As banking giants Wells Fargo and Bank of America have beefed up online offerings, deregulation has allowed brokerage houses entry into the online financial market. Brokers from Charles Schwab to E*Trade offer everything from mortgage lending and bill payment to ATM access.
In addition, Marsh & McLennan, the world's largest insurance broker, yesterday won approval from U.S. regulators to open a Net savings bank, another competitor for such Web-based banks as NetBank, CompuBank and WingspanBank.com.
The Internet has changed how consumers spend, save and invest their money. To adapt, online and offline banks and brokerages have boosted the range of their financial services as they try to provide one-stop shopping. The companies that eventually survive, analysts say, will be those that perform the best in a broad set of categories.
Online banks say they welcome the competition, which draws attention to online banking in general, said Michael Fitzgerald, president of Atlanta-based NetBank.
"We're going to be like ATM machines," Fitzgerald said. "Once people discovered them, they went out and found the company that offered the best service. I'm confident people are going to find NetBank."
The banking industry began to change with deregulation, which undid laws that had established walls between insurance, banking and brokerage firms and had kept them out of each other's businesses. The thinking was that such regulation prevented any one organization from having too much control over the nation's money.
Since deregulation, few nonbanking firms have pounced on the opportunity to move into other banking services, except for E*Trade.
The Menlo Park, Calif.-based brokerage firm last month launched E*Trade Bank, complete with federally insured services and products. In March, the company paid an undisclosed amount for automatic teller machine operator Card Capture Services, obtaining a much-needed brick-and-mortar presence.
"One of the biggest barriers for us has been not being able to provide a deposit capability," said Michael Sievert, E*Trade's general manager of consumer markets, who added that with the acquisition of Telebank, E*Trade becomes the largest Internet bank.
"We are now giving customers the physical touch, as well as the value of an electronic firm," Sievert said.
Schwab has cut deals with a host of ATM firms to offer its customers no-cost access to ATMs worldwide. San Francisco-based firm. Schwab, the largest online brokerage, also offers bank-like services as unlimited checking, automatic deposit, interest-bearing accounts and debit cards.
Jupiter Communications estimates that the number of U.S. households trading online grew from 4.3 million in 1998 to 9.6 million in 1999. The New York-based research firm said the value of all online accounts totaled about $415 billion in 1998. That figure could jump to $3 trillion by 2003, Jupiter predicts.
Although Merrill Lynch has appeared sluggish in moving onto the Net, its sheer size could make it a huge player in online banking should it decide to branch out, according to Robert Sterling, an analyst with Jupiter Communications.
"They are so big, they can afford to make mistakes," he said. "Merrill has got a quiver of Net offerings. If one arrow doesn't hit the target, they can fire another 15."
Traditional banks are not sitting idly by. Besides adding to their online services, most of them are taking a swipe at brokerage houses by offering online trading.
In banking circles, names such as Wells Fargo, Citibank and First Union are well known by consumers, so they don't have to spend as much on brand building as do the lesser-known Web-based banks.
But Gary Craft, a Deutsche Banc Alex Brown research analyst, said that traditional banks generally charge too much for their services. He sees an opening for online banks, which have lower overheads, to offer greater value to customers.
"I think consumers will say, 'You give me a system that allows a lot of high-dollar transactions securely at a low cost, and I'll give you all my deposits,'" Craft said.
That's the strategy Fitzgerald said online banks are pursuing as they attempt to stay competitive.
"For years all you heard was that the company that provided the least cost would win," he said. "We don't have to worry about building real-world branches or staffing them. We can pass those savings to customers."