the whole interview:
from internetstocks.com
"eFinance 2000: Checks and Balances on the Web
The once-lumbering financial services industry is finding its way onto the Web with quickening steps. eBrokerage is broadening into eInvesting, and new technology is creating online markets for mortgage lending and financial planning. Robertson Stephens Senior eFinance Analyst Scott Appleby outlines how the industry is reinventing itself as it goes online. The interview was conducted by Internetstocks.com Editor Edward Silver.
Question: Let's launch into your space by talking about what you expect to happen in the year ahead. What will eFinance look like at the end of 2000 compared to what it looks like now?
Answer: The eBrokers pioneered the industry, but we expect to see the rest of the eFinance players coming to the fore this year. Starting with the eBrokers, we expect continued growth. We believe it's likely that four to five million new online accounts will open this year and industry revenue will likely rise about 50%. For the rest of eFinance, we believe several things will drive increased traffic. One is a better model for bill paying and presentment on the Web. Online bill management is a very sticky service, which we think will eventually be integrated into the full-service sites we call the Super Financial Portals. This is one of the features that online banks don't offer yet. Offline, bank customers can get it in crude form, but you can't do it online at a bank site.
But banking itself is getting better technology, and more banks are coming to the Internet. We estimate that online banking accounts will grow 60% to 70% this year, from 14 million to 22 million. Much of the movement is being facilitated by new technology, which is starting to catch up with demand for online insurance underwriting, the mortgage process and credit-based business-to-business purchasing, for example. Technology is enabling more complicated transactions.
Q: What is it about the eBrokerage business that brought it online first?
A: The necessary back-end automation was in place, so all they needed to do was provide the front end, the Web site. It was already a technology-enhanced industry. There were hiccups with respect to capacity as trading volume mushroomed, but that didn't derail the positive trend. They were the first to provide a strong consumer value proposition and were able to develop their brands and operating acumen. Now they have become top Internet brands as well as top finance brands and are much better positioned to compete in the full-service industry. That points to a new theme, eInvesting, which builds on the eBrokerage services. The leaders are adding products like automated advice, mutual funds and more. Ameritrade, through OnMoney, will aggregate all your financial accounts at one site, while E*Trade is beginning to offer a complete suite of financial products.
Q: How are the eBrokers positioned against the traditional firms that are trying to use their scale to capture the momentum moving to the Web?
A: Schwab remains the leader in accounts and assets, and it competes with everyone: Merrill Lynch and Morgan Stanley Dean Witter on one side, and E*Trade, DLJ, TD Waterhouse on the other. It's attempting to go upstream and downstream at the same time. It's bringing in new technology to serve active traders and offering volume discounts while targeting high-net-worth investors with trust services and other products.
Even with Schwab's power, we believe there's still plenty of space for the pure Internet companies. Ameritrade (AMTD $16-1/8), Datek and E*Trade (EGRP $22) have truly grown their businesses via the Web. In large part, Schwab and DLJ simply brought their existing customers online. We believe the pure eBrokers have several advantages, including operating expertise on the Internet. Plus, having all their business on the Web makes them more efficient on a cost basis. E*Trade is the most Internet-centric among them and the most focused on building the SFP, in our view.
Q: More people are starting 401(k)s and managing them on their own. This seems like a vast market for eInvestment services.
A: It's very exciting. There is $11 trillion accumulated in U.S. retirement accounts, $1.5 trillion in 401(k)s alone. It's a multitrillion-dollar opportunity and millions of potential customers are really kind of lost. They need tools to give them the confidence to make decisions, they need education. If you had an online adviser with good technology and some human judgment, some ability to analyze, then these services, which we call eAdvice, would become great attractors of consumers, in our view. In many cases, employers are starting to work with these companies to provide additional benefits to their staff. They can also, incidentally, reduce liabilities tied to company-sponsored investment plans. The eAdvice group is mostly made up of private companies, but many are likely to go public this year. TeamVest and Direct Advice are among those we like.
But technology is also clearing a path for eInsurance and eMortgages, which are two of the more complex financial products. We expect technology will soon allow consumers to search for and select an auto insurance policy and have it underwritten within seconds. The insurance and mortgage models are typically referral-based now, and legacy distribution channels remain in place even when the front end is Web-based. We think new technology will speed up evolution this year.
Q: On the subject of technology, what are your favorite investment ideas among the enablers?
A: One of them is S1 (SONE $128), which is a technology provider to the online banking world. It enables any bank to create an Internet platform that functions as a portal. It provides not only online banking service but integrates many of the common Web functions like e-mail and search. Citibank is about to deploy this technology. The platform is still wrapped around the core online banking product: I can have my checking there, my trading, my credit card bill. Banks want this. If everything you do on a financial basis is at the site, you're going to be coming to it time and again.
We also have a Buy rating on Intuit (INTU $63-3/4). It started with Quicken personal finance software and has leveraged its know-how to develop a small business finance-and-accounting package called QuickBooks. It has about 90% share of its market and has become known as the small business operating system. The company's got about 2.5 million small businesses using QuickBooks and is layering online financial services into the platform, such as online payroll, order taking, Web hosting. We view QuickBooks as enabling small businesses to be more effective.
Q: How does growth look in this segment?
A: We expect technology enablers in eFinance to grow revenue in excess of 50% this year, and for the next three to five years as well.
Q: With the enablers making it possible to bring the panorama of financial services online, you believe they will tend to consolidate around the so-called Super Financial Portals. What will drive that and who seems best positioned to become one?
A: In the end, the actual financial service is a commodity, so to really compete well longer term you'll have to offer more than one commodity to leverage your brand, technology, personnel, marketing budget, etc. Scale is important and the Web brings new efficiencies to these commodity businesses. Also I think we will see that the concept of cross-selling is much more feasible online than it is offline. A main reason is the number of touchpoints you have with the customer. They'll keep coming back to check their various accounts so you'll have the opportunity to cross-sell them more easily than in the terrestrial world.
Eventually, we see the consolidation resulting in 15 to 25 Super Financial Portals globally. A number of players have a head start, in our view. Intuit could be one from the technology group. It's got a strong B2C brands in Quicken and Turbo Tax. Its Web site, Quicken.com, is the second-most-trafficked financial site after Yahoo Finance. It's doing insurance, mortgage and small business loans and adding bill payment. These are sticky applications.
eBrokerage leaders have built tremendous brands and high-frequency applications in securities trading. E*Trade (EGRP $22) has gotten into online banking and added insurance and mortgage sites. In addition, it is adding bill management and complete account aggregation. We still expect offline giants like American Express, Merrill and CitiGroup to be there because of the strength of their brands and huge customer bases. If they have technology limitations, they will just outsource those needs.
Q: Any room for the online vertical companies we are just getting familiar with?
A: Leaders in those verticals will thrive because of their expertise, we believe. I am thinking of InsWeb (INSW $16-5/8) in insurance, NextCard (NXCD $32-3/16) for consumer credit, eLoan (EELN $10-5/8) and NetEarnings for consumer loans. Also PayMyBills for bill management and Bottomline (EPAY $44-1/4) and Fundtech (FNDT $33-5/16) for ePayments.
Q: This is largely about meeting more and more consumer needs in one place. Are you envisioning a redefinition of what constitutes a financial services site and what constitutes a network like America Online and Yahoo?
A: Well, these eFinance portals can get entrenched in a fundamental place in people's lives. If you look at Abraham Maslow's hierarchy of human needs, our basic functions are providing for our food and shelter, of course. We need money for that. If a Web site enables us to manage our entire financial well being-our banking, trading, bill paying, retirement strategy--we will go there time and again and this behavior will become habitual. If the site also offers e-mail, search, lots of good information and other services, pretty soon it could become your main Web portal.
Q: Sounds like more blurring boundaries ahead.
A: It's interesting. AOL and Yahoo! have huge audiences they are likely to try to monetize further, but they don't offer these services because their finance partners are already generating big revenue for them. But eventually the networks could have the opportunity to invade this terrain. We expect them to become acquirers of eFinance technology and brands to better compete for the consumer wallet. If you're Yahoo!, for instance, and you're worth $100 billion, you might want to acquire E*Trade. That could make you a Super Financial Portal overnight. |
