Estimates on Internet Banking Growth
A burgeoning market in search of security
internetstocknews.com
Banking on the Net
Tuesday, October 26, 1999 12:44 PM
by Margot M. Amberg
Last week's smashing of the Glass-Steagall barrier promises to have important ramifications throughout the financial industry. Formerly limited from participation in each others businesses, now commercial banks, securities firms and insurance companies may co-mingle their assets. Consolidation is virtually assured, and will create even larger financial powerhouses, sending ripples through the system. The Internet-only players in the field are bound to get caught up in the tide. Will deregulation lift all boats?
Jupiter Communications (JPTR) predicts 28 million households will bank online by 2003. Forrester Research (FORR) estimates 3.4 million do so currently. Up to this point, many larger banks have tread timidly onto the Internet, if they have at all. Much like the online furniture e-commerce concept, there exists in the background a nagging need to come face-to-face with the product - in this case, one's money. Brick-and-mortar banks, for the most part, believe they have the best of both worlds, and have mainly been using the Internet as another "virtual" branch. Access to ATM machines fill-in where the branches are missing, and most banks would rather their customers use them anyway. Bank One (ONE) is the only large banking institution taking this one step further by creating a separate Internet bank named Wingspan. American Express (AXP) recently launched Membership Banking, a similar creation. This concept, of course, sets up the odd situation in which the bank is competing against itself. However, it seems that they "get it" - realizing the cost-efficient forces behind the Internet's attraction.
It's precisely the lack of brick-and-mortar baggage that has enabled the nimbleness of the pure Internet players. To attract Internet-only users they have offered higher rates for deposit accounts and lower loan rates. But their business model actually enhances their ability to do so, and as they gain traction, their costs decrease further. This effect is buffered, in turn, by marketing costs and deals to hook up with major players in the Internet arena - something the larger players have had to face as well.
The first company entering this space was Security First Network Bank in 1995. It went public in 1996, but the founders grew impatient waiting for profits and subsequently sold out to the Royal Bank of Canada in 1998. It's interesting to note that the company decided instead to focus on providing software technology and transaction processing to other financial institutions who serve their clients online. It's now Security First Technologies (SONE), and Intuit (INTU) is a large investor. Security First Technologies has also been scooping up other financial software-providing firms on the side.
E*Trade (EGRP) is purchasing TeleBanc Financial (TBFC), which is currently the largest Internet bank in terms of deposits. Net.B@nk (NTBK) is going it alone - so far. The company just reached over $1 billion in assets, and has been profitable in its past six quarters. Other players include the First Internet Bank of Indianapolis and CompuBank. Internationally, Enba PLC, an Ireland-based privately owned company, has European expansion in mind. Investors here include Intel (INTC) and Morgan Stanley Dean Witter (MDW). The company recently drew down a new CIO from Net.B@nk's coffers.
The Internet bank players offer it all in varying degrees - deposit accounts, mutual fund investments, credit cards, loans of all types, insurance through affiliates and ATM access. With regulations across industry lines now relaxed, their situation becomes a bit more complicated. Larger non-financial outsiders such as Wal-Mart (WMT) and Microsoft (MSFT) have been making noise for a while about entering the field. The financial trough is huge, and the catalysts are now in place for the bigger feeders to elbow aside or swallow up the smaller ones. The aim for all is to provide the largest menu of financial services from which to choose from - thereby controlling the ties to the customer. As the Internet has the inherent power to level the playing field, lowering costs will continue to remain the focus.
Taking a cue from Security First Technologies, a complementary investing angle to play might well be the financial software firms themselves as the players gear up for action. Some names to look at include nFront (NFNT), Phoenix International (PHXX), and Digital Insight (DGIN). Euronet (EEFT) is a European ATM-only play, but potentially could be a target for those desiring this type of access already in place. Readers can find a list of both domestic and foreign Internet Banks, along with their technology providers, featured on the Online Banking Report at www.onlinebankingreport.com/fullserve2.shtml. |
