Commonwealth Bank’s high-powered stockbroking arm, CommSec, started out as a just a few lines on a boardroom pitch. And, like many ideas, it almost didn’t happen.
Today, CommSec is an unstoppable force. It has more than three million accounts, it has helped get shares into the hands of middle Australia and it is a cash cow for the bank.
It has seen off other online trading platforms, both homegrown and international giants.
The story of CommSec, which turned 30 this month, is a story of the early days of the internet converging with the idea that sharemarkets were being opened up. Its launch coincided with monster public floats of names like Telstra, Qantas and even Commonwealth Bank being sold directly to Australian households. Superannuation was still in the early stages, but the idea was that anyone – from a truck driver to office worker – could own shares.
It was 1993 and newly appointed chief executive David Murray hired Morgan Stanley investment banker-on-the-rise Michael Katz from Tokyo to breathe some life into CBA’s staid corporate banking arm.
The business was still struggling to digest the commercial lending operations of the stricken State Bank of Victoria from a few years earlier. Through that bank rescue, CBA had inherited a 50 per cent stake in Collins Street stockbroker Burdett Buckeridge & Young.
All the retail banks were getting into stockbroking and Katz recalls that walking into CBA on the first day, the cultural gulf was immediate.
The flashy stockbroking side and the staid commercial banking team wouldn’t even talk to each other. “It was chalk and cheese. A very bad fit for the Commonwealth Bank,” Katz tells The Australian.
Through investment banking, he knew stockbroking firms being bolted on to commercial banks was a recipe for disaster. The main-street banks could not fully grasp the risks.
“One of my first recommendations to the board was to sell BBY – which we did,” Katz says.
CBA got a good price for the stake mostly sold to Jefferies, which won Katz more support from Murray.
As Katz settled in, it became clear to him the underlying strength of the Commonwealth Bank franchise. “I realised it was the retail heartland of Australia,” he says.
In the background, he had been reading up about US broking disrupter Charles Schwab, whose firm had listed on Wall Street a few years earlier.
He got hold of the Schwab prospectus and its latest annual reports (which were all physical documents) and it became obvious that this broker was trying to put more shares in the hands of middle America
Katz, then the institutional banking boss, says this was his “Eureka” moment. “This is what we should do in Australia,” he recalls.
“It’s a huge opportunity. We’d (CBA) just been floated. Qantas was on the blocks, Telstra was on the blocks. There was stuff happening everywhere. Superannuation had started. There’s clearly going to be a huge market.
“I put a paper to the board, and that said very simply that we would model on Charles Schwab.
“The secret was there were low commissions, trade execution only, no research, no capital markets, just high-volume, low-cost brokerage and that there was a perfect fit with the CBA model and customer base.
“I’d only been there for a year by then, and the board still didn’t quite know what to make of me, but they went along with it because I didn’t ask for any serious money.”
Commonwealth Securities was given the green light.
“Then we had a problem,” Katz says. “How to start it?”
The most immediate hurdle was stockbrokers had to become a member of the closed club of the ASX to become trade shares. Even though it was the 1990s, the ASX was still operating as though it were the London of the late 1970s.
For months, Katz tried to recruit former stockbrokers who could deliver the lucrative membership ticket of the ASX.
Few could understand what he was up to. Many just weren’t interested. Others were not a good fit for the bank. Katz hit a wall, so he decided to go it alone.
He assembled a small team in the institutional business he called the “Dirty Dozen”.
“These were old-school cardigan wearing CBA bankers. But they were really smart who had been frustrated they hadn’t got very far. Some were in the forex dealing room who were desperate to do something new,” he says.
Two of the dozen, Mal Stott and Paul Rickard, were sponsored by the bank to study and sit the ASX members’ exam.
“They passed. They got perfect scores because they’re both really smart guys. No other member of the stock exchange were that smart,” Katz says.
The banking giant now had a provisional licence and was ready to go.
Stott went on to become a senior executive at the institutional bank, and in 1999 interviewed a bright-eyed UNSW graduate for a job. The graduate? Matt Comyn.
Rickard was named the founding managing director of CommSec – a role he held for almost a decade. Comyn was also on the rise. From 2006, he ran CommSec for four years, including through the global financial crisis.
The early years were lean, but CommSec later became a big money spinner for the bank.
Last financial year it generated a profit of $115m, although this was down from $128m a year earlier on lower trading volumes. Profit margins run at a staggering 70 per cent, although it gets the benefit of leveraging some services from the bank.
CommSec paid a $120m dividend to CBA last year. The year before, the dividend was a staggering $235m which was pumped up be the high level of retained earnings. The business would be worth billions today.
Stockbroking was booming across Melbourne and Sydney in the 1990s, and CommSec was out in the cold.
Its base was in Sydney’s unfashionable Rocks district. No stockbroker took it seriously, but Katz liked it that way. CommSec was getting momentum by just going after the retail investors, who the stockbroking firms saw as too small to take seriously.
“When clients did their $1000 trades or less, that was small beer. It doesn’t get the juices flowing of a red blooded two-bottles-of-wine-for-lunch, stockbroker. They all want the guys doing $50,000 trades,” Katz says.
“We stood up and told the other brokers, ‘You don’t want the small retail. We’ll let you focus on what you’re really good at – looking after the big hitters’.”
In July 1995, CommSec was launched. BHP shares were the first trade.
In the early days it was still clunky. It was telephone only and orders were confirmed by fax. Staff would physically walk across the dealing room to put through the orders. Trades started out at $75 each but were pushed lower over the decades as new rivals arrived on the scene. Today, the fee is as low as $2.
The brokerage flew under the radar for the first few years, before other retail stockbrokers began taking notice of the volume of trades that were starting to tick up.
Change came in 1997 when Katz recruited John Beggs, a former economics professor who was slugging away at investment bank Daiwa Australia. “A crazy, genius,” Katz describes him as. They were toying with internet, and soon Beggs and a small team started to build the IT platform behind CommSec as an online broker.
They launched share trading that same year which was a first for the Australian market.
As the dot.com boom started getting under way in the last 1990s, Katz says it soon became evident CommSec had a massive edge to traditional broking.
“By 1999 we had it pretty much running as it should, as a straight-through process. When the crash happened in April 2000, the economics and physical processes of traditional stockbroking were put to the test,” Katz says.
“All previous crashes in history, from tulip mania onward, the issue is investors panic. They ring or try and contact their broker. A broker who is running a normal, physical stockbroking can handle, at a maximum, something like 30 calls an hour.
“If you’ve got thousands of clients, most of them can’t get through. And that’s what causes the panic, because the people say: “The world’s coming to an end. I can’t sell my shares’.”
CommSec had hundreds of thousands of clients when the dot.com crash hit.
“We stayed open. Everybody could get through,” Katz says.
That was the real takeoff moment, he says.
By 2001, about 80 per cent of CommSec trades were online. Soon after, it went fully online and even offered an SMS service to check share prices.
It wasn’t all smooth sailing. Katz recalls in the very early days of the telephone broking it was a painfully slow start with low volumes.
They tried to drum up interest in shares by marketing a $1000 share “six-pack” of Aussie names: BHP, Woolworths, CBA, Telstra, ANZ and even Coles Myer. By doing this, the bank almost stumbled on Australia’s first exchange traded fund (ETF). ETFs were only just emerging out of Wall Street and became wildly popular with retail and institutional investors.
But the execution of the pack was all wrong. The CommSec version involved investors owning a very small number of unlinked physical shares, rather than a pooled investment of an ETF.
Sales were non-existent, CommSec persisted with the packs right up into the early 2000s but gave up.
Katz also had long-running and bruising clashes with unions. Particularly in the 1990s, the Finance Sector Union had strict definitions of bank workers and conditions like hours and meal breaks. Katz wanted to hire young wannabe stockbrokers, for the energy of brokerage.
CommSec too was set up as a subsidiary, rather than a business unit. This remains the case today.
The key was that the workers were not on commission but a salary, which the FSU argued should put them on the clerks’ award. The bank was in and out of courts for years.
Eventually, CBA was hit with fines and forced to increase the pay. One Federal Court judgment labelled CommSec as an effective labour-hire agency operating inside the bank.
Katz left the bank in 2006, and went on to chair ING Bank in Australia. He helped establish and now chairs the Parkinson’s Research Foundation which supports research and management of the disease.
And the legacy of CommSec? Katz says it set the bank up on the path for its tech mindset, that today that has delivered a long-held dominance over rivals.
With Beggs’ team building its own trading platform in-house, this gave the management led by Murray the confidence that tech could be done from the inside.
Murray went on to build a new all-of-bank platform for CBA.
This banking engine is still paying dividends today. So is CommSec.
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