Media buying is done, put a fork in it

Over the past year, it has become patently clear that concentrating vast resources toward buying media on mainstream websites in order to conduct a low-touch business model for acquiring lots of small-deposit retail traders without a sales team is becoming an obsolete method of client acquisition.

It is fully understandable as to why FX companies went down this route at the dawn of retail FX trading. Quite simply, if it worked effectively, a digital marketing-led model would result in low withdrawal risk because there would be lots of very small, novice traders who would either lose their original deposit, or a small number may withdraw which would not be of any consequence compared to a high-touch model in which a client could withdraw $50,000 to $100,000 and seriously affect the company’s assets under management figure as well as its future volume figure.

The difficulty is that in this age of interaction with customers who require far more contact with their firm, be it via digital ‘new media’ or otherwise, the ad hoc broadcasting of banners on mainstream sites is now a dinosaur. Even the one exception to the rule, Plus500, a company whose marketing system was marveled at by every FX industry executive during a period in which the relatively small company with no sales team issued an IPO on the London Stock Exchange two years ago and then spent the time between then and this summer taking itself to a value of $1 billion.

Indeed, since then, even Plus500 fell foul of the ever-nearing obsolescence of a digital marketing-led model in that on May 18 this year, the company’s UK division invoked an account freeze, sending its share price into free fall and causing customers not to be able to trade, or to deposit or withdraw funds.

The reason for this was that the Financial Conduct Authority required a temporary prohibition of all account activity for existing customers, and instructed the firm not to accept deposits from, or open accounts for new customers until it has obtained and verified those customers’ due diligence information.

This was of course resolved, however the crash in share price and loss of confidence caused Playtech to make a bid to purchase Plus500, which ultimately became a long drawn out affair and has not yet proceeded to any form of transaction despite unanimous shareholder approval.

Therefore, it could be considered that this administrative glitch made a $1 billion company with a digital marketing-led success story that nobody else has been able to emulate, become a takeover target.

By contrast, companies which provide a high-touch method of spending alot of time with their customers, concentrating on high net worth direct customers or large IBs, have far higher conversion and retention rates when viewed as a percentage.

The situation outlined above that surrounded Plus500 this summer would be unlikely to occur within a company which has several meetings with a client and even travels to meet abroad. There are many reasons for this, but one of them is that the Know Your Client (KYC) procedure would have been carried out by the relationship building itself, and congruently, the client is likely to go ahead and invest for at least the medium term as it is unlikely that a trader would waste time building up a relationship with a company and then going through rigorous procedures to become a customer.

Using the low-touch model, the cost is higher than often considered, as it is human resource-hungry, requiring a media buying team to drive the cost of media down and optimize campaigns, a website optimization team for the digital aspect, a sales team which would call leads. All this is expensive enough, but the opportunity cost is worse. Digital campaign conversion rate is around 1% – rather similar to leaflet drop campaigns in the 1980s.

Knowing your client is efficient long term

At the opposite end of the scale are heavily regulated entities such as Swiss banks. During a visit to Swissquote’s headquarters in Gland, Switzerland this month, FinanceFeeds learned that the company requires prospective customers to go through very stringent application process in line with Swiss banking regulations. Once a customer is on board, not only is an individual trading account created, using proprietary technology, to suit the customer’s requirements, but also a seperate bank account per customer is opened for custody of customer funds.

This, rather than being viewed by clients as a nuisance, is quite the opposite as it is very easy for a broker to tell if a prospective client will be in for the long term if they are going to go through a lengthy application and compliance process. It also shows that stringent regulation and a company which will engage with them on an ongoing basis are very attractive attributes, and indeed it cuts retention costs and lengthens lifetime value by encouraging high net worth traders with large amounts to invest who will remain with the company for a long time.

In this circumstance, less is more – less customers, but more efficiency.

These two very different models exemplify one commonality, that being the correlation between regulation and marketing in our business. With a high-touch model, it is easier to avoid a contretemps with the blazer brigade than it is if customers are self-registering, execution only efforts.

It remains that of all the firms that have tried to master the digital marketing-led method, Plus500 remains the most successful, but the mere reality remains that only one company has managed to maintain this method whilst the majority of others have gone away from it, instead doing their best to onboard partners who have direct relationships with clients rather than casting the net wide via direct media advertising.

During the coming days, FinanceFeeds will be discussing with a very well respected FX industry marketing expert as to how to effectively advertise, and how to generate cost free content marketing, which we hope is of great value to our audience.