BW ONLINE DAILY BRIEFING
STREET WISE by Amey Stone June 2, 1999
Tremors in the World of Online Trading and Banking
E*Trade's purchase of Telebanc and Merrill Lynch's move to online trading rile brokerage stocks
The Internet's power to shake up the brokerage industry showed up yet again on June 1: E*Trade Group (EGRP) announced plans to get into the online banking business by purchasing Telebanc Financial Corp. (TBFC) for $1.8 billion in stock. And even that news was overshadowed by Merrill Lynch's (MER) stunning announcement that it would offer online stock trading at discount prices by the end of the year.
Investors, already fearful of rising interest rates, were none too pleased with Merrill's plans and sold off brokerage stocks. Merrill Lynch fell 8 3/4 points, or 10%, to 75 1/4 as investors worried that Merrill's retail brokers will be forced to compete with their own company's online division for trading commissions -- a situation sure to spark discord within the ranks. Other brokerages, including Charles Schwab (SCH), Ameritrade Holding (AMTD), and DLJ Direct (DIR), fell around 10%, since Merrill is sure to be tough competition online.
For much the same reason, E*Trade, too, tumbled 5 3/16, or nearly 12%, to close at 39 5/16. But the company's move into online banking, while overlooked by investors, is exciting news -- especially given the jittery stock market.
A "NATURAL EXTENSION." By scooping up Telebanc, E*Trade is getting access to a stable business that isn't directly tied to the ups and downs of the stock market. That will reduce E*Trade's dependency on revenues from trading. The company plans to reduce revenues generated by commissions to less than 50% of the total by 2000, down from 75% last year and 90% in prior years, says Kathy Levinson, E*Trade's president and chief operating officer.
"I think strategically it makes a lot of sense," says Derek Brown, an analyst with Volpe Brown Whelan, who says banking is a "very natural extension of E*Trade's business." Investors will be able to leave their dollars with the firm in an FDIC-insured account if they choose to exit the market. "That provides an extremely powerful asset-retention tool," says Brown.
With banking, E*Trade will also be able to gather more assets from customers by offering direct deposit for paychecks. Moreover, argues Larry Greenberg, executive vice-president for marketing at Telebanc, investors want the FDIC insurance they can get through a bank, but that they can't get from the alternative offered by most brokerage firms -- a money market fund. Levinson adds that investors often don't want to use a money market fund as a replacement for a checking account, since they don't want to pay small monthly bills from their investment account.
ACQUISITION SPREE? The other assets E*Trade will get from Telebanc, the largest pure Internet bank, are management and marketing strength, wrote Scott W. Appleby, an analyst with BancBoston Robertson Stephens, in a June 1 report. Already, the two firms have decided to team up to market a 12-month certificate of deposit yielding an attractive 6.5%, says Levinson.
Telebanc may be just the latest E*Trade acquisition. "We believe the ultimate value of the merger is the creation of a single financial portal, where consumers will be able to manage their entire investment and financial portfolios from one Web site, generating one financial statement," writes Appleby.
E*Trade's next deals could be in other areas of financial services, such as insurance and credit cards. The company may also acquire more content, says Levinson, who cites its deal for ClearStation, a Web site offering free technical analysis and investing information. E*Trade recently got into the mutual-fund business, launching its first proprietary funds in February. It also has a deal with E-Loan to provide home mortgages online. "E*Trade is very clearly attempting to become an online financial services destination with a brokerage business at its core," says Brown. "We've got great currency right now," Levinson contends.
As for Merrill's deal, she says: "We think it's great. It validates the space." But she points out that E*Trade has an advantage since it doesn't have the baggage of bricks and mortar offices and thousands of full-service brokers. "They are not exactly Netcentric," she says of Merrill.
Both Merrill and E*Trade have more work to do before they lure customers with a full suite of convenient and affordable financial services on the Web. But as of June 1, Merrill is just starting, while E*Trade seems well on its way.
Stone is an associate editor at Business Week Online |
