Originally created 01/12/00

First purely online banking-brokerage company approved

WASHINGTON -- Federal regulators have approved online brokerage ETrade Group Inc.'s acquisition of Telebanc Financial Corp., which will create the first purely Internet-based financial services company.

The Office of Thrift Supervision, which has regulatory authority over Telebanc, announced its approval today.

As a condition of its approval, the agency said it is requiring the new company to make "clear distinctions" between financial products that are insured by the government, such as bank deposits, and uninsured ones such as securities investments.

Once the merger is complete, ETrade customers will be able to trade stocks, apply for mortgages and pay bills, among other transactions, all on the same Web site. The company, based in Palo Alto, Calif., says it has some 1.5 million investment customers.

The thrift agency's approval came a day after Internet titan America Online and traditional media company Time Warner announced a $162 billion takeover deal. It followed by several weeks the enactment of sweeping legislation removing Depression-era legal barriers and allowing banks, securities firms and insurance companies to get into each other's businesses.

Though most brokers in the mushrooming online trading business offer some limited banking services, few companies other than ETrade have tried to combine large-scale Internet banking and brokerage.

Telebanc, based in Arlington, Va., operates a no-branches savings and loan named Telebank that began operating in 1989 as a low-cost marketer nationwide of consumer banking services through the Internet, a toll-free telephone center and automated teller machines. Telebank, with assets of $3.9 billion, doesn't make its own loans but buys home mortgages from other financial institutions.

Banks without branches say they are able to operate less expensively and thus pay higher deposit rates and charge lower fees than traditional banks.

Under terms of the stock-swap acquisition announced last June, ETrade will acquire Telebanc for stock worth about $1.8 billion. The combined company will carry the name ETrade.

ETrade made its name as an online stock brokerage but has been trying to diversify. The company already sells mutual funds and has a venture with online mortgage provider E-Loan Inc. that allows ETrade's customers to apply for home mortgages on the Internet.

Established "brick-and-mortar" banks and brokerages still control most of the financial services market. But as those firms start to add Internet services, millions of new customers could be lured by cheaper prices, industry officials say.


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