Online banks are faltering. Netbank has fallen 75 percent from its July 1999 high, and Wingspanbank is up for sale. The reason? They cannot bring customers in quickly enough. NetBank nets only around 15,000 new customers per quarter, while Wingspanbank struggled to justify its acquisition costs - customers are estimated to have cost the company around $1,000 each. The difficulty in attracting new account holders is not surprising mention the word 'bank', and customers think 'checking' account, a product they probably already have and are likely to buy from only a few companies in their lifetime. When people do switch banks, it costs them dearly in time and patience they are unlikely to launch the process on the basis of a few advertisements alone. Clearly banking is not the most effective proposition for acquiring online customers.

Online brokers, on the other hand, are attracting customers hand over fist, and at a reasonable cost. Total customer numbers for the top five competitors have risen 44 percent over the last year, with E*Trade gaining close to half a million customers in the first quarter of the year (excluding those it gained through its acquisition of Telebank). These gains are made at an average cost of around $250 per customer. The effect - online brokers are paying less than one seventh of the average market value of $3000 per customer that the share price suggests. This is an extraordinary way to create value for shareholders, as long as these companies can either deliver the earnings stream implied in the share price or sell out to someone who can.

The difference between brokerages, and bankers, perspectives creates an opportunity for the customer acquisition arbitrage, capitalising on new customers by passing them on for a higher price than they cost to acquire. This phenomenon is the driving force behind a series of recent mergers and acquisitions in which brokers have allied with customer-hungry banks.

Consider the plight of online and traditional banks: If they are to avoid further pounding of their stock they need to, respectively:

1. Bring in many more customers and lower acquisition costs

2. Dramatically increase the market value of current customers

Some, like Fleet and Bank of Boston have sought a solution in mergers that allow them to acquire customers at a discount and then spread reduced fixed costs over a larger customer base. However, scope for further such deals may be limited these two banks must now shed some of their customers to meet antitrust requirements.

Others have developed "hooks" products that attract a high volume of customers who may then buy additional products. A recent example is credit cards: some banks, like Capital One and Providian, successfully boosted customer numbers by offering attractive rates on no-fee cards.

Today, online brokering has become useful bait. Charles Schwab and Merrill Lynch have become very effective at using their online brokerage businesses to drive customer growth. They complement this success by using the rest of their business system to sell more products to their customers, thus increasing the value of each relationship.

With their track record for swift customer acquisition, on-line brokers are becoming an attractive engine for customer growth in the banking business. For example, Toronto Dominion Banks majority-owned T D Waterhouse has shown how this can work. The second largest online broker in terms of total accounts, it has built a profitable business through offering a full array of products and services to its brokerage customers, including banking products through its affiliation with T D Bank. T D Waterhouse's first quarter earnings this year were almost double analysts' predictions.

A second example, Telebank, clearly saw the opportunity to acquire customers quickly when it sold itself to E*Trade. At 28,000 customers per quarter, its acquisition rate was less than a tenth of E*Trades. Alternatively, E*Trade saw an opportunity to increase the value that it extracts from each of its customers. Of course, the value of this partnership will only be realised if the new E*Trade Bank can cross-sell banking products to its stock-trading customers; there are two early signs that they may succeed where others have failed. First, this new organisation understands its raison dtre it was formed to increase its share of wallet of E*Trades customers, and must do so or die. Second, intimacy and familiarity tend to generate loyalty and online trading has become a big part of the lives of those who do it. E*Trade certainly appears determined to eke the maximum value out of its precious customers, it is launching a door-to-door financial advice service and branching out into accounting and tax planning.

The verdict on E*Trade may be too early to call, in the meantime, it is not just newer companies like Telebank that are using brokers to generate customer growth. Think of blue-blooded US Trusts sell-out to Schwab. US Trust was finding its customer acquisition model increasingly expensive. It had grown by acquiring asset management companies then adding a private banking practice to increase the depth of customer relationships , a tough proposition given the rising price of asset managers. For its part, Schwab was already selling profitable money market accounts to hold customers' cash between trades. It needed an up-scale brand and some additional services to help retain increasingly wealthy customers. The combined entity, a top-notch brand plus a high quality, fast growing customer base - has excellent prospects.

The online banking and broking market in Asia Pacific, other than Australia and South Korea, is still nascent. In Australia, there has been a spate of alliance and acquisition activity in an effort to arbitrage customer acquisition and build an effective cross-sell platform to increase customers' "share of wallet". Recently, National Australia Bank invested 15 percent in Sanford securities, the third largest online brokerage in Australia to expand its online offering to its customers. Last year, ANZ invested in E*trade Australia (second largest online brokerage) to offer world class stock brokerage and other financial services products to its customers. With a projected acquisition rate of 200 customers per day for online trading through ANZ, E*trade can hope to double its current customer base of over 50,000 customers in less than a year. The bet is on increasing customer revenue by cross-selling effectively. While many other markets are still to prove the "cross-selling" story, the success of on-line market leader Commonwealth Bank and its online securities company Comsec suggests that, if delivered well, the companies can reap huge benefits.

Customer led acquisitions in the rest of Asia have been limited so far:
Regulations in many countries (e.g., Malaysia) prohibit a bank from taking an ownership interest in a stock brokerage company

Fixed brokerage commissions in countries like Thailand, Indonesia, Malaysia and Singapore have inhibited the growth of online brokerage

There are hardly any "clicks only" banks in Asia (first-e)

Many banks have a brokerage group company (OUB securities in Singapore) and they are currently pursuing a "clicks and mortar" strategy over acquisitions

Regulations do not permit online broking in many countries (Indonesia , Philippines and Thailand).

However, increasing deregulation, expansion of online brokerage, listing of many brokerage companies, increase in on-line banks like Egg and First-e suggest that Asia might follow the path of customer-acquisition driven deals. Recently, the new joint venture between ANZ and OCBC took a stake in Boom.Com, a leading Asian on-line brokerage. Bank of Tokyo-Mitsubishi has increased its stake in Kokusai Securities, Japan's 4th largest brokerage company. HSBC and Merrill Lynch have formed a joint venture to offer integrated banking and investment services, initially in the UK and Japan. While the clicks and mortar institutions in Asia are projected to dominate the online banking segment in the near future, they must either increase the value of existing customers through further consolidation or spot other acquisition engines like on-line brokers to buy. Specialist companies that can reel in the customers should keep an eye out for banks with which they can do a little arbitrage.

Scott Tanner is a vice president in Bain International, Sydney and Vicky Bindra is a manager in Bain & Company, Singapore.