Bank of America versus E-Trade

A Transformation to Online Services

By Rex A. Crouch

Copyrighted © by Rex A. Crouch 2009

This is an examination of Merrill Lynch, now Bank of America, and E-Trade. Two separate

entities serving the investment industries. One is a traditional brick and mortar investment, and

banking organization, and the other is an entirely online investing interface. In identifying which

of the two companies is more transformed into the modern information technology format, I am

arguing that there is no comparison; E-Trade is in fact an entirely online organization. In

integrating what I have learned about the two organizations, I present the following:

DIFFERENCE IN STATEGIES

TRANSFORMING PROCESS

OPPORTUNTIES AND RISKS

STRATEGY SIDE EFFECTS

DIFFERENCE IN STATEGIES

The E-trade strategy is one that distinguishes it from other online brokerages, and makes it

competitive with traditional investment and banking services. This strategy involves online

brokerage services; includes banking and loan services, various insurances, and advisory services

(Information Week, 2002). At the root of these services, E-Trade seeks to educate the investor

(E-Trade, 2008), and have very little actual human interface, and minimize edifices which

reduces overhead. In this strategy, E-Trade enables the investors with information, allowing

them to identify market opportunities, create actionable trading ideas, and make educated real-

time decisions regarding their trading. In visiting the E-Trade website, they let you know

upfront that they speak your language, whatever language that may be, and their presence is

international. A final note in this strategy is that E-Trade offers more services than its

competitors at more competitive rates (Fortune, 2008). With the fact that they do have more

services than the competition, E-Trade has stated that they believe their customer loyalty will

pull them through their most trying times.

Conversely, Bank of America, which has recently absorbed Merrill Lynch (MSNBC, 2008)

conducts investments face-to-face, and through an online an interface (Bank of America, 2009).

In their investing options, they offer ―self-directed,‖ ―full-service,‖ ―premier banking,‖ and ―U.S.

trust private wealth management‖ services. Bank of America’s self-directed investment option

sounds similar to E-Trade however, Bank of America makes this service sound substandard to

their other options which involves human interaction.

There are two significant contrasts between the two in their strategies. These are:

1. E-Trade’s efforts to educate the investor to be self-reliant, where as Bank of America

provides some self education information but would prefer to interact with the customer.

2. The number of branch offices Bank of America has. Each of these buildings costs on the

order of $100,000.00 of dollars, and each requires insurance, security, and manning. This

is money not being returned to the potential investor. E-Trade has one location in the

United States, this is in Virginia. For all I know it may be a barn—I do know that they

are not wasting money by building an office in every major city in America. Similar to

my banking services at USAA. USAA has one office in Texas, and owns no ATMs—it

saves enough money that it reimburses its clients for all ATM fees incurred each month.

TRANSFORMING PROCESS

For E-Trade there was no visible transforming process from a brick and mortar business to

online. Beginning in the mid 1990s, E-Trade opened its virtual doors for business. Its own stock

traded rather sluggishly until the 2000s (NASDAQ, 2009) when consumer confidence, as well as

actual us on the Internet began to grow. There were however, many small transformations along

the way for E-Trade (Wahlgren, 2002). The transformations made by E-Trade have been to ever

increase its presence in the global market, increasing the languages supported, and developing

the hardware infrastructure to stay ahead of the competition.

The transformation to online banking for Bank of America has been more of an investigation

than a research effort. The transformation for Bank of America began about 1988 when it

changed from Nations Bank to Bank of America in a merger (Bank of America Corporate

Affairs, 2007). While I have not found one inclusive actual source for Bank of America’s

transformation to online services, I can provide a firsthand account of some of the early

transformations in concert with other sources. After this merger, the bank developed an

information website. It was found that 60% of their visitors were already Bank of America

customers seeking additional information (InQuira, 2009). As their current clients were seeking

additional information, the bank tested six search engines, and ultimately chose the InQuira

search engine. This was for the purpose of making information more accessible to their clients.

Online banking was developing simultaneously. The online banking at first, was just a means of

checking your balances without actually having to stand in a line to see a teller. This must have

been after 1994 because Bank of America states that they use Secure Socket Layers (SSL) (Bank

of America, 2009) for their Internet transactions; this is port 80 and was not fully developed until

1994 (IBM, 2009). While online banking may have been secure, I distinctly remember

discussing an account with a Bank of America representative. She was using some form of

proprietary software to view my account, and answer questions when the application locked up.

In lieu of using the task manger to end the process, she turned her computer off, and back on. In

doing this, I witnessed a Windows 95 operating system initiated, and she was back online

without a password, or any other authentication. Obviously, internal security protocols were

established after the external ones. Eventually, transfers of monies could be made, but it was

limited to within Bank of America itself. After this initial ability to transfer monies internally,

online services developed quickly, exploded would almost be an appropriate word, allowing

customers to open accounts, pay bills, and invest. Up until this point, I have pieced together

what contractors have said, in conjunction with what I remember. I attempted to more fully

explain this transformation by gathering additional information from Bank of America itself. I

initiated email contact with corporate Bank of America on 8 March 2009 requesting the timeline

of events during the transformation to online banking services. The response I received on 9

March 2009 indicated that they did not have this information. I replied, and said that the fact that

Bank of America does not have a case study, nor an after action report on their transformation to

online services was interesting in itself. Bank of America replied the same day to that comment,

almost defensively, and stated that ―the information you seek is not available to the public at this

time‖ (Thomas, 2009). Given the two different responses, and my cynical nature, I believe the

information exists, but Bank of America has never culminated that knowledge into one

accessible document. Attempting the same approach with Merrill Lynch, I inquired about their

transformation, and if there they are restructuring their IT since they were acquired by Bank of

America. The reply email I received said ―We encourage students who have research inquiries

to visit our Web site at ML.com. Any information that we are able to provide can be found on

this site‖ (Merrill Lynch, 2009). Given these responses, I believe my investigative, and piece

mail development of the transformation is as good as can be provided.

OPPORTUNITIES AND RISKS

In scrutinizing the subjects of opportunity, and risks in E-Trade, I found there are three major

opportunities that have developed in electronic-trade (International Trade Forum, 2001) and also

affect Bank of America. These opportunities are:

Services

Software Developments

Hardware Markets

The risks in E-Trade consists of many ghost stories on the Internet—there are some who address

the risks involved in E-Trade’s stock (Laljee, 2008).

Types of Trades

Management

Addressing each subject individually:

OPPORTUNITIES

Services

With the Internet, E-Trade has gone to the global market place. In the process of

developing a broader market place, the company has developed a more diverse range of

services, and customizations for the benefit of the individual users. Some of the services

they now offer are:

Investment training

Research training

Trading training

Free portfolio reviews

E-Trade on your mobile

Among many other services available on their website (E-Trade, 2009). The number of

carefully prepared training programs to ensure the individual investor is working with the

information to make them successful is reassuring. While Bank of America could make

these services available, and do to some extent, but their efforts are aligned empowering

the individual investor.

Software Developments

Software developments continue to enhance the ability of E-Trade to be conducted in

multiple languages, and on various platforms around the world.

Hardware Markets

Hardware is the most significant opportunity for E-Trade. The development of hardware

infrastructures which support Internet technologies is growing at 12%–15% annually.

With this, new technologies are creating a more substantial demand for Internet-based

services.

At first glance, I thought these were very benign subjects—not worth mentioning, but I found I

was wrong. Within these three subjects we find that- As the hardware market expands, the

footprint of E-Trade additionally expands. Software developments increase the opportunity for

E-Trade to reach broader markets. Subsequently, E-Trade is allowed to expand its services to

accommodate the needs of the various users.

RISKS

Types of Trades

In expanding their services under the opportunities given, E-Trades have gone into new

market areas such as mortgages. This is perceived to be the single biggest risk in E-

Trades.

Management

The author of this source asserts that the management of E-Trade is not stable, because it

has diversified into areas such as mortgages that many considered volatile. As a result of

some of the investment management.

The risks are perceived to be in the types of trades being implemented, the investments being

made, and the management. However, none of the sources I have encountered can give concrete

evidence that the management is not stable—this may merely be an author’s opinion. From

another perspective, it is noted that E-Trade may be riskier than other organizations, simply

based on some stock types they hold (StockPickr, 2009) however, this has yielded many rewards

for the persons willing to work with E-Trade’s risks. Another well established fact is that E-

Trade focuses on Risk Management (BNet, 2008), this would indicate to me that risks taken are

not based on unstable management, but rather erudite professionals.

Bank of America shares similar opportunities, and risks however, they have employed their

opportunities differently. Bank of America employs a personal approach whenever possible

while exploiting its opportunities. Bank of America is also involved in mortgages, and

experiences the same risks in that regard. This brings us back to a subject of loyalty that E-Trade

relies on, and how loyalty supports risks. In the acquired Merrill Lynch company, as we will see

in a table presented later, could not retain their customer loyalty which ultimately resulted in

their acquisition by Bank of America.

In my assessment, I consider the opportunities that the Internet continues to provide the world as

another stepping stone for E-Trades, as well as Bank of America. The risks are ever present. In

reviewing the stock performance of each of the two companies, it is apparent that Bank of

America is mitigating the risks, and exposure better than E-Trade.

(NASDAQ, 2009)

(NASDAQ, 2009)

STRATEGY SIDE EFFECTS

As discussed, the strategies of these two investment and banking organizations are similar. With

these strategies, there are good, and bad side effects.

Good side effects for E-Trade’s strategy-

Well informed customers who feel loyalty to E-Trade have been a significant good side

effect of E-Trade’s strategies. Many small company owners I know swear by E-Trade,

and use it as a business tool—that’s customer loyalty. The below chart depicts customer

loyalty over a one year time period for online brokerages; note that only E-Trade, and

Ameritrade are the only companies that saw an increase in customer loyalty.

(American Banker Special Report, 2004)

Bad side effects for E-Trade-

Some investors need the psychological reassurance that their money is going into a solid

building, and not disappearing through the ether-net.

You must have access to the Internet to conduct trades. While that is not an issue for the

most part in the lower 48 states, and Hawaii. If you are conducting business in the

Northwest Territories, Latin America, or Southeast Asia as a few examples, you may go

for days without an Internet connection—but then again Bank of America is not

everywhere you want to be either.

Good side effects for Bank of America-

People who need personalized banking, need the security of brick and mortar, need to see

the same face every time for every transaction, can depend on Bank of America to meet

all of their banking, and investment needs.

Bad side effects for Bank of America-

The actual building develops a false sense of security. Your money can disappear just as

easily behind the vault door as it can through the cable modem.

Younger investors who lack significant amounts of money, and experience, are handled

differently than an informed wealthy investor—a treatment that can propel a young

investor into the arms of E-Trade.

SUMMARY

The strategies of E-Trade and Bank of America are remarkably the same in that they each offer

full banking services, insurances, and investment opportunities. While saying this, their

strategies are wildly different given that E-Trade makes concerted efforts to educate investors to

be self reliant, and Bank of America seeks to bring the investor in for personal interaction.

In the transforming process, we saw that transformation into an online banking and investing

service did not occur with E-Trade as they began entirely online. The transformation for Bank of

America was initially awkward, became smoother, and is now a seamless interface into the

building behind the website.

The opportunities and risks were similar for both organizations however, Bank of America did

not seem to be fully exploiting the Internet to establish a global footprint as E-Trade has done,

and is doing. In speculation, I believe the name change, or rebranding from Nations Bank to

Bank of America in 1988 was a shortsighted decision that has geographically limited Bank of

America to North and South America. Attempting to move into a broader market would

probably be as warmly received as Bank of Russia, or Bank of China would be received here in

the United States.

Oddly enough, while the strategies have been identified as being very similar, the side effects of

the strategies used by these two organizations are incredibly different. The impacts on customer

loyalty, the psychological need for security that edifices represent, and the education of the

investors are just but some of the side effects.

Culminating with my own personal opinion- I am Internet friendly, I dislike that an institution

would spend money to build structures when they are not needed. I have a disdain for my own

utility and insurance bills, and refuse to pay for somebody else. Having been both a client of

Bank of America, and USAA which is an entirely online banking and investing organization, I

have found that the best service has come from the online establishment. I found Bank of

America to be large enough that they didn’t mind losing a few customers; me being one of them.

For me, good service from the business equates in loyalty on my part conferred to the business.

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