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E*TRADE Extends into Physical Realm

E*TRADE -- the pioneer company that helped propel the financial services field into the future five years ago when it launched its Internet trading service -- is redefining itself to become the E*TRADE of tomorrow. But those who follow developments in online financial services think that vision is increasingly resembling traditional banks of today.

Since last fall, E*TRADE has been quietly rolling out a click-and-mortar strategy with the opening of the first "E*TRADE Zone" in a Target store located in Georgia. In partnership with the retailing giant, E*TRADE plans to open 20 more Zones across the country over the next two years. These stores, which utilize very little square footage, are relatively simple: a few computer terminals; an ATM; a representative during business hours.

Now the Menlo Park, Calif.-based company has secured retail space on Manhattan's highly-trafficked Madison Avenue -- one of the most expensive areas in New York. E*TRADE plans to open its first "E*TRADE Center" concept store during the second quarter of 2001. No date has been set.

In its latest TV spots, E*TRADE itself pokes fun at the enormous cost structure of traditional banks. And data shows the mockery is somewhat justified. The American Bankers Association found that in 1999 banks spent roughly $1 million to $1.18 million in average operating expense per branch depending on the size of the bank.

But E*TRADE officials are quick to point out that their new centers are different from traditional bank branches. "It is not a branch in the traditional sense ... in terms of the costs that it incurs and the functions that it serves," said Deborah Newman, spokesperson at E*TRADE Bank.

Perhaps, the change of heart is fueled by the relatively slow adoption of online financial services. Most Web-based financial services have yet to win acceptance among consumers, according to a report by Mercer Management Consulting. The study, "Digital Business Designs in Financial Services," found that consumers make online purchases of insurance, loans, and mortgages far less often then they buy computer hardware, books, travel, clothing, and other consumer goods and services online.

To be sure, E*TRADE is also trying to keep up with those traditional banks, which have made substantial in-roads in transitioning to Web-based financial services. If you compare any large money center bank with a competitive online venture like E*TRADE, "they will end up pretty equal five years from now," said Avivah Litan, research director of financial services at Gartner Group.

E*TRADE Centers will not only offer access to banking and brokerage products and services but also tools and education to help the consumer access more online. Personnel are at hand but customers are directed to machines to conduct their transactions. While automated self-service help hold down costs, the location "helps to forge a relationship with customers and potential customers," Newman said.

But replacing physical labor with technology doesn't necessarily insure lower costs as banks have found in migrating their customers onto the Internet. While customers migrate their transactions, the number of those transactions (account balances, transfers, etc) increases dramatically. "They (banks) ended up not saving money because they had more transactions per customer," Gartner's Litan explained.

However, there are residual benefits. Banks found that as a result of their responsiveness, customers tended to stay with the financial institutions that would catered to their needs. This is exactly what E*TRADE is doing.

"It's more a customer-retention strategy than a cost-cutting strategy. They are starting from one end of the spectrum and going to the other end" as opposed to banks who have migrated from offline to on," Litan said.

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