Transform Business Models

For a long time, Chinese securities firms relied heavily on brokerage as a source of revenue. This resulted in too much homogeneity in business activities, low added value, weak risk resilience, and a type of profitability that is highly affected by market volatility in the industry as a whole. Another reform priority for Chinese securities firms is the business model transformation from a channel-based profit model to a service-based model. Securities firms can then build business growth on diversified and personalized services. Such transformation will bring change to business philosophy, business rules, product mix, profit structure, and the risk-return matching mechanism. Specifically, Chinese securities firms need to achieve the following goals:

- Restructure existing brokerage services and place broker services at the core.

- Consolidate securities underwriting services.

- Promote restructuring and M&A services.

- Explore new business models in asset management services.

Each of these goals is discussed in detail below.

Restructuring Existing Brokerage Services and Placing Broker Services at the Core

As a result of the impact of marketization, standardization, and internationalization, the lucrative golden age is now gone. Faced with the need for a market-oriented transformation and more intense competition in specialization,

Chinese securities firms have to change their homogenous financial services and extensive business model as soon as possible.

Change the Brokerage Competition Chinese securities firms need to change their business offices from trading channels to financial supermarkets. Due to the commission rate liberalization and lowering access barriers, the value of business offices as trading channels has fallen rapidly. Customers have increasingly higher requirements of personalized transactions. This requires business offices to change their role and become providers of integrated services, rather than simply trading channels. By doing so, they can identify valuable customers, improve customer services, and consolidate customer relationship management. On the other hand, Chinese securities firms also need to introduce the broker-based marketing model that Western securities firms have already created with an idea borrowed from the agent-based model in insurance. As they further their exploration into broker management, assessment, and incentive mechanisms, Chinese securities firms have been improving the conditions that allow for the broker-based marketing model.

Transform the Brokerage Management Model The flattening of profit margins brings attention to business management by scientific methods. After a painful price war, Chinese securities firms have to reexamine their management model and find a way toward low-cost expansion through process reengineering and technological innovation. They need to integrate corporate resources and reengineer business processes according to a customer-centric model. Reengineering conventional brokerage business processes and conducting customer and market-oriented process management need to become regular activities among securities brokers. On the other hand, securities firms are also expected to replace the decentralized trading model with a centralized one. Conventional securities brokerage basically builds on a business-office-based, decentralized trading model. It is hard for a securities firm to control the risk in independent business offices. A centralized trading model enables the securities firm to integrate the back-office systems of all the business offices into one trading platform, where business offices share resources and have an advantage of integrated cooperation.

Transform Brokerage Activities While integrating and reducing the number of physical business offices, securities firms need to make an effort to expand off-site trading, particularly online transactions. Online and telephone transactions now contribute about 50 percent of the total transaction volume of an average business office, whereas over-the-counter trading and other on-site trading have been declining. Along with the development of network information technology, new trends of brokerage expansion will emerge in which Chinese securities firms may enter into a strategic alliance with banks and other financial institutions whose customers are potential investors.

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