The Internet Encyclopedia (Volume 3)

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Flicker WL040/Bidgoli-Vol III-Ch-23 September 15, 2003 15:3 Char Count= 0

WHYE-FINANCE? 275

Electronic

Communications

Networks (ECN)

Day-trading

Financial Portals and

Discussion Lists

Electronic

Securities

Exchanges

Insurance

Interbank and

Intergovernment

Transactions

Bill-paying

Retail

Banking

Stock and

Bond

Brokerage

Figure 1: Wall Street’s web of online financial services.

investing (p. 19). (This compares to online banking rates

of 3.3% and 0.3% of online time, respectively.)

Other sources cite even greater volumes of online in-

vesting. As early as May, 1997, NetSmart announced that

42% of Internet users surveyed researched financial ser-

vices online, and that 30% of them had made online in-

vestments (Research Alert, p. 8). The Direct Marketing

Association’sStatistical Fact Book 2001includes a Nets-

mart America.com study reporting that 13% of Internet

users invested online in 2000 (Netsmart.America.com,

2001), and Jupiter Media Metrix forecasts 3.6 million on-

line trades by 2006 (out of 32.5 million Internet users),

up from 1.5 million in 2001 (Guglielmo, 2001). In a 2001

study, IDC estimated that there were 7 million online bro-

kerage accounts in Europe in 2000 and forecast growth to

17 million accounts by 2004—approximately 10 million

less than comparable U.S. volumes. In fact, providing on-

line trading has become a securities industry imperative;

Accenture reports that “traditional retail brokers lost $2

billion of their $54 billion in 1999 revenues to online trad-

ing companies such as E∗Trade, eSchwab, and Ameri-

trade” (Tsien & Dumaine, 2001, p. 2).

The business-to-business financial sectors have not

been left out of this revolution. ActiveMedia Research

expects that “finance, insurance, and real estate” will be

among the four top “Internet-based commerce leaders” in

business-to-business markets by 2004, with e-commerce

penetration in “transportation, trade and finance” grow-

ing from 1% in 1999 to 34% in 2004 (Karr, 2000).

Digital Distribution

Digital distribution is an extremely efficient supply model.

Purely digital “products” can be sent over computer net-

works cheaply. It is no coincidence that the most profitable

e-commerce efforts to date have not had to deal with phys-

ical goods. They were able to automate operational pro-

cesses and to avoid significant warehousing, shipping, and

handling expenses. Additionally, the Internet offers oppor-

tunities to automate critical procedures and to transfer

many customer service activities from venders’ employ-

ees to the customers themselves. In 2000, Forrester Re-

search documented the precipitous drop in the price of

information, from encyclopedias to stock prices, as the

transmission medium evolved from paper and ink to bits

and bytes. Online financial services were able to take full

advantage of these factors. For example, after launching

a revised Internet trading product in 1998—one that was

low-priced but offered full access to the firm’s customer

services—Charles Schwab reported that it saved over

$100 million annually due to “net efficiencies” (McFarlan

and Tempest, 1999). (See Figure 2.)

The Investor’s Perspective

“Where do you think I’d better go?”

“Anywhere you like, anywhere you like,” said the

goose.

(Charlotte’s Web,p. 17)

From the investor’s perspective, e-finance offers opportu-

nities unavailable in the pre-Web world. It lets individual

19891989 1994 1999

Paper

Electronic

$0

$40

Web

1989 1994 1999

Satellite

$0 Web

$400

Figure 2: The cost of distributing “digital” products is minimal.