By Maria Trombly | Securities Industry News | June 13, 2005

The online brokerage business just got a little more cutthroat in Japan. It's no longer enough to offer low commissions and convenient trading. By the end of the summer, customers will also be able to collect Yahoo "points" every time they make a trade. They can then redeem the points through Yahoo Japan's online shopping portal for, say, toasters or wireless gadgets.

Yahoo Japan users will be able to open accounts through the Yahoo portal with one of two brokerages--E-Trade and Tokyo-based Nikko Cordial Securities, Japan's third-largest traditional brokerage, with just over 2 million accounts.

E-Trade says it hopes that the deal will attract new investors, and may also help it with its investor education efforts by offering related content to customers and potential customers among Yahoo users.

"We're helping to build an investment climate where many new investors can participate in the stock market," said the company in a press release.

"The biggest benefit to us is customer acquisition," confirms E-Trade Japan spokesman Eriko Takeshita, adding that the service will be available only to Japanese residents.

Since Yahoo will simply be passing customers to the brokerage sites, there won't be any need to integrate technology platforms, Takeshita says.

Yahoo Japan is not directly affiliated with Yahoo in the U.S. "We are a subsidiary of the Japanese Internet firm Softbank Corp., which is our largest shareholder," says Emi Takase, a spokesperson for the company. "It cannot be seen as a branch or a subsidiary of the U.S.-based Yahoo."

E-Trade, meanwhile, is 55 percent owned by Softbank Investment Corp., making it a natural fit. It is also the largest online brokerage in Japan, with around 654,000 accounts as of this May.

Yahoo Japan is 33.5 percent owned by U.S. Internet portal Yahoo and 42 percent owned by Softbank. It sees about 37 million users a month, and dominates the competition in terms of its "reach" among Japanese Internet users, according to figures from Nielsen/NetRatings. Japan had 68 million Internet users in November 2004. More than half the population uses the Internet.

This isn't Yahoo Japan's first foray into financial services. Earlier this year, it announced that it will buy two-thirds of Aozora Trust Bank as part of a plan to roll out Internet banking services in 2006. And the Japanese-language portal started issuing its own branded credit cards in May.

Meanwhile, in the Eastern Pacific

Yahoo Japan's American cousin, meanwhile, has some irons of its own in the financial services fire. Earlier this spring Yahoo announced that it will enter the financial data distribution business, set up its own ticker plant and establish direct relationships with the New York Stock Exchange, American Stock Exchange and Nasdaq. Previously, Yahoo had acquired market data from Reuters.

Yahoo plans to offer this data and associated charts and tools to its users, and will also resell it to third parties. It has already reached an agreement to sell its "Quotes from Yahoo Finance" to Forbes.com. Among the tools that Forbes.com has signed up for is a mutual fund charting application.

"Yahoo's innovative new stock ticker platform eliminates the middleman, giving us greater flexibility in how we develop, deliver and distribute our offerings," said Craig Forman, Yahoo's vice president for information and finance, in a statement earlier this year. "The platform creates new opportunities for Yahoo Finance that will improve the tools and services on our Web site, contribute to our distribution business and provide significant cost savings."

The company said its tools will play an important role in extending the Yahoo Finance brand beyond the core site. For example, if users need more information beyond the basic quotes and charts, such as historical prices or analyst estimates, they will be directed back to Yahoo Finance by a hyperlink.

U.S. Yahoo already features links to Schwab, Ameritrade and the U.S. E-Trade, notes Damon Kovelsky, an analyst at IDC's Financial Insights. "But these are advertising relationships," he emphasizes.

In the U.S., Kovelsky says, portals cannot offer credit cards or brokerage services themselves, but they can act as intermediaries to other brokerage sites.

"Both are types of advertisements, and the portal would pay or be paid accordingly," he says. "This scenario is applicable to most countries throughout the world."

Different Rules

The Yahoo Japan deal takes this kind of marketing relationship a step further, however, with a specialized online trading site specifically for Yahoo customers, and the loyalty points program that rewards Yahoo users for their online trading.

Yahoo Japan is also well known for its financial services, including its real-time stock market data, says Takase. The deal with E-Trade and Nikko Cordial has been in the works for about a year, she notes.

One Yahoo loyalty point will be equivalent to one Japanese Yen. Users can spend the points on Yahoo Japan's online shopping website.

Takase says the agreement is unique in Japan. While two of Yahoo Japan's Internet rivals, Livedoor and Rakuten, already offer online brokerage services, the Yahoo Japan deal is different: Livedoor and Rakuten are licensed as brokerages themselves, whereas Yahoo Japan will simply serve as an intermediary.
Under Japanese securities law, any bank, company or even individual can apply to be recognized as an intermediary.

Nikko Cordial will set up dedicated desks to handle its Yahoo Japan customers, as well as an exclusive Web site for these customers.

The company says it expects to offer stock trades, government bonds, and other services through this channel and that the service will be launched in August or September. Yahoo Japan reached the deal with E-Trade and Nikko on June 1, Takase says.

One Nikko Cordial official, who did not want to be named, confirmed that the deal is unique in Japan, and to Yahoo globally as well. "What Livedoor and Rakuten are doing is totally different because they own their own brokerage companies," he said.

An official with a Japanese regulator confirmed this, saying that Yahoo Japan was registered as a sales representative with the Japan Securities Industry Association, not as a brokerage. "They applied for the role of being a qualified intermediary," he said. Under Japanese securities law, any bank, company or even individual can apply to be recognized as an intermediary, he said, and many have done so.

Details about how the deal is structured, how many loyalty points Yahoo Japan users will get in return for their online trading, and how Yahoo Japan hopes to profit from this arrangement, have not been released.

According to Yasumasa Goda, an analyst at Merrill Lynch's Japan office, Yahoo Japan will not be capturing financial income from the securities transactions commissions and margin transactions. These are the major sources of revenue for online brokerage firms, Goda said in a research note about the announcement.

Goda added that large numbers of users don't necessarily guarantee customers, as shown by the stagnant results of the Yahoo Shopping service in Japan. "We do not believe this news will mean large changes in the current situation for Yahoo," he said.

Wendy Yu contributed to this report.