Online retail brokerage has grown to become part of the mainstream in the United States. No longer a novelty or esoteric technology, online brokerage is widely used and accessible. The ubiquity of the Internet in the US and the popularity of the investment markets have played a significant role in promoting online investing.
The Latin American Internet brokerage market remains immature when compared to the US Internet brokerage market. Key reasons for this include lower rates of Internet usage and equity ownership as well as a strong propensity toward liquidity as a result of the history of financial crisis in the region. Consequently, even the more affluent Latin Americans have been slower than their US counterparts to embrace Internet investing.
The proliferation of online brokerage in the region faces a plethora of daunting challenges that will have to be overcome for online personal finance to gain adoption even at a minimal level. One of the most compelling factors impeding growth is the fact that Internet penetration rates are still very low at around 3% in Latin America, compared to almost 50% in the United States. Reasons for this discrepancy include the inferior landline telecommunications infrastructure as well as high PC acquisition and Internet access costs.
Exhibit 1
Personal Computer Penetration and Internet Usage, First-Half 2000 Source: TowerGroup
Regardless of the economic and infrastructure limitations currently impeding rapid adoption of online personal finance, Internet brokerage firms are flooding the Latin American arena, threatening to inevitably saturate a market that has not really developed yet. In Brazil, InvestShop offers online stock trading, transaction capabilities, financial content and real-time news. Argentina’s LatinStocks, US-based Zona Financiera.com and Patagon.com, the online brokerage arm of Banco Santander Central Hispano (BSCH) are all vying to assume leadership positions as financial supermarkets. The sites are laden with financial information ranging from stock quotes to financial news and are very sophisticated in their multi-lingual and multi-cultural design. They are experiencing strong adoption rates in the higher-income levels of society, however, primarily for informational purposes at present.
In the longer term, Internet brokerage will gain further adoption through the convenience of service delivery via the cellular device. Online brokerage firms electing to integrate wireless into their channel strategies will build their business on fertile ground and bypass the challenges surrounding low Internet penetration in the region: Latin America had almost 40 million cellular phone users last year, as compared to 5 million Internet-enabled PCs.
Exhibit 2
Cellular Device Penetration by Region, 2000-2004 TowerGroup believes that the wireless device will eventually emerge as an important delivery channel for reaching online brokerage customers in Latin America. With Internet delivery via the personal computer strongly inhibited by an inferior telecommunications network and high PC acquisition costs, the wireless channel is quickly becoming the most important medium of communication, particularly in the more affluent markets-Brazil, Mexico, and Argentina. This development augurs well for the adoption of the wireless device for both informational, and increasingly in the longer term, transactional brokerage services.
With skyrocketing wireless penetration rates in Latin America, online brokerage firms will recognize the potential of the mobile device as a medium to interface with their customers. With only a small portion of the population controlling the bulk of assets within each nation, personal finance sites in the region will move swiftly to establish a channel mix that will satisfy the customers they are eager to keep as well as broaden their target markets through eliminating the hurdles presented by low Internet penetration rates.
Although cost, infrastructure, and other factors will have to be overcome for wireless Internet access to gain widespread adoption, TowerGroup believes the efforts underway to leapfrog existing landline telecommunications systems in the region, with newer, more advanced wireless networks will help mobile technology quickly gain ground as the dominant means of accessing the Internet in the region. Already in Venezuela and Paraguay, the number of wireless phones is greater than the number of residential main line phones.
Internet brokerage in Latin America is gaining ground, though slowly. The ubiquity of the Internet via the wireless device, the real-time “entertainment aspect” of the stock market, and the increase in online information and transaction capabilities will emerge as key drivers of the online brokerage wave in the future. TowerGroup believes that, over the next five years, Internet brokerage account numbers will rise steadily in the major Latin American nations – Brazil, Mexico and Argentina – which have already been designated by the aforementioned major financial portals to be important heavy market expansion targets.
Virginia Philipp is an analyst, Latin America&Caribbean, TowerGroup