Telebanc Financial Corp. says it is starting to reap the benefits of a multimillion-dollar marketing campaign to attract new customers and build brand loyalty.

Its Arlington, Va.-based subsidiary, Telebank, added $277 million of deposits in the second quarter, and officials say that exceeded their expectations by $72 million. They say they have raised their estimate of new deposits for the third quarter to $305 million, from $270 million.

Part of the credit goes to a greatly expanded marketing budget, the company said. The $3.2 billion-asset company is spending about $21 million this year, up from $5 million last year. The money is funding campaigns conducted nationally, regionally, on-line, and with existing customers.

The effort reflects a growing recognition that advertising and branding are essential to the success of banks that operate mostly or totally on-line. Bank One's First USA credit card subsidiary, for example, is said to be devoting $150 million to building recognition of its Internet bank.

Marketing and advertising are "absolutely the most crucial elements," said Octavio Marenzi, a research director at Newton, Mass.-based Meridien Research. To be fully accepted by consumers, Internet-only banks must establish a sense of security and longevity through proper branding, he said. In addition, they face the difficulty of "playing catch-up" with traditional banks.

Telebank personnel now dedicate about 70% of their time to branding and marketing issues, compared with about 30% five years ago, said Mitchell H. Caplan, president and chief executive officer.

By the end of this year Telebank will have spent $8 million to $10 million on a national marketing campaign using television, radio, print, buses, and billboards. The effort focuses on getting new customers who are immediately drawn to the bank's low fees and high interest rates on deposits.

Telebank also initiated regional campaigns this year in Los Angeles, Philadelphia, San Francisco, Chicago, and New York, and Mr. Caplan says they have begun to pay off. "The goal is to saturate one market at a time and then roll it into a national campaign," he said.

Another objective of the regional campaigns is to test the bank's ability to attract customers who normally would not be swayed by the low fees and high interest rates. These people, who usually hold deposits at larger, well-recognized regional banks, tend to be the most profitable, Mr. Caplan said.

They are more brand-loyal than rate shoppers and are amenable to buying additional products from an institution they have a relationship with, he said.

"It was a big question whether we could get that customer base," Mr. Caplan said. "We are a niche bank."

Feedback from Los Angeles, where the first regional campaign was conducted, has been encouraging, Mr. Caplan said. Telebank tripled its accounts and deposits in the area after 10 months, he said. "We were able to meaningfully penetrate the big banks."

On the Internet, Telebank's marketing strategy consists of developing relationships with groups whose Web sites appeal to specific demographic groups. "We have never run banner ads because I don't think they work," Mr. Caplan said.

Instead Telebank has put financial content -- mortgage and retirement calculators, for instance -- on 17 sites, such as those for Sam's Club and the National Association of Senior Citizens. The sites, which have links to Telebank, have the potential to reach 20 million people.

"This is potentially our cheapest form of customer acquisition," Mr. Caplan said.

Another key component to Telebank's marketing is to seek references from its own customer base.

Telebank intends to retain its brand once it completes its merger with the Palo Alto, Calif.-based on-line brokerage E-Trade Group Inc. "To just pull it presents a huge risk in terms of confusing the customer," Mr. Caplan said.

But Mr. Marenzi said retaining the brand would be a mistake. Telebank should piggyback on of E-Trade's successfully established brand, he said.

As a stand-alone bank, Telebank had intended to spend $50 million on marketing next year. That could change this fall, when the merger with E-Trade is expected to be completed. E-Trade is the most aggressive advertiser among the Internet-only financial companies; last year it spent about $250 million on marketing, according to Mr. Caplan. In the last quarter alone it spent about $120 million, he said.

As Telebank spends more on marketing, its per-customer acquisition costs are coming down, Mr. Caplan said. Historically it has spent $250 to acquire a new customer, but two quarters ago that dropped to $187.

At the time, Mr. Caplan said, he considered the decline an aberration. But last quarter the cost dropped again, to $185.

Newer entrants such as Bank One Corp.'s are helping to "educate people on a national level," he said. The popularity of on-line investing also has eased consumers into Internet banking, he said.

Mr. Caplan, who was a lawyer before buying a $50 million-assetbank in Virginia that became Telebank, said he has learned about banking -- and now branding -- "from the ground up."

In general, executives at Telebank lack banking experience. "I'd never hire a traditional banker," Mr. Caplan said. "They have preconceived notions."

He added: "A lot of what we've been doing is forging a whole new path. We've had to learn to do guerilla marketing."

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