As weak trading volumes and a slow Web advertising 
market take a toll on their results and
stock prices, online brokers are moving fast to diversify their revenue sources.
However, it is still "too early to say" how the online brokerages' movement into other sectors of the banking industry will go, Yankee Group analyst Lisa Melsted told the E-Commerce Times.
On Monday, Net brokerage E*Trade (NYSE: ET) launched a mortgage service and Ameritrade (Nasdaq: AMTD) said it is adding pre-market trading and a portfolio service. E*Trade's move follows its acquisition of online mortgage originator LoansDirect.
The steps taken by Net brokerages to diversify come as a prolonged slump in the stock market has sent investors -- particularly smaller, cost-conscious investors and individual traders -- to the sidelines.
Even so, Melsted questioned whether customers will flock to banks that do not have real-world offices and branches. Last year, 22 percent of Internet users were online bankers, and 13 percent said they pay their bills online, according to Yankee.
Gaining Position
In announcing its new mortgage service, E*Trade stressed its diversification strategy.
"The E*Trade brand doesn't stand for just brokerage anymore," said Mitchell H. Caplan, managing director of E*Trade North America.
E*Trade also said the new mortgage service opens up opportunities for it to cross-sell services and products, while at the same time creating new revenue streams, including origination points, loan-related fees and gain-on-sale revenue. The services offered include home purchase, second mortgages and refinancing.
E*Trade is announcing acquisitions at a rapid pace. In addition to picking up LoansDirect in January, the company said in May that it would acquire rival WebStreet (Nasdaq: WEBS) for US$45 million in stock.
Relationship Wanted
Ameritrade's new pre-market trading and portfolio management services are "the latest in a suite of products that enhance ease and flexibility in online investing," the Omaha, Nebraska-based company said.
"We're building long-term relationships with our clients by tailoring our technology, products and services to fit their needs for an entire life cycle," said Ameritrade interim president Pete Ricketts.
Jobs Slashed
In addition to diversifying services, online brokerages are cutting costs and lowering expectations.
Earlier this month, CSFBDirect (NYSE: DIR), a newly acquired online trading unit of Credit Suisse First Boston, said it would eliminate 180 jobs. CSFBDirect is the former DLJDirect subsidiary of Donaldson, Lufkin & Jenrette.
Ameritrade and Schwab have also announced plans to cut jobs.
Lowering the Bar
On another note, discount online and offline broker Charles Schwab (NYSE: SCH) reportedly said last week that unless trading volume picks up, it will be difficult for it to meet financial expectations for the current quarter. Over the year, Schwab's shares have fallen 62 percent.
Also over the last year, E*Trade shares have lost 70 percent and Ameritrade has fallen 71 percent, while CSFBDirect has lost 59 percent.
Reality Check
E*Trade and Ameritrade, which saw their stock prices and their business soar in previous years along with the bull market, need to diversify in order to withstand the current downturn, analysts say.
Still, Melsted said there is hope for the sector.
"Just because
there's a downturn and a lot of Internet businesses have gone under doesn't
mean that there's still not growth for the Internet," the
analyst said. "That's just not the case."
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