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The Performance Arms Race Continues in Financial Services (Part 2 of 3)

In the first part of this blog I examined the relationship of performance, user experience, and the competitive marketplace in financial services.  In this second part I will look at the ROI.  For Financial Services Institutions (FSIs), what is the payback for improving the performance of their web sites and mobile sites and apps?

Part Two: The ROI of Performance

There are many reasons why ROI is difficult to calculate.  I have dealt with this challenge as it relates to performance, user experience, and technology adoption for over 20 years, and across many segments of financial services.  The best way to deal with it is to dive right into an example, and then consider how to extend the example to other segments.

In Part One I showed how the brokerage segment is most keen on performance.  The brokerage segment also provides some very good metrics from which to build an ROI case. 

The first step is to identify the elements for our ROI case.  You can categorize these elements as income producing elements, and expense elements.  Personally, I prefer to first examine top line elements which grow the business, and can make the biggest impact for a firm.  In brokerage, the common elements I work with are:

1.    Daily Average Revenue Trades (DARTs)
2.    Account Openings
3.    Call Center Reduction
4.    International Users
5.    DDoS and intrusion mitigation
6.    Ad spending
1.    DARTs

DARTs are the major competitive benchmark of the brokerage industry.  All publicly listed brokerage firms report their DART numbers and other related data in their SEC filings, much they way an auto company would report the number of cars sold.  For brokers, DARTs can range up to 400,000, that is 400,000 stock trades, options trades, FX trades, etc, per day, handled by the firm.  It's huge.

The second element is the average commission per trade (CPT).  This is typically in the range of $10 - $15.  The third element is the number of trading days per year.

I just reviewed the most recent 10K public filings for one of the publicly traded U.S. brokers, and found the following information:

1)    DARTs for the year were 400,000 (rounded).
2)    Average CPT was $12 (rounded).
3)    Trading days = 250 (rounded).
4)    Commissions and transaction fees accounted for 45% of the firm's revenue (rounded).

Some other interesting facts from the 10K, which are not part of the ROI calculation but are very interesting to see are:

5)    The greatest number of trades placed in a single day was 895,000.
6)    Their systems are capable of handling approximately 1,500,000 trades per day.
7)    Their systems are capable of handling approximately 33,000 client logins per second.

Given this data we can calculate:

Daily commissions = DART x CPT = 400,000 x $12 = $4.8M.
Annual commissions = DART x CPT x Number of trading days = 400,000 x $12 x 250 = $1.2B.
Now for the hard part: what is the impact of performance?  I know of no direct evidence, nor have I seen any brokerage firm produce data on this.  But nearly everyone agrees that there is an impact.  It's not just that having a faster trade process will result in more trades, but it's the fact that most active traders do not rely on a single firm.  It is common for an online, active trader to have two brokerage web sites on their desktops, side by side, and they will use the site that is the fastest and most reliable.  On mobile, the sensitivity to performance is even greater.  So performance matters.  But the question is how much does it matter?

Revenue:

My approach is to present a range of calculations to illustrate the impact on revenue.  Based on the CPT of $12 from the 10K report we have:

Rich chart.PNG

Up until this point, this is sound science.  There is no disputing these numbers.  This is all based on the exact data from the 10K report.  A 1% increase trade volume will result in an increase in annual revenue of $12M.

But as I say, ROI is in the eye of the beholder.  I make no attempt to impose my opinion of the expected increase on when dealing with a customer, but rather, illustrate the above data and let them decide for themselves.  When justifying the cost of Akamai, my conclusion would be stated as follows:

"An even immeasurable increase in trade volume as a result of Akamai performance and reliability improvements can result in a significant increase in commission revenue."
And then, ask the question:

"How much would you be willing to spend to increase your revenue to $12M?"
Net Income:

But let's not stop at revenue.  We can take this further.  In my next blog I will examine the impact of performance on net income for a firm.  In the mean time I invite you to contact me directly with your comments or questions, or if you would like to discuss other ROI cases.

Rich Bolstridge is Akamai's Chief Strategist for Financial Services

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