prevent catastrophic crashes.

Virtually all stock industry sectors are sharpening their technology as the market-sector battles flash. For example, for the first time in history, the New York Stock Exchange is considering trading NASDAQ stocks due to frustration with its inability to nab high-tech monsters such as Microsoft, Intel and Dell. The growth of technology stocks on the NASDAQ has taken a large bite out of the NYSE’s market share.

 Enhanced Technology and Extended Trading Hours: Due to increasing trade volume and investor demand, NASDAQ and the NYSE are completely changing the way they operate in several essential ways. For example, 24-hour trading is approaching quickly as on-line capabilities become increasingly ready to facilitate it. Already, some companies are building systems to allow investors to indulge in after-hours trading, and others are utilizing wireless devices to let customers trade at any time from any place. Individual investors will continue to demand enhanced services. The ability to make trades after normal market hours is a logical way to serve the needs of individuals who can best make time to manage their portfolios after normal working hours.

However, existing technology has to be upgraded before promised services get too far ahead of systems. In early 1999, several of the largest on-line firms experienced difficulties when tidal waves of trades were unleashed by the heady stock market. Among firms whose systems floundered were Charles Schwab Corporation, E*Trade Group, Inc. and Toronto-Dominion Bank's Waterhouse Securities, Inc. Ameritrade hired a technology expert as its co-chief executive in an attempt to forestall systemic computer breakdowns.

Along with technical problems and changes, organizations in charge of regulatory practices have been forced to pick up the pace. Securities regulators are taking long, hard looks at day trading firms and those who promote rapid-fire trading designed to capture minuscule stock price differentials, as opposed to benefiting from long-term securities holdings. Firms offering investors a pie-in-the-sky picture of quick wealth gained through rapid trading are being thoroughly scrutinized by state and federal officials.

Television commercials aired by such firms often feature what are supposed to be average people getting rich quickly through Internet trading. These ads are being eyed by regulators as the distinction between humorous irony and false advertising blurs. Regulators may decide to target these messages, subjecting firms to fines or pre-airing clearance. In a June 1999 speech by Securities and Exchange Commission Chairman Arthur Levitt, allusions were made to the potential danger of humorous ads such as one of Morgan Stanley Dean Witter & Co.'s. In the ad, a truck driving on-line trader accumulates enough wealth to buy his own private island. Levitt apparently didn’t find it funny.

Crack-downs on stock fraud are intensifying as well, with the implementation of cyber-cops and Internet patrollers. On-line message boards and newsletters shouldn't be a safe place for those engaging in fraudulent behavior. Newsletters that tout stocks but fail to give supportive data and proper disclosures are a target for these regulators, as are hucksters promoting stocks on-line to boost prices and then dumping the stocks. 

Trading via Electronic Communications Networks (ECN’s): One of the most remarkable developments to spring from the on-line movement is the Electronic Communications Network, or ECN. These privately-organized networks of investors allow buyers and sellers of securities to post notice of their desire to trade directly to each other, via the network, bypassing stock brokers and traditional stock exchanges completely. These ECNs create highly efficient markets that lower transaction costs for participating investors. The cost of trading on an ECN may run from a fraction of one cent up to four cents per share, which may be as little as 99% lower than the cost of trading through a traditional market maker. While these networks are a relatively new development, there are already at least eight ECNs. Leaders include Instinet, The Island, MarketXT, REDIBook, Archipelago, Bloomberg Tradebook and The Brass Utility. These firms made a September 1999 announcement that they intend to create a joint, transparent network to make trading data and buy or sell orders available to members for extended hours and with enhanced accessibility. However, both the NYSE and the NASDAQ must be keenly aware of the competition from ECNs. Extended hours, enhanced services and even direct connection services identical to those offered by upstart ECNs could easily be offered by the major, traditional exchanges, rendering ECNs essentially superfluous. But that would only happen if the major exchanges created systems that could make trades at the vastly reduced costs offered by ECNs. Otherwise, the market share of these ECNs will continue to climb rapidly.

      The Internet is creating a more truly global economy than has ever existed. For example, if a company wishes to conduct a business meeting between its American, Japanese and German subsidiaries, it can now do so via on-line video conferencing, instantly and at any hour of the day. International finance, arbitrage, trading and currency exchange can now be practiced 24 hours a day from any location on the planet.

Equally as important, the Web provides a seemingly endless plethora of the latest global financial news with a great deal more expedience than the morning paper (though you can usually read that on-line as well).

Several sites have surfaced that place an increased emphasis on international, as opposed to domestic, finance. For example, Worldlyinvestor.com focuses on international investing for individual investors. Original content from columnists and correspondents peppers the site, which has its own rankings that enable country and sector-divided individual screenings.

Two types of banking institutions are now competing fiercely for on-line customer:

1.          Internet-based, or "virtual," banks that have no traditional storefronts, lobbies or ATMs, and

2.          Traditional banks that offer Internet access to accounts and services as an additional convenience.

On-line-only banking firms are giving traditional brick-and-mortar establishments a run for their money. Throngs of technology firms have developed payment and payment-processing function-capable software that easily runs over communication networks, creating the opportunity to cut out traditional flesh-and-blood, brick-and-mortar offices as the economy's primary payment processors. Since commerce is clearly becoming more electronic and will continue to do so at an increasing rate, traditional banks are teaming up with technological firms in order to compete with slick on-line-only financial institutions.

On-line banks are simply more cost-effective to operate than traditional institutions. When the traditional expenditures associated with brick-and-mortar banks are eliminated, and several new customer-friendly features are accessible to the user, the Internet bank arises as a viable competitor. The customer is often offered a much simpler, faster and direct banking experience on-line. Account information can be accessed with the click of a mouse at any time of the day or night, and inter-account transfers can be seamlessly executed. Internet banks are additionally able to offer higher interest rates to depositors and often charge lower fees.

Internet banks’ net interest margins are usually thinner than at traditional banks, due to the payment of high interest rates. Internet banks’ “efficiency ratios,” measures of banks’ operating economies, are hurt during the implementation of this strategy and tend to be significantly lower than the average bank's.

Internet banks are currently focused more on long-term growth than on accumulating fee business. Since Internet banks are regulated and must meet certain regulatory capital requirements, they must continuously tap equity markets so that growth does not outrun their capital-generating potential. This means that entrepreneurial on-line banks must consider an entirely different set of conditions for growth compared to other types of Internet businesses.

Traditional banks such as Wells Fargo and Citibank are determined to compete on-line. These establishments offer the same sets of customer-friendly services through web sites as do their Internet-based competitors, and are able to offer free, traditional ATM services and lobby services as well. Since Internet banks are virtual by nature and cash is tangible by nature, banks with an established base of branches may be able to offer considerable competitive advantages.

In most instances, on-line account holders of Internet-only banks pay user fees at other banks’ ATM machines each and every time actual cash is desired. Though direct deposit services can usually be arranged for paycheck transfer through the account-holders’ place of business, other check deposits have to be snail-mailed to the Internet bank. Though some on-line account holders insist that lower user fees more than make up for inconvenience and ATM costs, others assert that inconvenience associated with slow check processing negatively outweighs the benefits that only Internet banking can offer.

Still, the “virtual vs. tangible” issue is one that analysts and critics believe will be bridged as technology further alters the public’s view of financial services. Ideally, the ultimate e-bank will offer one-click access to complete financial services, such as loans and mortgages, checking, bill payment, securities trading and insurance. This banking ideal is not that far off, and new Internet banks, traditional banks and legislative forces alike are making progress toward all-inclusive on-line banking.

According to Gartner Group, Inc., existing Internet-only banks have currently accumulated approximately 2% of the estimated 9.5 million customers who choose to manage accounts on-line or through Internet banking sites. Analysts at Jupiter Communications expect that number to grow to 28 million by 2003. Only about 225,000 persons currently bank solely through Internet-only institutions, but that number is predicted to grow steadily.

During the summer of 1999, the U.S. Senate initiated work on what has been called the most important banking bill in 60 years. Legislation is constantly loosening and changing as technological progression dictates the need for new guidelines, and proposed legislation is another outgrowth of that need.

Financial reform issues currently being debated include community reinvestment and operating subsidiaries. The House bill currently proposes extensive consumer privacy protection, an issue that plagues those considering handling their finances on-line. Customers would have a chance to block their banks from sharing financial information with third-party marketing establishments under the House’s bill, garnering it much support. Additionally, several Democrats have proposed that new legislation should prevent banks from sharing information with affiliated companies. The bill has been called “the greatest expansion of privacy rights in modern finance” by House Banking Committee Chairman Jim Leach. The Senate bill, on the other hand, has no limits on information sharing, as the Senate proposes tackling those issues through separate pieces of legislation.

 Smarter Cards and Cyber Cash 

Called the "first true Internet Visa" by its creators, Internet Access Financial, the NextCard serves as a pioneering model for credit cards of the future. Though there are several similarities between the operatory regimens of standard cards and the NextCard, a number of differences set it apart, and perhaps ahead, of the crowd.

To begin with, applicants go on-line to apply for the NextCard and get accepted or rejected in approximately two minutes. Customers are drawn towards NextCard not only because of an expedient application process, but also because of unusually low introductory interest rates. After step one of the application process, NextCard automatically shows the customer's other credit card balances on the screen without asking for the numbers so that he/she can specify what amount he/she wishes to transfer to the new NextCard balance.

NextCard has completely integrated its own computer systems with the national credit card-processing system, allowing for these real-time credit and balance transfer approvals. All card-related business can be conducted through the card's web site. Statements can be reviewed, balances can be transferred, the card can be upgraded and general services can be obtained. Though the card seems fairly standard, with the exception of the application process, its creators are currently working on building a bank underneath the credit card company.

Jeremy Lent, CEO of Internet Access Financial, plans to attack Internet banking's principal dilemma: tangible cash vs. virtual or conceptual funds. Lent proposes that this dilemma will eventually be solved by the "smart card," a proposed relative of the NextCard. The smart card digitally represents cash by way of a small chip embedded in the card. Theoretically, every establishment will eventually accept smart cards instead of cash, and people will use these cards to complete transactions once requiring cash. Several analysts agree with Lent's money-evolution theory. Just as customers can no longer present wheels of cheese or live chickens as barter at their favorite store, cumbersome coins and flimsy paper slips may be on the road to extinction as well, according to Lent. On the other hand, such smart cards would require that transaction fees be paid, while the costs of cash transactions are currently borne by the U.S. Federal Reserve Bank system.

Electronic Billing and Payments

Though it may be at the expense of banks, e-billing may certainly benefit both the customer and a portion of the business world — it could save paper and some of the estimated $17 billion that businesses spent on postage in 1998 alone.

Either through a customer's e-mail or via his/her bank's web site, businesses would send bills electronically. When the customer is ready to pay up, one simple click would automatically send the e-bill to an e-bill clearinghouse. There, the e-bill is deducted from the customer's account and the vendor's account is credited.

In June 1999, the Exchange clearinghouse was created by First Union, Wells Fargo and Chase Manhattan banks. Currently, Citibank is collaborating with Transpoint to offer e-billing services, and Bank One is teaming up with computer services giant EDS. A few sites already exist that enable businesses to send e-bills to individual e-mail accounts, such as Billserve.com and Paymybill.com. Also, customers of Intuit's Quicken.com and Microsoft's Money software have electronic bill payment options. However, it is noteworthy that some firms have been trying to popularize electronic funds transfer (EFT) in the U.S. for decades with little success.  EFT has been popular in France for business-to-business payments.  As far back as the mid-1970s, the Bank of France established a subsidiary office in Dallas, Texas in hopes of selling EFT services to Americans. However, acceptance was very limited at first

      For those seeking home financing, either for the purchase of a home or to refinance an existing mortgage, the Internet is a great place to start. Just type the word "mortgage" in your favorite search engine and you'll be sifting through thousands of search results.  Try to get local companies first. You will get better service from a company with a branch office near you, since it is better equipped to handle any problems that arise. Furthermore, many companies with Internet services reduce or even eliminate the standard one percent origination fee, which will save you a great deal of money.

The automation that the Internet brings to many mortgage processes is a great benefit both to consumers and businesses.  The time it takes to originate, process and underwrite a mortgage application can be whittled down to hours and days instead of weeks and months. The Internet is also a vast source of information on all aspects of the mortgage industry, resulting in empowered, better-informed customers. Jupiter Communications estimates that up to 16% of all mortgage applications will be originated on-line in 2003, for a total of one million mortgages representing $155 billion. Some loan portals, such as E-Loan, iOwn and Loan Works, are spending fortunes on radio, print and television advertising in an effort to build brand recognition. While these sites offer competitive rates and on-line applications, they still don't have the ability to process or close a loan electronically; consequently, total automation is not yet a fact. Some consumers still demand personal service when it comes to such an important business transaction.  While much of the legwork can be done over the Internet with on-line mortgage companies, actually closing a loan electronically is still a few years down the road. 

V.                 Insurance and the Internet

Insurance is one of the slowest sectors of financial services to move the selling process to the Internet. In the same way that very few companies have converted to direct mail to sell insurance, many companies are resisting using the Internet for direct selling. Insurance remains an agent-to-customer relationship industry. However, the purchase of some types of insurance via the Internet can offer the customer tremendous cost advantages. For example, life insurance lends itself to cost/features comparison, and the Internet is both an ideal way to receive such information and an excellent medium for making the purchase. Likewise, automobile insurance is already being sold directly via the Internet to a rapidly growing degree. In fact, the rapid growth of the sale of automobiles via the Internet is leading to the use of links to automobile insurance sites (and auto financing sites) that are being used by a large number of cyber customers.

In the near future, watch for leading edge insurance marketers to capture an excellent market share by selling homeowners insurance and business insurance (including fire, extended coverage and liability insurance) at extremely competitive rates over the Internet.

If you are considering buying insurance via the Internet as a consumer or as a business owner, you should weigh the advantages and disadvantages. As with any financially-related venture, it’s always wise to explore your options when it comes to insurance. It is easier than ever before to gather information and shop around for the best deal. This relatively new wave of information availability is creating an increasingly competitive market and is making it much more difficult for insurers to charge uncompetitive rates. It has never been more important — or easier — to do your insurance homework.

A number of insurance information portals have recently surfaced. Many enable the customer to make an informed decision. One such site, Insure.com, informs its visitors on how to interpret misleading insurance sales pitches, how to file a complaint against an agent or insurer, and what steps to take to collect a claim that an insurer won’t pay. Like several of its contemporaries, the site features an extensive list of research links. It additionally offers free access to Standard & Poors and Duff & Phelps ratings of insurance companies' financial stability.

Reliaquote Insurance at www.insureclick.com offers well-organized information on life insurance basics and also quotes from over 1,000 different insurers. The site asks the user to complete a short questionnaire regarding his or her needs, and then offers several policies on-screen. The visitor can then apply for whichever policy is desired on-line, an impressively easy process. The site was listed as a favorite by Forbes magazine, and several similar quoting sites exist on the Web.

Like any other financial services-related industry, the insurance segment will continue to undergo major changes as e-commerce and the Internet affect it. The Internet and the development of e-commerce promise to deliver more expedient operations and cost efficiency to the insurance industry, though they also raise many new questions.

According to consultants at Booze, Allen and Hamilton, insurers selling over the Internet have a substantial cost advantage over the lifetime of a customer, relative to non-Internet based insurers. Additionally, reports done by Datamonitor indicate that Internet insurers have a 23% expense advantage over agency insurers and a 5% advantage over direct response writers. Reduced sales costs, lower customer service expenses and more advanced information-gathering capacities fuel these efficiencies. Meanwhile, electronic commerce’s progression is prompting the integration of insurers information systems.

The role of insurance intermediaries/agents and the overall structure of the insurance market are changing dramatically as a result of Internet and e-commerce influences. Insurance portals now exist that can generate a number of competing insurance quotes within seconds. Since information transmission and the facilitation of transactions have been the primary function of insurance agents, electronic markets that can perform these tasks more efficiently and with fewer costs threaten these agents. Several agent functions are currently being disintermediated or simply replaced. Today, there are approximately 1.8 million insurance agents in the U.S., taking an average commission of 11.3% of insurance policy premiums, according to the Insurance Information Institute. According to the Center for Risk Management and Insurance Research at Georgia State University, the furthering of electronic commerce will decrease the use of the independent agency system relative to exclusive agent and direct-response distribution systems that have grown since the 1970s. The future role of the insurance agent may be geared more toward customer service and general advising roles. Nonetheless, the majority of today’s on-line insurance sites require the services of a traditional agent to finalize the sale. This will change quickly, as more new sites follow the lead of Ecoverage.com, a new firm that sells directly via on-line methods, without the use of any insurance agents.

The concept that the network becomes more valuable as more people are connected to it is also affecting the insurance industry. Hundreds of millions of people on the Internet translate into an increase in the value of Internet-based insurance services.

With the increased value of on-line connection comes decreased distribution costs. For example, products such as travel, credit or burial insurance have relatively high fixed costs and low value, and are relatively expensive to produce. Customers purchasing these products generally pay a high price per dollar of coverage. The Internet allows the disintermediation of this high overhead for low face-value products, meaning that prices can be lowered and more insurance sold by reducing the transaction cost. Increased access through electronic commerce is also influencing some consumers to purchase broader, high-value insurance products, such as liability umbrellas, to manage their risk.

The sheer competitive edge that the Internet provides prompts firms to offer more unique and complex insurance and reinsurance products. Transactions involving many products rely heavily on information and communication, areas where the Internet proves to be a considerable competitive advantage. At the same time, the sale and servicing of complex insurance products will require different kinds of networks appropriate for individualized transactions. Security will be an important consideration, given the large amount of proprietary information at stake.

The Internet is currently prompting many insurers to restructure and repackage insurance services. In order to take advantage of advanced Internet technology, many companies are reengineering, outsourcing and/or streamlining their management functions or marketing and distribution arms. Some insurers will be able to reduce their investments in physical facilities and certain personnel as a result of the Internet’s ability to more efficiently deliver their services. For example, giant Allstate Insurance announced in 1999 that it will layoff about 10% of its workforce and begin selling insurance over the Internet as part of its new plan to streamline the firm.

Electronic commerce may also enable independent agency insurers to more easily adapt their distribution mechanisms to market competition and expedite their transactions with intermediaries.

Several different strategies will be used as the insurance industry becomes more Internet oriented. For example, on-line insurance sellers that rely heavily on information technology for many functions are rapidly emerging, while other insurers are simply using electronic commerce and the Internet to significantly increase the productivity of their human and physical resources via wide area computer networks. Some aggressive insurers will grow significantly through the effective use of the Internet and electronic commerce while others will wane due to market changes. For example, the consulting firm Forrester Research forecasts that sales of insurance to consumers via on-line methods will amount to about $250 million in 1999 (a tiny portion of the total insurance market) but will leap to $2.1 billion by 2001. Meanwhile, integration between the insurance industry and other financial services industries will become a more seamless and common process.

The inclusion of the Internet and e-commerce into the insurance industry changes the way that customers interact with their insurers. Customers can obtain quick quotes from a number of companies and can see ratings and evaluations of insurers on the Web. Additionally, they can receive better customer service and enjoy cost savings provided by outsourcing. Price comparisons are easily obtained on-line, and customers can also have access to internal records in order to see where their claims are in terms of payment, when an annuity payment is due and how a mutual fund is performing. Technology brings the customers closer to the basic insurance contract through eliminating inefficiencies. 

Major Insurance-Selling Sites on the Internet

Ebix.com 
www.ebix.com enables consumers to solicit bids from 170 agents in 46 states.

Ecoverage
www.ecoverage.com sells only its own brand of insurance, created with an underwriting partner. No agents are utilized.

Insweb
www.insweb.com enables consumers to compare quotes from 46 different insurance companies.

Quicken Insurance
www.insuremarket.com is part of the Intuit family. This site provides quotes from 21 different insurance carriers.

Quotesmith.com
www.quotesmith.com enables consumers to compare quotes from an array of insurers. Quotesmith has over 300 insurance companies in all 50 states within its database.

Major On;Line Sotck Brokerage Sites
With costs for a typical trade and approximate share
of the on-line trading market as of late 1999:

Source:  Plunkett Research, Fortune Magazine

Ameritrade
www.ameritrade.com
$8.00 to $13.00, approximate market share of 9.5%.

Brown & Co.
www.brownco.com
$5.00 to $10.00, approximate market share of 4%

Charles Schwab
www.schwab.com
$29.95, approximate market share of 18%

CyBerCorp
www.cybercorp.com
$14.95, approximate market share of 2%

Datek Online
www.datek.com
$9.99, approximate market share of 11%

DLJdirect
www.dljdirect.com
$20.00, approximate market share of 3.5%

E*Trade
www.etrade.com
$14.95 to $19.95, approximate market share of 15%

Fidelity
www.fidelity.com
$25.00 to $30.00, approximate market share of 10%

Merrill Lynch
www.mldirect.com
$29.95 to $34.95, approximate market share NA

Morgan Stanley Dean Witter
www.online.msdw.com
$29.95, approximate market share of 2%

TD Waterhouse
www.waterhouse.com
$12.00, approximate market share of 12%