How To Effectively Integrate A Bank-Brokerage

With the number of active self-directed investors and traders growing, banks and brokerages need to build a better model.

The US self-directed market exceeded 40 million investors in 2012, according to Celent research report, 'The Race for Self-Directed Investors: Developments in Online Trading Among Brokers and Banks.'

Both active investors and active traders present a significant opportunity for firms, with aggressive future growth rates. According to the report, the active investor market alone is now made up of nearly 17 million individuals (42% of the total US self-directed market), growing at a rate of 7% and 6% over the last two years, respectively. Active traders witnessed the most significant progress with 15% growth in 2012.

We’ve seen a major increase in interest for bank-brokerage integration in response to the surge in this segment. The movement for a more assimilated bank/brokerage model is driven in part by the evolution of the US investor.

The convergence trend emerging in 2013 builds on a similar growth phase large institutions underwent several years ago, mostly driven by the repeal of the Glass-Steagall Act (in 1999) allowing banks to move forward with brokerage capabilities. However, it has been a slow development often hindered by internal and external factors such as budget, resource and technology limitations.

One such example is Bank of America's acquisition of Merrill Lynch in September 2008. It took several years of dedicated resources to yield a truly unified integration of the bank and brokerage, which culminated with the rollout of Merrill Edge, launched in June 2010. This was a significant milestone and marked a step toward integration of the bank-brokerage for the institution and other players in the industry.

Recent changes in available technology, over the past two years in particular, have made internal bank-brokerage consolidation a valid opportunity for channel growth, most notably for regional and mid-sized banks. Up until this point, the barrier to entry was so high that an integrated offering was not a cost-effective investment for these institutions.

A bank has to offer online capabilities combined with personal service if it wants to keep existing clients and grow new ones.

Tips for Successful Technology Integration

Integrating online banking with online brokerage can be quite technical, often including changes to sales, customer service, messaging, branding, products, navigation, authentication, account linkage, balance display, money movement, etc. During this process it is important that existing customers do not suffer any disruption in service. The final integration should offer a seamless opportunity to extend the present relationship and any glitches during the transition could come at a cost of customer experience and ultimately impacting retention.

According to Celent, bank-brokerages are expected to focus on integrating services in 2013 with an initial concentration on single sign-on, real time money movement and the ability to view holdings across multiple accounts. Further assimilation will focus on unified banking and brokerage performance metrics, pre-filled account data for easier account opening, and integrated banking-brokerage mobile apps.

The Digital Differentiator

Clients want access to their banking and investment information in real-time from any location. The digital phenomenon touches several technologies, devices and channels, such as social media, mobile, tablets and online. Among online brokers, mobile trades via mobile apps have more than doubled since the beginning of 2011 and have grown 50-70% from year-end 2011 to year-end 2012 (Celent). For those brokers offering both banking and brokerage, there is a unique opportunity for differentiation in the mobile channel by further integrating mobile banking and mobile brokerage.

Social media offers another set of in-demand features driven by community models, both public and private. The opportunity to interact with a forum, live chat, or create groups and profiles enhances the need for a more connected model.

Incorporating a digital strategy facilitates client retention, client acquisition and differentiation, with a chance to truly engage your network.

Trading Platform Enhancements

Active traders and active investors demand advanced trading capabilities, integrated charting features, and real-time market information. Active investors specifically put more weight in availability of services such as education, networking, mobility, and the availability of advisory support for trade suggestions.

Over the past several years, the number of trading platforms has expanded, leading to a fragmented market. Since 2010, several firms targeting the active investors and active traders have emerged. For example, there are now a number of firms focused specifically on options, futures, and equities trading. Additionally, a number of bank-brokers, insurance groups, mutual fund providers, and private wealth managers have enhanced their online trading capabilities to supplement their other wealth management services, according to Celent.

To remain competitive, firms exploring the bank-brokerage model will need to focus on enhancing their trading platforms to differentiate themselves. High trading volume and use of complex trading strategies make the active investor and active trader very profitable segments for an integrated model. Tools to target these segments will be vital to capturing more assets, but the complexity can offer greater challenges for the team charged with creating the tactical framework for these efforts.

Building a Better Bank-Brokerage

Over the past 18 months there has been greater interest among bank-brokers in the online trading space. For some banks this means reconsidering and enhancing existing tools and strategies, and for others it means adding online brokerage as a new service to existing clients.

The biggest advantage for bank-brokers remains their pre-existing retail banking customer base.

In part II of "Bank-Brokerage Integration, A Tactical Framework" we will explore the critical path elements and challenges for authentication, account linkage, balance display and money movement. Part II will be posted in a few days.

About The Author: Joe Stensland, Executive Vice President, Product and Delivery Management As Executive Vice President, Product and Delivery Management, Joe Stensland is responsible for overseeing the product and market strategy for Scivantage. Joe brings to Scivantage a proven track record in successfully launching, growing and managing technology products in the financial services market.