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Schwab preps Net bank despite hurdles

The big online discount brokerage expects to launch the bank later this year. But with the concept still largely unpopular, is Schwab making a good investment?

Charles Schwab is going ahead with plans to set up an online bank, despite the fact that the concept has been slow to catch on with consumers.

The big online discount brokerage expects to launch the bank later this year, but company representatives said this week that Schwab doesn't yet have a charter for it. A charter would make it legal for the company to operate the bank.

The bank, which Schwab plans to market to its existing customers, will "provide a better overall experience to our more affluent clients who are asking for a more integrated offering of both brokerage and cash-management services," Schwab spokesman Glen Mathison said.

But what Schwab is doing is not anything new for a brokerage. Companies like Merrill Lynch and Salomon Smith Barney have already developed their own banks in-house. E*Trade Financial, which bought Telebank in 2000, has been aggressively marketing its banking services and now has one of the largest ATM networks in the United States.

Meanwhile, traditional banking companies such as Bank of America and Wells Fargo have done the opposite, offering online brokerage services.

Schwab's move comes as the company tries to recover from the economic downturn. With the decline in the stock market, Schwab's 2001 earnings were down 72 percent compared with 2000. The San Francisco-based company went through two rounds of job cuts last year, and Steve Scheid, president of the company's retail business, resigned last week.

Schwab's effort to enter online banking may run into some industry headwinds as well.

Despite nearly 20 years of development and marketing, banks have persuaded only a fraction of their customers to sign up for online banking. And the majority of customers are not doing anything more than looking up their balances, industry analysts say.

Since Schwab has no plans to open an extensive system of branches, its banking customers will be expected to interact with the company largely online. Because most of its customers are familiar with online stock trading, they may be more receptive to banking that way.

On the other hand, the demand for banking service in general may be tapering off.

About a year ago, investors looking for a safe haven were pulling money out of the stock market and investing it in certificates of deposit and other bank accounts, said Chris Musto, an analyst with Gomez. Cashing in on this trend, E*Trade was able to double its number of banking accounts in the year after it bought Telebank, Musto noted.

But with interest rates now at a low ebb and the market apparently having bottomed out, CDs and bank accounts are no longer as attractive as they once were, and Schwab may have trouble persuading customers to sign up for and deposit money into bank accounts.

"This is a longer-term proposition," Musto said.