By contrast, E-Trade — perhaps because it began as an online-only bank and is relatively new — has been able to more easily integrate its lines of business just as it has integrated its IT applications. Unlike traditional banks, E-Trade does not have a separate Internet division and, says Framke, there are no barriers between the company's trading, lending and cash management operations. "All retail technology is done in the same organization," Framke says. "There is no distinguishing between brokerage, lending or cash."

With fewer layers of bureaucracy to wade through, E-Trade executives can make quick decisions about getting new services up and running. For example, in 2004, Framke gathered with Caplan and other top E-Trade executives to present a plan for using multifactor authentication to identify customers. At the time, the use of at least two types of authentication — generally something a person knows, such as a password, and something they have, like a hardware token — was emerging as a safeguard against identity theft. Framke knew customers were concerned about online security, and he wanted his company to respond to these worries.

After Framke's presentation, the group decided on the spot to move forward with the plan, which involved giving tokens from security vendor RSA to E-Trade customers in addition to a user name and password. That type of nimble decision making is typical at E-Trade, where in contrast to practices at most large banks, Framke oversees all Internet technology and plays an important role in executive decision making. That contrasts with some larger financial companies in which the Internet division is far removed from top management and which, experts say, accounts in part for the lack of progress deploying multifactor authentication by the industry as a whole.

Having separate channels "makes it easier to deal with customers from a line of business perspective", says Carter Hansen, senior VP of user cantered design at Wachovia's e-commerce division. "The challenge is, how do we come up with the best customer-cantered recommendation in the online channel and avoid the impulse to do what's best for the line of business?"

Listen to Customers

The challenge for banks, then, is to do what customers want, even if it seems counterintuitive. The more tools and functions that are available to customers in a straightforward way, the more money they'll bring to the bank. That's the lesson E-Trade learned after it introduced QuickTransfer, a function that allows customers to transfer funds free of charge between accounts within E-Trade or outside the company.

"We were early in the industry to open our door," says Framke, noting that there was some initial concern that customers would use the transfer function to take money out of E-Trade. However, the opposite occurred. According to company data from the first quarter of 2005, 750,000 customers initiated QuickTransfer and for every $US2 transferred to outside accounts, $US3 came back to the bank. According to Rob Shenk, senior VP of retail strategy at E-Trade, customers adopted QuickTransfer because it provided a more efficient way than traditional wire or check requests to transfer funds. "It's also a statement to the customer that our products are not 'roach motels,' where your cash is trapped within one financial institution," Shenk says.

According to an equity research report on E-Trade issued earlier this year by Keefe, Bruyette & Woods, "it appears E-Trade customers are choosing to place more cash with the company rather than their traditional bank as some of the largest contributors of net inflows are Bank of America, Chase, Citibank and Wachovia." Shenk says this information is proof that customers and their cash are drawn to the easy-to-use and effective functions such as QuickTransfer.

"Our bet has been that if we give our customer the functionality to see what they are making and to move their money around as they see fit, we will bring more money in," Framke says. He adds, however, that it's also important not to overwhelm the customer with too many options. "You need to walk the line between offering sophisticated functionality but not too much." For example, he notes, E-Trade would rather offer fewer, highly effective functions like QuickTransfer than a wider variety of more run-of-the-mill ones.

Framke cites E-Trade's move to offer token-based "multifactor" authentication as another such key function. When the company introduced the RSA tokens in March 2005, it was the first financial company in the United States to offer multifactor authentication to US-based customers (the technology is now strongly recommended by banking regulators). E-Trade customers who choose the service use a token that displays a new six-digit number every minute. The number acts as an extra, onetime password that matches with an identical number generated at the same time at E-Trade's offices. Framke won't specify how many customers have opted to use the security tokens, but says E-Trade is pleased with the adoption. "If people feel secure, they tend to keep more money with us," he says. E-Trade did not provide data to back up this claim, but Internet performance monitoring company Keynote Systems says that in its most recent survey of prospective customers of online brokerages, E-Trade was ranked as a top performer in privacy and security.