E-Trading Hangs On

There was homegrown expansion as well. It launched E-Trade Bank in April 2000 as the company's branchless bank, and the following year it launched E-Trade Mortgage, an online-only mortgage lender. In February, the company launched E-Trade Financial Advisor, a customized advisory service that combines personal- and electronic-investment guidance and account-aggregation services that let customers integrate their financial information into a single repository.

As it grew, E-Trade moved beyond the virtual world. Diversification, says company president and CEO Mitchell Caplan, isn't only creating different lines of business, but also different ways for customers to interact within each line of business, be it electronically or via a physical location. "Our power is to offer services in an integrated way so we're allowing customers to make their choices about how they want to buy and where, and we're making it easier for them to do it," he says.

E-Trade opened financial centers in five U.S. cities, and smaller financial offices in SuperTarget retail stores through a partnership with the retailer. A 2000 acquisition gave it ownership of an ATM network that the company has turned into E-Trade Access. With more than 11,000 ATMs, it's now the third largest ATM network.

Diversifying has kept E-Trade profitable in the market downturn, E-Trade executives say. Though it has more than 3 million brokerage accounts, the company wouldn't be doing well if it couldn't rely on its other business units. During the hardest times of the recession, E-Trade saw about 79,000 transactions per day, compared with more than 200,000 in late 1999 and 2000. In the early years, when transaction fees and commissions accounted for 80% or more of the company's revenue, that market change would have been deadly. E-Trade's brokerage business now accounts for just 30% of revenue, with mortgage and banking services making up the rest and helping to keep the company profitable.

Diversification has allowed E-Trade to get more out of its customers, too. Over half of its new bank accounts and 30% of its new mortgages come from its brokerage customers for whom E-Trade can provide consolidated financial statements in an electronic portfolio. The success of these divisions, Dotson says, lies in the fact that the company was originally virtual and took the opposite approach to the changing business environment than its more-traditional financial-services competitors. "A lot of companies can offer bank, brokerage, and mortgage services, but because they have a brick-and-mortar infrastructure, getting them integrated is more difficult," she says. "We're a technology company, so it's easier for us."

In February, E-Trade decided to migrate all customer-facing Web sites to Linux. It ditched expensive Sun Microsystems Unix systems in a move that the company says could eventually save millions of dollars.

While all these strategic decisions have helped the company grow throughout the good times and bad, the end game has yet to come, CEO Caplan says. "Look five to six years from now, and you're going to see the greatest generational transfer of wealth that has ever occurred" from aging baby-boom parents to their children, he says. "And if you look at the demographics of the generation that's going to receive that wealth, they're clearly underserved."

That demographic is a tech-savvy group that's used to virtual relationships and is as -- if not more -- comfortable doing business by phone or PC as they are going to a financial center, Caplan says. "What's fascinating is that they've been abandoned because the traditional players say our cost infrastructure is too big, or they're not targeted because the players say they're not profitable and not worth the cost," he says. "Our goal is to position ourselves to take advantage of that in two ways: to make their lives easier and to offer value-based products so we can become the consumer champion. That presents a very unique position in the marketplace."

As E-Trade makes its play for the next generation and Ameritrade vies to increase its market share, it's clear that both companies are pursuing very different strategies. What's still to be seen is which approach -- a singular focus or diversification -- will pay off in the long run.

Photo of Caplan by Sacha Lecca.