Online Investment Platforms in the UK: Succeeding Through Differentiation

February 26, 2019

Online Investment Platforms in the UK: Succeeding Through Differentiation

The ten-year bull run in UK stocks fuelled significant growth for D2C investment platform providers. To gain market share and improve profitability, platform providers need to set themselves apart from competitors and develop offerings tailored to the specific needs of their target customers.

Over the last decade, stock markets have seen strong investor engagement and asset growth due in part to favourable conditions created by central banks. D2C (direct-to-consumer) platforms, which traditionally rely on transaction and platform or custody fees as revenue sources, have thrived as a result. With the investment climate becoming more challenging, both investor engagement and asset growth are likely to become more tempered. What does this mean for D2C platforms?

Challenges facing D2C platforms

To date, D2C platforms in the UK have fared well with low price competition as Hargreaves Lansdown, industry leader with a 40% market share, has not used its leading position to draw peers into a price war. However, things are subject to change as these prices are bound to come under pressure from both new entrants and old giants, such as Vanguard reinventing the established business model. Moreover, the rally seen in stock markets over the last 10 years has made it possible for D2C platforms to generated higher revenues from increased asset sizes and the corresponding rise of percentage-based fees. However, this trend cannot be relied upon to fuel future profitability growth.

Given these trends, the UK D2C platform industry is due to see a growing threat of price rationalisation, ultimately leading to pressures on margins. In addition, asset price shocks will affect revenue streams of the D2C providers that charge assets under administration (AuA) based fees. When transaction prices come under pressure and asset prices become vulnerable, the D2C platform industry will face challenges meeting their profitability targets.

A one-size-fits-all approach to pricing doesn’t work

Across the industry, D2C platforms offer users largely uniform propositions in terms of features and prices (with the exception of users who trade extremely frequently). This one-size-fits-all approach leads to many customers being ignored or underserved. Most D2C propositions aren’t catering effectively to the needs of customers with different price and feature preferences, which means platforms end up leaving money on the table. There are no tailored solutions for e.g. customers who only make a few transactions a year and are therefore willing to pay higher transaction fees in return for low platform fees.

The right strategy for D2C platforms is to offer different price models and/or price levels for customers based on feature and price preferences and communicate this to their target audience through an intuitive value-selling approach. On most D2C platforms, users automatically get a discount when they perform a certain amount of trades per month or quarter. However, this scattershot approach is ineffective at driving consumer behaviour in a favourable way. D2C platforms can maximise profits by segmenting customers based on behaviours, understanding their preferences and catering to those preferences with differentiated pricing propositions.

Staying ahead of the game

To gain market share and outperform competitors, D2C platform providers have to adapt their offerings. The key lies in price- and feature-based differentiation. Our experience leads us to believe that there are three broad, but distinct sets of ‘execution-only’ customers with individual needs and requirements that D2C investment platform propositions should be designed around:

  1. Fund investors: Primarily interested in stable and relatively regular fund investments
  2. Domestic equities investors: Primarily interested in UK-based equities
  3. International equity investors: Interested in diversifying their equity holdings beyond UK markets

In addition to customers’ feature preferences, usage sophistication and willingness to pay, there are other nuances that vary between, and even within different customer groups; putting emphasize on platform providers’ ability to accurately segment their target customers. The two main differences are preferred trade-off between platform fees vs. transaction fees and the price elasticity derived from this trade-off. D2C investment platforms need to bear these value drivers in mind when futureproofing their propositions.

A successful differentiation strategy

To gain market share or improve profitability, companies should develop different sets of features that appeal to their specific target customer segments and put the right price tags on these sets of feature. For instance, if international equity investors value the ability to deal in multiple currencies without incurring FX charges each time, D2C platform providers could bundle this feature into an all-inclusive platform fee with lower transaction prices and an overall higher platform fee.

The starting point for firms is to understand their strategic goals, such as an increase in market share vs. profit maximisation. Next, firms need to understand precisely who their target customers are, what the value drivers for these customers are, and whether their current proposition and pricing will be able to cater to these customers effectively. Finally, by developing a differentiated proposition and pricing that focuses on the preferences of these customers, D2C platforms in the UK will be able to achieve their strategic goals.