Having staked out their own lucrative corner of the virtual financial services world, on-line brokerage operations are taking aim at banks.

Their banking rivals, despite having about the same number of years' experience on the Internet, "are utterly unprepared for the force and fury with which the brokers are coming to town," warned Bill Burnham, senior research analyst at Credit Suisse First Boston.

Speaking at a recent industry conference, Mr. Burnham described brokerages as "Viking hordes" about to wreak "carnage upon a bucolic rural village of agrarian bankers."

Brokers have essentially created a new delivery channel. In 1998's third quarter, 25% of all stock trades were initiated on-line, according to Credit Suisse First Boston. They also have a sense of purpose and momentum that banks as a whole have failed to muster in their struggles to find a profitable on-line business proposition.

"For discount brokerages, the Internet has become mission-critical in a way that banks have not faced yet," said Christopher Musto of Gomez Advisors Inc. of Concord, Mass.

Use of the Internet by brokerages is so pervasive that the term "on-line brokerage" is becoming dated, said Blake Darcy, chief executive officer of Donaldson, Lufkin & Jenrette Inc.'s DLJ Direct.

For now, on-line brokerage remains confined to a niche of early- adopting, computer-literate, largely self-directed investors. The high percentage of on-line trades reflects in part the kind of transaction explosion that automated teller machines brought to consumer banking. People are doing more transactions because access is easier, so the raw electronic percentage may be a bit misleading.

What seems to separate brokerages and banks is a state of mind: On-line delivery systems tend to be part and parcel of retail brokerage strategies; at banks they are still an appendage of traditional modes, regarded more as a customer maintenance or retention tool.

"Banks haven't had this baptism by fire and aren't battle-tested," Mr. Musto said. "They haven't had customers judging them by the effectiveness of their Internet offerings."

"Everyone has the same shot at the consumer," said Edward E. Furash, chairman of Monument Financial Group of Alexandria, Va. "The difference ahead lies not so much in what kind of organization you are but how you position it on the Internet."

"The discount brokers have had this very tough, intense experience of making a go at the Internet and finding their business transformed," Mr. Musto added, which could also threaten the full-service traditionalists. "When full-service firms finally develop a significant Internet presence, they will have ceded territory, initiative, and experience to some discount brokerages."

Brokerages adding banking services to their Web sites-such as E-Trade Group, Ameritrade Holding Corp., DLJ Direct, Waterhouse Investor Services, and Charles Schwab & Co.-appear to be ahead of banks in assembling "one- stop" Internet shops.

E-Trade of Palo Alto, Calif., has been one of the most aggressive in its quest to become a financial "destination site" on the World Wide Web. It has begun offering on-line mortgages through E-Loan Inc., credit cards through Bank One Corp.'s First USA unit, and insurance through InsWeb.

E-Trade chief executive officer Christos Cotsakos has said, "Destination E-Trade is our most potent marketing and customer education tool. Our target is the 10 million to 15 million investors who currently use the Internet for investment research but continue to execute trades off-line."

Since the destination site opened in September, more than 500,000 people have signed up.

"Our goal is to be a major financial hub," said Rebecca Patton, E- Trade's former senior vice president of advanced products. "We want to be the killer hub in the investing and financial area. We don't want to have consumers go somewhere else."

The leading discount broker, Charles Schwab & Co., is also well positioned. Schwab's $427 billion of customer assets exceeds the deposit base of even the newly merged BankAmerica Corp. Its 269% increase in consumer assets during the past four years far outpaced the 17% increase in bank deposits in that time.

Schwab eagerly embraced the Internet with its creation of e.Schwab. The on-line service "was seen by some as a real threat to our customer base" of branch-using clients, said David S. Pottruck, president and co-chief executive officer of the San Francisco brokerage. "We knew that we would be 'eating our own children,' but we moved ahead aggressively."

Schwab "wisely and bravely self-cannibalized," wrote analyst James Marks of Deutsche Bank Securities in a recent report.

It was successful at finding on-line prospects and locking them in. It commands $30 per on-line trade in a market where E-Trade charges $15 and some others as little as $8.

Schwab is adding insurance to its Internet-based brokerage services and, for customers of its high-balance Schwab One account, electronic bill payment through Checkfree Corp. Schwab is the first of 12 brokerages expected to offer bill payment through Checkfree.

Ameritrade recently announced OnMoney, an Internet hub offering mortgages, insurance, and other financial services. The brokerage plans to use the Open Financial Exchange home banking standard to let customers get consolidated financial information from a variety of institutions. The brokerage is in negotiations with financial services firms to participate in OnMoney, which is still under development.

Frank Petrilli, chief executive officer of Toronto-Dominion Bank's Waterhouse Investor Services, said the brokerage would have a full Web banking site along with its current brokerage services by the end of the first quarter.

Banking companies are not sitting on the sidelines as brokerages move in on them. Citigroup, BankAmerica Corp., and Wells Fargo & Co. are among those that have launched Web-based brokerage services.

"Banks have an opportunity to keep head-to-head with brokerages," said Mark Baumli, vice president of Wells Fargo. "There is a great deal of loyalty to banks." And banks are more often than not regarded as people's principal financial institutions.

Banks can always buy brokerages. Fleet Financial Group, for example, gained entree into on-line brokering when it bought Quick & Reilly.

"We are learning a lot about compliance and the multibroker-dealer relationship," said Robert B. Hedges, Fleet's managing director of retail distribution. "We want to make sure we do it the right way."

Said Ms. Patton, formerly of E-Trade, "Different customers are attracted to different institutions as their primary financial relationship. It is like two institutions with different strengths expanding into the same space, but neither one can fully cover it." Mr. Clark, a former American Banker reporter, is on the staff of National Journal's Technology Daily in Washington.

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