Lines between Net brokers, banks blur

E*Trade's purchase of Internet-based Telebanc Financial will help broaden its financial offerings, but analysts are split on whether buying the bank is a wise move.

4 min read
E*Trade's $1.8 billion purchase of Internet-based Telebanc Financial yesterday will help broaden its financial offerings, but analysts are split on whether buying a bank with fewer than 70,000 customers is a wise move.

"It's a bad idea. They need physical distribution," said Forrester Research analyst James P. Punishill. "This purchase simply distracts and wastes capital that could be put to better use."

But Genni Combes, who follows E*Trade for Hambrecht & Quist, called E*Trade's move "really smart."

"The consumer wants a frictionless environment where they can move money around," she said. "The demand is for a full suite of products and services. This will resonate with consumers."

Analysis firm Zona Research expects others to emulate the deal.

"E*Trade is far ahead of the pack and has the potential now to compete not only with brokerages, but banks as well," Zona told its clients, suggesting the E*Trade-Telebanc Financial combination could one day challenge standard portals.

"We focus on becoming the dominant online financial services company," said E*Trade president Kathy Levinson, dismissing any need for bricks-and-mortar offices. "Other institutions, be they Merrill Lynch or Schwab, have chosen a business model, where online is ancillary."

The merger comes as online brokerages are broadening their financial offerings, while traditional bricks-and-mortar brokers are slowly adding online trading to their menus. Yesterday, venerable Merrill Lynch said it would offer online trading to its customers, following a similar move last month by Prudential Securities.

Combes's comments parallel the reasons cited by E*Trade and Telebanc Financial for the merger.

The E*Trade deal could spark acquisition talks for other Internet-only banks. Security First Network Bank was acquired last October by giant Royal Bank of Canada. But several Internet-only banks remain, including NetBank, CompuBank, and First Internet Bank of Indianapolis.

"Banking services require a physical distribution channel," said Forrester's Punishill. "We believe virtual-only banks will be only a niche." But he thinks online brokers would be better advised to do partnerships or get a banking charter in other ways than by acquisitions.

Also, brokers like Schwab and mutual fund firm Fidelity are already growing into the "financial portals" that E*Trade aspires to become. Schwab offers not only stock trading and research from its site, but online bill paying, credit cards, free checking, and ATM access.

Bill Burnham, online financial services analyst with Credit Suisse First Boston, thinks online brokerages are positioned to become global online services firms by adding mortgages, banking, and potentially other financial offerings.

"Online brokers have the opportunity to do an 'Amazon,'" Burnham said at a financial services conference held last month. "Brokers are going to move from positioning themselves as U.S. online or discount brokers to becoming global online financial services firms. Several will begin offering banking in the summer."

Telebanc has nearly 70,000 accounts in all 50 states and 22 foreign countries, said Larry Greenberg, Telebanc executive vice president. Assets at the end of March were $2.6 billion, with $1.3 billion in deposits.

Robert Sterling, online banking analyst at Jupiter Communications, sees the deal as a play for controlling customer assets, a traditional measure of financial services firms.

"If E*Trade wants to compete with Schwab, they've got to get their assets up and they've got to offer broader, more bank-like services to their clients," said Sterling. E*Trade had $21.1 billion in customer assets as of March 31, Schwab had $542 billion, and Merrill Lynch had $1.5 trillion. But Forrester Research says banks won't stand still as E*Trade advances.

"The true leaders in online banking are not virtual banks like Telebanc but traditional players like Wells Fargo and Bank of America, each with nearly a million online customers. With others like First Union and Bank One committing in earnest to this channel, big banks will not sit idly by while E*Trade attempts to win over their best customers."

E*Trade's Levinson believes the merger will revolutionize the personal financial services industry.

"This is the first pure-play Internet company to unite banking and brokerage," she said. "We will be first to offer integrated online financial services and products."

E*Trade, with a significant minority ownership from Japan's Softbank Technology Ventures, already has relationships with online insurance site InsWeb and online mortgage broker eLoan, two other Softbank investments that have filed for initial public offerings (IPOs).

E*Trade also has an investment in online investment bank E*Offering, which gives it access to stock sold in IPOs, and it recently acquired ClearStation, which provides charting and technical analysis of stocks.

Telebanc has invested $3 million in online insurance agency Answer Financial, a deal by which its customers can use the Cirrus network of ATM machines, often without fees.

With a full-service marketplace that also offers shopping, mortgages, insurance, tax services, and a credit card, E*Trade is now a virtual financial superstore.