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Merrill Lynch expands early foray into banking

The brokerage joins others in a financial wave that is transforming the industry rapidly.

Merrill Lynch said Tuesday it will offer federally insured savings accounts to many of its brokerage customers and will expand its online mortgage business.

The move is the latest example of brokerage firms expanding into banking. Also on Tuesday, American Express announced new products for its online bank, which was launched in July. Charles Schwab in January announced a $2.7-billion acquisition of U.S. Trust Corp., a New York-based bank for wealthy individuals. And ETrade, a big online brokerage, last month completed its purchase of Telebank, an Internet bank, and plans to offer customers a brokerage account linked to a federally insured bank account.

This transformation of the brokerage industry is expected to accelerate thanks to a law passed late last year eliminating the Depression-inspired barriers that separated banks, brokerages and insurance companies.

"Each side is eating in the other's back yard," said Samuel Hayes, professor of finance at Harvard School of Business, who expects the trend will drive down the cost of banking and brokerage services due to greater competition.

Merrill Lynch, the world's largest brokerage firm, is expanding its cash management account, which currently allows customers to buy stocks, write some checks and invest in money market accounts and also offers a Visa credit card. The company requires $20,000 to open a cash management account, but the money is not currently federally insured. Soon, the company will give customers the option of putting some of their money in savings accounts, which are insured.

Merrill Lynch can then use the savings deposits to make home loans and business loans to more customers, the company said.

Customers of Merrill Lynch currently have $119-billion in taxable money market accounts. If that money were transferred into savings accounts, Merrill Lynch would rank 10th on the list of biggest U.S. banks.

Still, Hayes, the Harvard professor, said Merrill isn't trying to be your local bank.

"They don't want us to write all of our checks to the local dry cleaners; it's not profitable to them," he said. "So they are not really wanting to take the place of the banks, they just want to skim some more of the cream."

Some of Merrill's competitors also are going after the cream. Charles Schwab, which has dominated online trading, announced Jan. 13 its acquisition of U.S. Trust as part of a strategy to offer trust, financial and estate planning and private banking services.

While Schwab and Merrill Lynch are aiming at well-heeled customers, investors with fewer resources can now do their banking with ETrade. As part of its acquisition of Telebank, ETrade plans to launch its own cash management account in the spring, allowing customers to link their brokerage accounts to their bank accounts.

Telebank, which is federally insured, offers customers no-fee, interest-bearing checking and savings accounts for those who maintain a minimum balance of $500. It also offers rebates on ATM fees of $6 a month.

The new services will make ETrade more competitive with American Express, which is best known for its credit cards and travel services, but also offers banking and stock trading.

On Tuesday, American Express said it would expand its online bank to include a no-fee, federally insured checking account that earns 2 percent interest, with a $100 minimum balance. The bank also will offer a money-market account earning an attractive 5.65 percent interest rate.

"Online banking offers values and advantages that bricks-and-mortar branches cannot match," said Ruediger Adolf, senior vice president of strategic planning and business development at American Express. The biggest reason is that online banks don't have the tremendous overhead costs of running a network of branches so they can offer better interest rates.

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