Competition in Domestic Brokerage Market to Intensify
The author is an analyst of NH Investment & Securities. He can be reached at junsup@nhqv.com. -- Ed.
Arrival of fintech platform-based securities firms to intensify competition in domestic brokerage market
Deng Xiaoping once said, “I don't care if the cat is black or white, so long as it catches mice.” In our view, the pragmatic view expressed in the quote can also be applied to the securities industry. In other words, it does not matter whether securities firms adopt a property IB-focused business model or a brokerage-centered model, as long as they generate sufficient earnings based on the model they choose. They could also take a flexible stance by maximizing retail brokerage income while trading value is rising, and turning back to property IB businesses when Covid-19 subsides.
With trading value rising, we expect competition in the brokerage market to intensify given its low entry barrier. If fintech-based securities firms enter the market, competition to undercut commission rates is likely to spread, as fintech-based firms are predicted to focus more on attracting customers via marketing activities than reaping profits.
So far, there are no fintech-based securities firms in Korea that offer retail brokerage services. While Kakao Pay Securities (formerly, Baro Investment & Securities) has started a securities business, the scope of its services is currently limited to fund sales. Toss Securities has yet to be established, and NAVER Financial is currently no more than a platform for financial services, though it is expected to evolve into a fintech-based securities firm going forward.
Kakao Pay Securities has yet to enter the brokerage arena due to the segment’s low profit levels. The main sources of income for brokerage businesses are commission income and interest income. With brokerage commission rates continuing to fall over the last year, existing firms have made up for decreasing brokerage commission income through interest income. They have reaped sound interest income by offering margin lending and securities-backed lending. But, strong capital power is required to provide these services. Lagging far behind existing companies in terms of shareholders’ equity, and thus unable to generate interest income as high as its peers, Kakao Pay Securities has not been motivated to enter the brokerage market, though it is likely to offer brokerage services eventually.
Strong stock trading value is likely to advance the date when fintech-based securities firms such as Kakao Pay Securities enter the brokerage market. Brokerage commission income is currently sound, and demand for trading overseas stocks that carry higher commission rates than trading in domestic stocks has picked up considerably. In addition, unlike financial product sales, stock brokerage services do not entail the hassle of explaining products to customers.
Fintech-based securities firms to eat away at market share of small/midsized players rather than Kiwoom
If fintech-based securities firms enter the brokerage market, existing players are bound to suffer market share decreases. But, the extent of market share loss should differ by company. Some predict that being specialized in online brokerage and boasting the largest share of the domestic retail market, Kiwoom will be hit hardest. However, we believe that other players (especially small/mid-sized firms) will be more vulnerable to the expected foray of fintech-based securities companies into the brokerage market.
Following the introduction of non-face-to-face account opening in 2016, competition to attract online customers heated up from 2017, led by large companies. As a result, from 2017, large firms such as KIS, NH, and KB enjoyed a higher share of the brokerage market. However, having temporarily fallen, market share at Kiwoom (the then-number one brokerage service provider) bounced back. And, since 2019, its market share has increased further. These developments indicate that: 1) new customers at large companies were either first-time investors or disloyal customers who defected from small/mid-sized firms, rather than customers from Kiwoom; 2) Kiwoom boasts a strong competitive edge in brokerage services; and 3) securities players’ brand power and HTS/MTS service quality is as important as their commission rates.
Based on past trends, we believe that if fintech-based securities companies enter the brokerage market, most of their customers will be first-time investors or defectors from uncompetitive small/mid-sized firms. Kiwoom and large players with strong brand power and customer loyalty should be relatively unaffected by the expected entry of fintech-based securities firms into the brokerage market.
Competitiveness hinges on brand awareness, market share, and HTS quality
With trading value rising, how will the securities sector change? While polarization should continue to unfold among securities firms, the direction of polarization is likely to differ from the past.
When the capital investment business model prevailed from 2014 to before the Covid-19 outbreak, competitiveness hinged on capital power. The more shareholders’ equity and assets securities players had, the more opportunities they landed to secure big deals. In addition, backed by government policies to encourage securities companies to expand their size, the scope of permitted services broadened for large firms (eg, prime brokerage services and promissory note issuance) versus their smaller counterparts. In other words, the sector became polarized based on capital power.
However, things have changed. The outlook for the property IB market has dimmed, and the significance of stock brokerage services has grown. If lending services are put aside, brokerage businesses do not require capital power. Under the circumstances, competitive factors for securities firms will be: 1) high brand power; 2) diverse channels to ensure more customer touch points; 3) high-quality MTS/HTS services that enable stable and convenient trading; and 4) solid retail market share and a resultant reduction in fixed costs, which should prove crucial if competition to undercut brokerage commission rates unfolds.
Among existing securities companies, Kiwoom is best suited for these conditions. The firm boasts an outstanding share of the brokerage market and strong brand awareness among retail customers. It is also specialized in online brokerage, which puts the company in an advantageous position over rivals amid growing non-face-to-face activity. While the firm faces profit volatility at the PI division and trading platform issues, these issues are surmountable. In the current market environment, Kiwoom is a definite top pick for the securities sector.
Mega-sized IBs are also better positioned than small/mid-sized firms, as they boast better brand power and higher market shares and can afford to invest in system upgrades. They are also able to attract retail investors, utilizing their high-quality WM services. That said, it is uncertain if large players will be able to maintain strong brand awareness after fintech-based securities companies enter the brokerage market. Accordingly, they need to polish their image, strengthen partnerships with fintech firms that have not entered the securities market, consider offering more differentiated WM services, and continue investing in their MTSs/HTSs.