Over six months after the introduction of the new regulatory framework in Europe, we are finally at a point where some inevitable trends appear to be shaping up. While industry consolidation has been a theme, there is a precursor which is causing it: ever-rising client acquisition costs.
Before the introduction of the MiFID II regulatory framework that has greatly limited introducing broker activities throughout Europe, size has not been a key factor for companies. Big, small, and medium-sized firms have all had different channels to acquire clients, thanks to the flexibility provided by IBs and affiliates.
Last year’s ESMA regulation was only one part of the industry-wide shift in Europe. It was the implementation of MiFID II that started a tectonic shift in client acquisition costs in the industry. Granted, that has been mitigated for crypto-heavy brokers, who got a bonus in Q4 of 2017 and Q1 of 2018, but after that dust settled, a brand new reality for retail brokers in the EU unfolded.
Big Brokers Marketing Spend
Anticipating the shifting environment, big brokers started spending more to acquire new clients. Those clients would be crucial to entering ESMA’s new regulatory framework with a solid base of clients. The more professional, the better, and attracting elective professional clients has become the keystone for maintaining a more consistent flow of revenues.
With the average CPA in the industry was circulating between £500 and £1000 in the UK in previous years, these numbers sharply increased in 2018, especially since August 1.
The talk of the day now is the ever-rising client acquisition cost that keeps swelling. Companies who can afford it, continue investing in ever-more creative ways to maintain a steady flow of customers to their platforms. Marketing is playing a bigger role when compared to years ago.
Capital-rich firms have been well-prepared for the tectonic market shift. They invested heavily in new technology and content creation to keep attracting new clients, but also to keep their existing users more engaged.
Official stats for client acquisition costs have only been published by Plus500 so far. The company reports an increase of 97 percent year-on-year to $937 per client. That said, these numbers should be taken with a grain of salt because the company was heavily involved in the crypto trading boom. Back in 2016, the broker reported a figure of $1,195 per customer.
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Buzzwords Catching Up
Different companies chose different approaches to market their added value to their clients. With the changes in the reporting requirements about client profitability, every broker needed to find a new way to promote an existing product. As we noticed in the immediate aftermath of the publication of the figures, a crucial element has been the
Some have loud-sounding buzzwords such as AI, cryptocurrencies, blockchain, education and so on caught up to the hype. As usual, the brokerage business found new ways to market its product to the market, while complying with a new round of regulations.
Suddenly having an MT4 platform license in Europe became insufficient to attract a steady new flow of clients. Brokers have had to become more creative and open up new clients-clients-acquisition channels. One such channel has consistently been decent mobile apps, and unsurprisingly brokers that invested in this area in advance are now getting dividends.
Cost of Entry Keeps Rising
While most companies in the industry are relying on ready-made software to enter the market, the times have clearly changed. Custom-made solutions that are adding value to the client’s experience are important.
While a barrier of entry into the industry of $20 million seemed too high 10 years ago when the US introduced that same number as a requirement, these days a startup broker willing to set up a regulated operations in the EU and has zero clients is looking at about the same figure, or at least that is the average that some senior industry executives are pointing at.
While the EU didn’t increase capital requirements for retail brokers to the draconian levels that we saw in the USA 10 years ago, the MiFID II and ESMA regulatory frameworks have clearly reshaped the industry.
Rising Offshore Wave
The constraints put on smaller-sized brokers by the regulators in Europe have largely driven smaller companies offshore. While they are facing a challenge to establish trust with their clients despite being located thousands of miles away, smaller brokers have the opportunity to operate in a more familiar way.
Direct social media targeting of clients has been gaining traction. IBs and affiliates which are unregulated are jumping on the bandwagon and joining the offshore industry’s push to acquire European clients.
The regulators have solved their problems because they can offload the responsibility to retail clients, while offshore has become the only viable destination for smaller-sized brokers operating in Europe.