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“Schwabing” the competition
A case study in m-commerce
Charles Schwab’s savvy effort to exploit the transactional possibilities of the wired Internet coined a new verb for the dot-com age. Can the brokerage extend similar technological hegemony to the wireless domain?

by john edwards
March/April 2001

Whenever Audrey Schaefer gets a tip alerting her to a hot stock, she reaches for her phone. But instead of calling her broker, she punches a few buttons on the Nextel mobile unit, enters the wireless Web and accesses her Charles Schwab brokerage account. “A few minutes later, I’ve completed the trade,” she says. “I feel very ‘cutting edge.’”

Schaefer, a corporate communications consultant who lives and works in Derwood, Md., opened her Schwab account in late 2000. By the end of January she had completed about a dozen wireless trades. “I like the flexibility it gives me,” she says. “Since I can make a trade wherever I happen to be, it helps me save time.” Schaefer also likes the way Schwab’s PocketBroker service alerts her to stock upturns, downturns and breaking news. “It’s kind of like having a stockbroker with you wherever you go,” she says.

Schaefer isn’t the only busy professional who enjoys the convenience of wireless trading. According to International Data Corp., a technology market research firm located in Framingham, Mass., there will be over 10 million active wireless brokerage users in North America by 2004, up from less than 1 million at the end of last year. San Francisco-based Schwab is hoping to latch onto a sizeable chunk of this market, says Jonathan Craig, the firm’s vice president of global wireless solutions. Although cagey about how many wireless users Schwab currently serves (Cahners In-Stat Group estimates Schwab has about 10,000 users), Craig intends to replicate the brokerage’s Internet success in the mobile world. With 4.3 million accounts, Schwab’s eSchwab offering is the No. 1 online trading service.

That won’t be as simple as a wireless trade, though. As 2001 dawned, Schwab trailed rival Fidelity Investments, which was the first major brokerage to offer a wireless trading service. Fidelity’s InstantBroker, which debuted in October 1998, has approximately 75,000 customers. At this early stage, however, customer numbers are relatively meaningless, according to Edward Kountz, senior analyst for mobile financial strategies at TowerGroup, a Needham, Mass.-based company that provides research services to financial institutions. “Fidelity moved into wireless more quickly, while Schwab’s solution is coming out at a more measured pace,” he says. “The market’s numbers will change very quickly.”

Schwab launched its first version of PocketBroker in Canada back in June 1999. A version for American subscribers followed a year later. The service is also available in Hong Kong and is scheduled to roll out in several more Asian and European countries later this year, including Japan and the United Kingdom. PocketBroker is available at no extra charge to Schwab customers using a Web-enabled mobile phone, two-way pager or Internet-linked Palm handheld system.

Schwab views wireless trading as a technology with almost unlimited potential. “The market doesn’t stand still while people are on the road, Craig says. “This is something that people really want, and it’s up to us to provide a service that meets their expectations.” That’s the vision. In reality, for most investors wireless trading remains a distant and exotic technology. A recent IDC survey of brokerage customers found that fully half didn’t know whether their brokerage offered wireless trading. Worse yet–considering Schwab’s 8 vision–61 percent of respondents admitted that even if their brokerage did offer such a service, they lacked the mobile hardware required to access it. Yet Shaw Lively, IDC’s e-investing research manager, expects interest in wireless trading to pick up as brokerages begin educating their customers on the benefits of wireless trading and as Web-enabled mobile phones and other mobile devices become more widely used. His is the patience of the experienced gardener: “For the brokers, offering wireless trading is like planting a seed and watering it until one day you see the plant pop through the soil,” he says.

While waiting for wireless trading to take root, Schwab and other brokerages are using the technology as a tool to attract and retain customers and to differentiate themselves from the competition. “They’re saying, ‘look at us, we’re a high-tech leader,’” says Octavio Marenzi, managing director of Celent Communications, a Boston-based technology and consulting firm for financial services companies. By personalizing their services with reporting and analysis features that link directly to individual accounts, Schwab and other brokerages hope to use wireless to ensnare current customers. A July Forrester Research report found that nearly half the firms it surveyed reported that customer retention was the No. 1 reason for adopting wireless. “As the holdings, financial position and lifestyle of a customer change, so will the information they access via their mobile device,” says IDC’s Lively. “Each time these changes occur, their mobile brokerage becomes more personalized, increasing the value of the current service and the barriers associated with switching brokers.”

As for attracting new customers, Schwab also isn’t above using time-honored techniques. In November, the company started offering free Research In Motion 957 two-way pagers to active traders who open an account. Schwab also offers a free Web-enabled phone to people who start an account with at least $10,000. “It’s not unlike luring customers with a free toaster,” Lively says.

When developing PocketBroker, Schwab drew deeply from its experiences in the Internet world. “Schwab defined the Internet in terms of brokerage–you could say they colonized the ’Net,” says TowerGroup’s Kountz. Schwab learned many lessons from developing and implementing its online service, Craig notes. “We discovered that people want to feel in control of their finances. So providing stock quotes, for example, was a way of meeting that need.” But Craig also believes that it’s impossible to serve a broad user base with only a limited number of features. And the wisdom of tailoring services and applications to the actual needs of real people has hit home. “Customers resonate to different types of applications,” he says. “You must offer services that they can really use, so this something we are always working on and expanding.”

Despite the fact that wireless trading is barely out of the starting gate, the industry has already emerged as a mobile commerce bright spot.

While many retailers and service companies still are talking about how they will bring wireless content and transactions to the masses, brokerages are actually doing that now. It seems the service and the means to use it are well matched. “Financial services lend themselves to wireless better than almost anything else,” says Celent’s Marenzi. “Investors using these services do so on a regular basis, and they use it with a clear idea of what they want to accomplish.”

Unlike some of its competitors, Schwab isn’t focusing only on professional traders and other high-end customers. The company’s all-inclusive approach should help it build a comprehensive user base that cuts across age and income, says Surya Kolluri, vice president of strategy for Destiny Web Solutions, a Conshohocken, Pa.-based provider of Internet consulting services to financial institutions. “Schwab has done an excellent job at introducing their wireless service to a large and diverse audience,” he says.

But while Schwab and other brokerages have proven they can deliver a functional service, they have yet to prove that it can be profitable. “It’s extremely unlikely that anyone is turning a profit on wireless trading right now,” Marenzi says. He notes that even the brokerages themselves have trouble quantifying just how much money they’re making–or losing–from wireless trading. “It’s hard to figure out,” Marenzi says. “Most customers would just pick up a phone and call in a trade if they were unable to do it wirelessly. You wouldn’t necessarily lose the trade.”

Like its competitors, Schwab is concerned that wireless data still is an immature and inconsistent technology. Schwab’s own PocketBroker documentation warns customers that the service isn’t entirely reliable–akin to the printed caveats that voice customers receive.

As Schwab and other brokerages continue to roll out their wireless services, a major marketing goal is overcoming user skepticism. “People fear what they don’t understand,” Kolluri says. “Not many people understand wireless trading.” Schwab-user Schaefer hasn’t yet experienced any major problems with PocketBroker. “Just a few of the usual disconnects and other glitches,” she says. Yet Schaefer remains wary of electronic trading in general, and isn’t eager to repeat an experience she had with an unnamed online trading service. “The trades went to the wrong user’s account,” she recalls. “It took 17 phone calls to resolve the problem. I’m crossing my fingers that nothing like that ever happens again.”

The quality of end-users’ experiences is critical, as Schwab envisions using its wireless trading technology as a platform for a variety of m-commerce transactions, including banking and shopping. For trading or other m-commerce services to take off, data speeds will have to as well, Craig says. He awaits the widespread availability of broadband wireless access. Though existing wireless data transmission speeds are agonizingly slow–9.6 kilobits per second on a phone and 14 to 19 kbps on larger mobile devices–next-gener-ation networks are expected to supply broadband transmission rates of up to 380 kbps, enabling multimedia content.

At least two significant challenges remain for operators of wireless trading services. One is a lack of universal standards for mobile air interfaces. The problem isn’t as bad overseas as in the United States. In most of Asia and Europe, Schwab can rely on the widely accepted GSM standard. In the United States, however, Schwab must cope with competing wireless networks that utilize a disparate set of standards, including CDMA, cellular digital packet data, Mobitext and GSM. “This makes it very inconvenient, and costly, for the brokerages to provide service,” Kolluri says. To alleviate some of the pain, Schwab has formed marketing and technical alliances with several wireless developers and service providers, including Aether Systems, Nextel, AT&T Wireless Services and Sprint.

The other hurdle is security–or the lack thereof. “It’s hard to think of a field that’s more conscious about security than brokerages,” says TowerGroup’s Kountz. But Schaefer, the Schwab customer, isn’t overly concerned about potential security lapses. Schwab, however, isn’t complacent. “We take security seriously,” Craig says. “We’re using a lot of the same technology as we do with our wired solution–encryption, firewalls and so on.”

Wireless security solutions are not yet fully in place, Kountz warns. “WAP has a security hole. The move to public key infrastructure remains incomplete. Although the hacker community has not yet zeroed-in on wireless trading, the community is acutely aware that security needs to be addressed.”

For Schaefer, faster and more reliable service sounds like a good idea. But she offers a caveat that brokerages might heed in shaping their wireless service offerings. “I’m all in favor of anything that will make trading easier,” she says. “But I’m also going to be careful not to let easy trading overshadow my need to trade intelligently.”

INSET: Offering wireless trading is like planting a seed and watering it until one day you see the plant pop through the soil.

INSET: It’s extremely unlikely that anyone is turning a profit on wireless trading right now.