E*Trade Stays Ahead of the Curve

Online brokerage firm E*Trade expanded its operations this week with the launch of E*Trade Bank, an online consumer banking service that will offer FDIC-insured banking products and services fully integrated with its electronic brokerage.

The move comes less than three months after E*Trade’s merger with Telebank, the largest pure-play Internet bank.

As the number two online brokerage service, E*Trade has a considerable customer base already, which it plans to target for the new banking services. The bank will offer interest-bearing checking and saving accounts, as well as money market accounts and high-yield certificates of deposit. Customers will also be able to use online bill payment services.

The new bank will unveil additional services throughout 2000, including a nationwide network of kiosks that will be used for banking transactions, to promote its investment services, and to offer customers educational materials about stock trading.

Cross-Marketing Genius?

E*Trade’s foray into consumer banking has as much to do with bolstering its position as a stock trading site as it does with expanding its services. The move has been well-planned and strategically timed to capture the largest market share possible before online banking really takes off.

So far, consumers have been hesitant to commit their financial lives to the Internet, but many analysts foresee a change.

Cambridge, Massachusetts-based Forrester Research estimates that only 4.8 million of the 103 million households in the U.S. use online banking. Goldman Sachs & Co. puts the figure even lower, at three to four percent of total households.

By 2003, however, these analysts expect that about 18.5 million households will routinely use online banking services — and agree that the banks that will have the most credibility with consumers are brick-and-mortar institutions that also offer Internet services.

E*Trade hopes to defy that prediction with its nationwide chain of kiosks. In advance of this week’s announcement, the company quietly acquired a network of 8,500 ATM machines to establish its sidewalk presence.

Additionally, it has changed Telebank’s name to “E*Trade Bank,” which instantly gives the bank higher name recognition among consumers. “We’re crossing the last threshold associated with the adoption of online banking, which is a physical presence,” said Telebank president Mitchell H. Caplan.

Bank Customers Want Solid Presence

Analysts and industry executives point directly to the experience of Charles Schwab & Co. as a model for what works in the world of online financial services.

The largest online brokerage company reports that two-thirds of its new online accounts come from its branch offices, not from the Internet.

Others are paying attention to Schwab’s lead. Chartered in 1995, Security First Network Bank of Atlanta, Georgia — the first Internet-only bank — currently has only two brick-and-mortar offices. However, according to senior vice-president of marketing Jane Fershko, the bank acknowledges the need for a larger brick-and-mortar presence.

Security’s parent company, Royal Bank of Canada, has agreed to buy Prism Financial Corp., a Chicago, Illinois-based mortgage company with 150 office in the United States.

Financial Benefits Sway Consumers

E*Trade seems to be aiming to emulate American Express, which has no branches but makes 8,800 ATMs available for Internet customers to use.

“Our customers tell us they prefer the higher rates rather than a branch,” said Ruediger Adolf, senior vice-president of strategic planning at American Express.

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