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Finance

Coronavirus persuades house of Nomura and its peers to go digital

Japan's tradition-bound brokerages rethink branch-based in-person consultations

Nomura and other Japanese securities giants realize their sales traditions need a makeover but are unsure how much of one.

TOKYO -- Japan Inc. is crawling out of the nation's state of emergency, but the search for a new normal is barely under way at Nomura, Japan's top brokerage house, where the coronavirus pandemic has highlighted the need to adapt a more digital model to keep pace with nimbler rivals.

Some of its branches resumed operations last Tuesday, two days after the government decided to lift the state of emergency for nonmetropolitan regions. But concerns linger over whether customers will come back. Face-to-face consultations had long been a hallmark of Japan's vaunted brokerage services.

Underlining the challenge for traditional brokerage houses in keeping their clients, let alone attracting new ones, in the first quarter of 2020 Nomura was overtaken by online discount broker SBI as Japan's leader by number of customer accounts.

Nomura's new three-year year profit target, released on Tuesday, also shows a tough road ahead. Pretax profit for the year ending March 2023 is projected at 110 billion yen ($1 billion), double the level for the past fiscal year but half the level six years ago.

"The world will not return to the pre-coronavirus situation," said Takumi Kitamura, chief financial officer of Nomura Holdings, in an earnings briefing on May 8. "We are still in search of a new way of doing business."

Kitamura acknowledged that the brokerage's sales representatives have struggled to get used to doing things remotely, adding they now use phone calls, email and video chats to handle queries and take orders from clients. "Some of these tools will become a permanent feature of our business," he said.

The challenge facing traditional brokers is becoming more evident as financial markets stabilize. In March, when turmoil was ripping through the markets and Tokyo stocks lost 30% from the start of the year, people flocked to brokerage services without being asked, seeing a great bargain-hunting opportunity.

But as markets later rallied, investors became less active, leaving brokers struggling to keep investors engaged.

In April, retail revenue was down about 20% from the average for January-March at both Nomura and Daiwa.

"Internet-based services will have a bigger presence in the post-coronavirus era," said Natsumu Tsujino, an analyst at Mitsubishi UFJ Morgan Stanley Securities. Some longtime investors are discovering that they can invest without relying on in-person consultations.

Nomura's Kitamura insists that demand for expert advice won't go away.

"Many of our clients, including individual investors and business owners, are facing financial issues in the wake of the coronavirus crisis," Nomura's Kitamura said. "A service that helps them manage and protect their assets is being asked for."

The first task for traditional brokers is to offer more communication channels than face-to-face visits. These include video conferencing, instant messaging, phone calls, emails and online investment seminars. "So many things can be done remotely today," Tsujino said.

The next task is to find ways to attract new clients online. The key will be how to attract investors to the website, have them sign up for online service, then deepen engagement through offline services such as seminars and visits.

Online discount rivals are already moving ahead. During January-March, online discount broker SBI gained 289,000 accounts to overtake Nomura -- although while SBI counts all its accounts, Nomura and Daiwa only counts the number of active accounts.

No. 2 online broker Rakuten Securities added 105,940 accounts in February and 164,011 in March, rewriting monthly records in consecutive months.

Discount brokers like SBI were considered a platform for short-term investors but are now attracting mainstream investors. "We have noticed an increase in inquiries from elderly people to our call centers," an SBI official said.

Online brokers are ramping up their services, too. Rakuten is using a chatbot to answer simple questions from investors, while SBI makes its analyst reports available to all retail investors.

Among the traditional brokerage houses, Nomura stands out for its conservative ways.

Compare it to Daiwa, a front-runner in Japan's so-called work-life reform push. Way back in 2007, Daiwa introduced a female support program and a campaign to encourage employees to leave the office by 7 p.m.

Women make up 20% of branch managers at Daiwa.

More recently, between November and February, Daiwa provided tablets to all employees, allowing them to work remotely. Sales representatives can execute orders with the tablet.

Nomura's message wasn't as clear as Daiwa's initially, but the brokerage is catching up.

"We will improve our IT infrastructure so that employees will be able to work anyplace just as productively as they work in the office," CEO Kentaro Okuda said at the Investor Day event on Tuesday, echoing a similar message from Daiwa.

Okuda said Nomura will differentiate itself from discount rivals by offering comprehensive and individually tailored services covering real estate management, inheritance and life insurance, like private banking.

"Instead of providing the same service to many people," he said, "we will deliver services in a more customized fashion tailored to the needs of each client."

Bespoke services have traditionally been furnished to high net worth individuals in Japan, typically business owners or doctors operating their own clinics.

But there are not enough of these clients to support major brokerage houses, said Haruyoshi Mabuchi, an independent financial consultant and former Nikko Securities analyst. "There aren't as many high net worth individuals in Japan as in the U.S.," he said. "Brokerages cannot support their large workforces by serving this segment alone."

Securities trading takes place in a price-competitive mass market with slim margins. But it offers volume, at least in Japan, where many residents still have no investment experience, Mabuchi said.

The large brokerages are trying to serve more of these masses in the most cost-efficient way. Nomura has a joint venture with chat app Line that provides a smartphone-based investment service. Daiwa operates a mobile service called Connect. Nikko SMBC has partnered with SBI to complement its face-to-face service.

As competition intensifies, brokers are coming under pressure to cut costs.

Daiwa last year said it would trim operating costs by 15 billion yen in two years and close many of its first-floor branches that occupy prime real estate, replacing them with field offices which might not sit adjacent to busy train stations. Nomura said it would reduce the number of branches by 20% and retail costs by 30 billion yen.

But these restructuring programs are already under scrutiny as the coronavirus has upended retail brokering. Are any branches still necessary? Some have large conference rooms for investor seminars.

While one train of thought says sales representatives should keep their travel time to a minimum and use it to go online with clients, another says small field offices in wealthy areas foster fruitful face-to-face visits.

The thinking on branch networks remains in flux.

"Trends in which employees work from home or have no fixed location are going to take further hold in both the retail and wholesale businesses," Nomura CEO Okuda said. "The way branches operate ... will come under review as interactions with clients become more digital and work styles grow more diverse."

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