Tech Center

Internet Brokers Threaten Lenders
By Moving Into Banking Services

By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL

As banks clamor to get into the brokerage business, some upstart Internet brokerage firms are moving into banking.

Need a home mortgage? You can compare rates and apply on-line for a loan through E*Trade Group Inc. Sick of writing checks and licking stamps? Charles Schwab Corp. now lets you pay your household bills on-line. Last week, the company also said it was testing a high-end, on-line checking account, seemingly designed to pry affluent customers loose from their relationships with commercial banks.

Schwab Co-Chief Executive David S. Pottruck insists, "We have no plans to do car loans, credit cards, mortgages or the like." But clearly, other on-line brokerage firms do have such plans.

Companies such as E*Trade and Ameritrade Holding Corp. are building one-stop financial supermarkets offering a plethora of banking and financial services, including loans and insurance.

Internet brokerage firms affiliated with retail banks -- such as Quick & Reilly Inc., now owned by Fleet Financial Group Inc., and Toronto-Dominion Bank's Waterhouse Investor Services Inc., which has its own bank charter -- soon will sell bank products on-line and offer consolidated, electronic account statements.

"This is the biggest single threat that the commercial banks face right now," says analyst James Marks, who follows on-line finance companies at Credit Suisse First Boston Corp. "The on-line brokers have established large-scale, on-line financial relationships ... and [they're] not going to stop with investment products."

Banks, meanwhile, have been slow to embrace the Internet. Just 27 of the nation's 100 largest banks and thrifts, as measured by assets, offer banking services over the Internet, Mr. Marks wrote in a research report released earlier this week. Seventeen of them don't even have a Web site.

More important, banks will find it tough to compete with fast-growing Web brokers who, by offering consumers an easy, cheap way to compare rates for products such as car loans and home mortgages over the Internet, turn those products into commodities, according to Mr. Marks. "It breaks the stranglehold that banks have had on distribution through their branch networks, where customers have never had that choice before," he explains.

Traditional brokerage firms, of course, have offered other types of banking services for years. In 1977, Merrill Lynch & Co. introduced its widely copied Cash Management Account, an asset-management product that now offers unlimited check-writing and a credit/debit card, among other features. Customers need $20,000 to open the account, however, and pay a $100 annual fee.

Discount and on-line brokerage companies, such as Schwab and Quick & Reilly, offer similar products, but they usually have lower minimums and fees. The discounters' customers are more "mass market," meaning they "may be more akin to bank customers" and thus more likely to desert their retail bank if a brokerage firm can meet all their financial needs, says Judah Kraushaar, a financial-services industry analyst at Merrill.

"If you have someone's brokerage account, then you get their checking account, then you issue them a credit card ... you're really tying them in," says Marni Pont O'Doherty, a bank analyst at Keefe Bruyette & Woods Inc.

There are limits to what kinds of banking services on-line firms can offer. Just like other securities firms, they would need an official bank charter to offer plain-vanilla checking accounts insured by the Federal Deposit Insurance Corp., for instance. But they are free to offer money-market accounts with check-writing privileges, which are insured by the Securities Investor Protection Corp. (Basic SIPC insurance protects account assets up to $500,000 while basic FDIC insurance covers $100,000 in deposits.) Some brokerage firms also find regular checking accounts unattractive because of their low profit margins.

Generally, the Depression-era laws separating banks and brokerage firms haven't been interpreted to restrict discount-brokerage operations, such as on-line trading businesses, owned by banks and securities firms. The laws were created mainly to separate investment banking from commercial banking, and discount brokers don't usually engage in securities underwriting.

Schwab's new Internet checking offering, which is being used on a test basis by a few hundred customers, remains a money-market account. "We don't want to get into the mainstream checking business," Mr. Pottruck, the co-CEO, says. Still, "our surveys show us that customers don't want to write their household checks out of their investment account." The product benefits Schwab because it gives the company a chance to control all of a customer's assets, not just investments.

Now, though, the vast majority of Americans still use a commercial bank as their "primary transactional provider," according to PSI Global, a Tampa, Fla., firm that does research for the financial-services industry. A PSI survey this year found just 4% of U.S. households use another type of company -- such as a brokerage or mutual-fund firm -- for that purpose.

With that in mind, Waterhouse got a bank charter from the U.S. Comptroller of the Currency -- even before its acquisition by Toronto-Dominion -- to offer things such as checking accounts and mortgages to its Waterhouse Securities customers. The brokerage company has about 1.2 million accounts, about 300,000 of which are set up for customers to trade over the Web, a spokeswoman says. Waterhouse National Bank, a "virtual bank" with no branches, has about 200,000 customers.

Later this summer, Waterhouse will roll out a full-fledged on-line banking site to link the bank and brokerage companies. Customers "want to be able to see all of their net worth together in one spot," said Carrie Rattle, a senior vice-president at the parent firm. Quick & Reilly and Fleet, which bought that discount-brokerage firm last year, have similar plans.

David A. Fingerman, Fleet's vice-president for on-line financial services, notes that a just-released PSI study found that 52% of people who already have access to the Internet expect to be banking on-line within the next year.

Other on-line brokers are going even further. Instead of offering a mortgage, credit card or insurance policy from just one bank, fast-growing Ameritrade is creating a unit called OnMoney that will give customers a choice of providers. "Nobody has proven that [consumers] want a single source for all their financial services," Ameritrade President Joseph A. Konen said.

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