By Prashant Mahesh

Made for each other. Financial services and the web are so compatible that it is natural for financial services to take to the Internet medium like fish to water. Easily digitalised and delivered online, there could not be anything better than financial services that could be offered on the web.

Financial services on the web offer great benefits. The primary benefit is the reduced cost of transactions. Consider this: it costs only a penny to process a net-based transaction against $1.07 for a branch-based transaction and 27 cents for an ATM-driven transaction. Though online banking services are growing fast, they are currently clouded by complex regulations and security concerns, which are in the process of being streamlined.

That apart, services are bound to succeed on the web. Quite a few experts are optimistic about such a thing happening sooner than later. For a simple reason. Web-driven financial transactions bypass traditional hurdles such as logistics and delivery. For an e-broker, once systems are in place, it becomes just a game of volumes.

Consider the case of stockbroking. From the open outcry in trading rings to online trading, the Indian stockmarket has come a long way. Today, even shares are held in electronic form. All these mean fewer hassles for the investor. One, he need not go to the stock exchange. Two, the risks usually associated with physical delivery of shares such as bad delivery, theft and forgery are not there.

Another advantage of net trading is that investors can gain greater access to more information than ever before. Corporate analysis and financial results are available at the click of the mouse. Such is the power of net trading that in the USA it accounts for as much as 37 per cent of all retail trades. Soon it is expected to surge up to about 50 per cent just in a year.

Not just access to greater information, Net trading is erasing geographical boundaries. Thanks to physical trading, players were confined mostly to centres which had stock exchanges. With computers the reach has increased to more than 300 cities within India. With the internet, this reach is bound to widen further and even cross national borders. Says Gurunath Mudlapur, who handles e-broking activities of the Mumbai-based Khandwala Securities: "With e-broking, the potential is tremendous and one can reach out to a far wider audience."

Net trading spinoff

One major spinoff from online trading is the manifold-rise in trading volumes. Today, the two major stock exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) together account for a turnover of more than Rs 10,000 crore against a mere Rs 1,000 crore logged in a few years ago.

Trading on the Internet requires a mere Internet access and sometime in the near future could need just a mobile phone. With this sort of convenience, days are not far when a new class of day traders will crop up and this is bound to lead to a dramatic surge in trading volumes.

Needless to say it is a win-win situation both for the investors and the brokers. With electronic trading, the time lag between buying a share and its actual delivery is bound to whittle down further. This should lead to elimination of risks for both the broker and the investor. Not just that, the investor should also stand to gain, thanks to reduction in brokerage rates. Estimates are that brokerage which is currently as high as 2 per cent is expected to dip down to somewhere between 0.5 per cent and 0.75 per cent.

There are signs of this already happening. ICICI has signalled a lowering of brokerage rates recently. It has launched ICICIdirect.com for e-trading, which has received a terrific response. Just in a matter of weeks, as many as 10,000 individuals have registered with it. ICICIdirect.com plans to charge a flat brokerage rate of 0.85 per cent for delivery-based transactions. As a part of a three-in-one service deal, one has to open a bank account with ICICI Bank, have a depository account with them and trade with them. As a part of the freebies thrown in to attract an investor to the site, ICICI is also giving free research reports, thanks to its tie-up with various research houses, and access to Reuters news. Also being provided is a link to the nse-india.com and bseindia.com to enable investors view quotes of scrips as and when they are traded. Its rival HDFC Bank has also been quick to announce its venture into e-broking.

E-brokers galore

This is just the start. Many local brokers such as Infrastructure Leasing and Financial Services (investsmartindia.com), S S Kantilal Ishwarlal (sharekhan.com), Motilal Oswal (motilaloswal.com), Khandwala Securities (Kslindia.com) already have their websites in place. Most of them offer their databases through the site along with investment recommendations for clients. Quite a few brokers are even routing orders through their e-mail facility. They are all waiting for the Reserve Bank of India to grant final permission before commencing Net trading.

There are no doubts that Net trading has tremendous scope. Look at countries such as the United States of America and South Korea. In USA, Charles Schwab is already a big Internet stockbroker and Merrill Lynch has finally fallen to the charms of the web.

Things are changing here too. In India, currently Geojit Securities is the only broker allowing direct connectivity to the web. Most other brokers are routing their orders through the web. Says Yash Kulshreshtha, assistant vice president (e-broking), Motilal Oswal Securities: “Before beginning with web trading, brokers have to ensure that they have a proper risk management system and connectivity with the bank and the depository.” As far as content is concerned, brokers can offer investors details about mutual funds, initial public offerings and corporate news among other things.

Where is e-broking now? Most leading brokers are working on the software part of the concept and once that is ready it shall only be a matter of time before they launch e-broking. On balance, e-trading is some manna from the heavens for the investors. For various reasons. The markets will be far more liquid and efficient, trading volumes will explode, retail investors will begin trading at very low costs and markets may remain open all the time. As Net trading catches up, investors are bound to turn more knowledgeable about matters of finance and would flock to the Internet for transacting everything from mortgage loans to pension fund contributions.