E-Trade Group Inc., the second-largest securities broker on the Internet, has agreed to buy TeleBanc Financial Corp. of Arlington, a fast-growing Internet bank, in a $1.8 billion stock swap that would create the first financial services supermarket that exists only in the electronic realm.

E-Trade, headquartered in Palo Alto, Calif., said that as part of the acquisition it will build a 400,000-square-foot corporate campus in the Washington area, adding 400 new jobs to the region. The exact location hasn't been determined, but it would most likely be in Northern Virginia, company officials said. The facility would replace one originally planned for Austin.

The deal was announced just seven days after TeleBanc chief executive Mitchell H. Caplan, 41, and E-Trade chief executive Christos M. Cotsakos, 50, first hatched the plan over dinner at a sushi restaurant in Palo Alto.

Caplan said he came to the dinner to discuss potential joint promotion; he had "no interest in being acquired." By the end, however, "I realized we would be the absolute, dominant industry leader if we merged," Caplan said. "We realized it's the perfect merger because the corporate culture and vision are so similarly aligned."

The merger would bring together two companies that have helped pioneer the sale of financial services over the Internet. It could also spur traditional brick-and-mortar banks and brokerage firms to offers more services over the global computer network.

Merging the two companies would enable a customer to deposit money, get a credit card, take out a mortgage and car loan, and trade stock and bonds at a single Internet site. Longer term, the merger could position E-Trade to become a media company that would offer an array of content, data and shopping over computers, wireless and even set-top television devices.

"E-Trade is clearly saying `we don't want to be just an online brokerage anymore,' " said Christopher Musto, director of financial service at Gomez Advisors Inc., an electronic commerce research firm in Concord, Mass.

"They are trying to be all things to all people online," said David S. Berry, analyst at the bank consulting firm of Keefe, Bruyette & Woods Inc. But, he said, it's important to remember "there are lots of people trying to occupy that space as well." He noted that Citigroup Inc., Charles Schwab Corp. and Wells Fargo & Co. all have a substantial presence on the Internet.

The companies predicted that the merger, which requires approval from banking regulators and the companies' shareholders, would be completed in September. Under terms of the deal, E-Trade would trade 2.1 of its shares for each TeleBanc share.

In trading on the Nasdaq Stock Market, E-Trade closed at $39.31 1/4 yesterday, down $5.18 3/4. TeleBanc closed at $74.50, up $8. TeleBanc, which has assets of $2.3 billion, has doubled its assets each year since it was co-founded by Caplan, a former Wall Street lawyer, a decade ago. It uses telephones, automated teller machines and, most importantly, the Internet to attract customers. Like the handful of other purely Internet banks, it offers higher-than-market rates on money market accounts and other products, saying it can do so because its lack of retail offices gives it low overhead costs.

The much larger E-Trade, which has assets of $21.1 billion, is a prototypical Internet firm that has redefined an entrenched industry -- the brokerage business -- in the space of a few years. It has grown at extraordinary speed, now handling 1.2 billion stock trades a day.

E-Trade has become synonymous with a burgeoning breed of stock player known as day traders. Armed with online accounts and spared the large commission fees of in-person brokerages, day traders can navigate their own stock market joyrides. They are public emblems of how the bull market coupled with computer technology has democratized the modern stock market, eroding the influence of professional brokers and dispersing it to investor desktops.

There are now more than 7.5 million online investor portfolios, and the number is likely to reach 18 million by 2001, according to Gomez Advisors. According to Goldman Sachs & Co., from 3 percent to 4 percent of U.S. households now use online banking, a number that is expected to grow to 20 percent in two to three years.

In addition to stock trade commissions, E-Trade would reap income from banking fees, advertising and licensing under the merger. "Get eyeballs, build a network and wait for the revenue to come" is an abiding maxim of Internet commerce firms with big ambitions.

Cotsakos, a Vietnam Purple Heart winner and famously hard-charging chief executive, is fiercely ambitious about E-Trade's revolutionary potential. He envisions an online "supermarket" that will reach seamlessly into the fabric of everyday personal finance. And his company has spent about $150 million on advertising to make E-Trade seem ubiquitous in the marketplace.

Cotsakos said the East Coast campus E-Trade plans to build in the Washington area will house TeleBanc's 150 employees in addition to 400 new E-Trade workers, most of whom will be new hires. He said the location of the new campus could be announced by August.

Details of the deal

Shares: E-Trade will pay 2.1 shares for each of TeleBanc's shares, valuing TeleBanc at $93.45 a share (a 40 percent premium over Friday's close). After the merger, which executives predict will be completed this fall, TeleBanc shareholders would own 13 percent of the combined companies.

E-Trade

Business: Offers online stock trading, as well as market data and cash and portfolio management services

Based: Palo Alto, Calif.

Chief executive: Christos M. Cotsakos

Financial report, 1998

Revenue: $285 million*

Loss: $71 million*

Internet address: www.etrade.com

Yesterday's closing stock price: $39.31 1/4, down $5.18 3/4, on the Nasdaq Stock Market (ticker EGRP)

Telebank

Business: Offers financial products and services to customers through the Internet, telephones, automated teller machines, faxes and mail. (TeleBanc Financial Corp. is the parent of TeleBank.)

Based: Arlington

Chief executive: Mitchell H. Caplan

Financial report, 1998

Deposits: $1.2 billion

Earnings: $1.38 million

Internet address: www.tele-bank.com

Yesterday's closing stock price: $74.50, up $8, on the Nasdaq Stock Market (ticker TBFC)

*12 months that ended Sept. 30, 1998

SOURCES: The companies, Bloomberg News

E-Trade Highlights

1992

E-Trade established by physicist William Porter.

1996

E-Trade launches its Web site.

Christos Cotsakos becomes chief executive.

1997

E-Trade forms alliances with America Online and Bank One.

1998

E-Trade services become available for WebTV users.

1999

E-Trade unveils an its online investment bank.

System failures affect user access for several hours over a three-day period in February.

Recently surpasses 1 million customer accounts; trades that it handles comprise 18 percent of the total Nasdaq market and 7 percent of the NYSE.

SOURCE: News reports

CAPTION: E-Trade, based in these offices in Palo Alto, Calif., is the second-largest securities broker on the Internet. It agreed to pay $1.8 billion for TeleBanc Financial Corp., an Internet bank based in Arlington.

CAPTION: Christos M. Cotsakos

CAPTION: Mitchell H. Caplan