Reader ROI

• The challenges facing online banking
• Why E-Trade has succeeded as a Web-based bank

Suppose you're sitting on a little cash. Should you put some in a term deposit? Sock it away in a money market account? Now imagine you can visit your bank's Web site to figure it out. Using an online tool, you can move the money around and examine how your earned interest and rates will change, depending on where you put it. Coloured bar charts representing the amount of interest earned in a year shift up and down depending on your choices. When you decide on the right mix, you can open a new account with a few key strokes.

One might assume every bank would offer such a tool, but few provide customers with anything close. The application described above, called the "intelligent cash optimizer", was introduced in 2005 by E-Trade Financial. E-Trade was given up for dead after the dotcom bust, but the online brokerage resurrected itself by sharply cutting costs and embarking on a diversification plan that included acquiring a Web-only bank and linking it with its core trading operations. E-Trade's net interest income, a significant portion of which derives from its banking operations, accounted for 51 percent of its revenue in 2005. Analysts say the company's success derives in no small part from its customer-friendly services. The company reported earnings of $US1.7 billion in 2005.

And E-Trade is giving brick-and-mortar banks a run for their money. According to a June 2006 study by the Pew Internet and American Life Project, 43 percent of Internet users, or about 63 million American adults, now bank online. And a survey released early this year by IT consultancy Keane found that financial institutions consider customer satisfaction with online services key to their revenue growth through cross-selling of products to existing account holders. Yet many banks offer little more than rudimentary services such as the ability to check an account balance or pay bills electronically.

"Very few banks don't realize at this point that online banking is big business," says Matt Poepsel, VP of application management at online benchmarking company Gomez. "But many banks are still finding their way." Banks need to offer more online information and advice that is tailored to the individual account holder, as well as more sophisticated, easy-to-use online tools, experts say. However, Keane found 49 percent of banks surveyed considered their technology platforms to be the primary obstacles to improving their online customer experience.

"At some level, E-Trade shouldn't exist," says the company's CIO, Greg Framke. "If big firms had embraced the Internet as a channel, we wouldn't have had a chance." Instead, industry experts point to E-Trade as a model for how banks should run their online operations and prepare to serve the emerging generation of customers raised on the Internet.

The problem for most traditional banks is that they have grown up as a group of autonomous silos, with loan departments working separately from brokerage and cash divisions. Many have also built their branch, call centre and Internet divisions as separate units and are now struggling to provide service and sales across all channels. CIOs at these banks have a tough time integrating their back-end systems, notes Rusty Wiley, global banking industry leader for IBM's business consulting services. "The way banks have built their channels independently has created an inconsistent user experience from the Internet to the call centre and the branch."

Some major banks, including Wells Fargo, Bank of America and Wachovia, are well on their way to integrating systems and offering sophisticated online tools (see "Big Banks That Get the Web"). But "E-Trade takes it to the next level," says Brad Strothkamp, a senior analyst with Forrester Research. "They leave no stone unturned and [they] sweat the details when it comes to integrating their offerings and providing more functionality." Here's how they've done it.

The Right Business Model

E-Trade's first online business model was a bust. After the stock market crash of 2000, the Internet broker's stock price plunged from more than $US60 at its peak to less than $US3 in 2002, while the company lost a total of $US428 million. Among its problems, E-Trade had a bloated staff and lacked financial discipline, as did many dotcoms. But when Mitchell Caplan, now E-Trade's CEO, joined the company in 2000 as its chief banking officer, he was convinced that despite the gloomy mood among Internet companies, E-Trade had a future as an online bank. In 1989, Caplan had founded Telebank, a savings and loan that had no physical branches. Telebank offered banking products and services via a toll-free call centre and later online.