Page 160 - Electronic Commerce

Selling on the Web

intermediary, such as a human agent, is cut from a value chain. The introduction of a new
intermediary, such as a fee-for-transaction Web site, into a value chain is called
reintermediation.

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Stock Brokerage Firms: Two Rounds of Disintermediation
Online stock brokerage firms use a fee-for-transaction model. They charge their
customers a commission for each trade executed. In the past, stockbrokers offered
investment advice and made specific buy and sell recommendations to customers in
addition to their transaction execution services. They did not charge for this advice, but
they did charge substantial commissions on the trades they executed. In the United
States, these commission rates were set by a government agency and were the same for
each stockbroker. Thus, because they could not compete on price, the best way for
brokerage firms to compete was to offer more and better investment advice.
After the U.S. government deregulated the securities trading business in the early
1970s, a number of discount brokers opened, including the highly successful Charles
Schwab firm. These discount brokers distinguished themselves by not offering any
investment advice and charging very low commissions. They did not employ account
executives (as the traditional brokerage firms did) because they did not need to offer the
same level of personalized service; the attraction to customers was their low commission
rates. Traditional brokers had provided free research to all of their customers, but many
of those customers neither wanted nor valued the research. Those customers were very
happy to move their business to the discount brokers who provided fast, inexpensive trade
execution only. As this shift occurred, individual stockbrokers were disintermediated from
the industry value chain.
A second round of disintermediation occurred in the 1990s as new online brokerage
firms took business away from the discount brokers who had earlier taken business away
from traditional brokers. The Web made it possible for firms such as E*Trade Financial to
compete with both traditional and discount brokers by offering investment advice posted
on their Web pages or sent in e-mailed newsletters. This advice was similar to that offered
by a traditional broker, but could be provided without many of the costs of distributing
the advice that traditional brokers had incurred (such as stockbroker salaries, overhead,
and the costs of printing and mailing paper newsletters). These Web-based brokerage
firms could also offer fast execution of trades by having customers enter data into Web
page forms, thus competing with the discount brokers.
Of course, the full-line brokers found that they were simultaneously losing business to
both the discount brokers and the online brokers. In response, both discount brokers and
the few surviving traditional brokers opened stock trading and research information Web
sites in attempts to take back some of their business from the online brokers. After two
rounds of disintermediation and the financial crisis of 2008, the brokerage firms that
remain today do most of their business online. TD Ameritrade is one example of a surviving
firm that offers a combination of investment advice and advanced trading tools to a wide
range of customers online.

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