Internet Banking - Netbank and Telebank Lead the Charge in the Impending Revolution in the Banking Industry
by Neil Sandhu
Recently, Internet banks have been among Wall Street's favorite companies. In fact, Netbank (NASDAQ:NTBK) and Telebank (NASDAQ:TBFC), the two
leading Internet banks, have seen their shares record stratospheric gains over the past week. The gains have largely been fueled by recent positive news within both
the Internet sector and the banking sector as well as some company-specific news out of Netbank and Telebank. Most recently, Netbank has announced breakneck
account growth. Perhaps most importantly for Internet-crazed investors, Netbank just announced a three-for-one stock split.
But is there something fundamentally underlying Wall Street's current obsession with Internet banking stocks? I believe that the retail banking industry is in the very
early stages of a profound revolution similar to that already occurring to a greater degree in the brokerage industry. In fact, the Internet bank has the potential to
cannibalize its brick-and-mortar brethren.
Lower Costs
Internet banks do not have the same costs associated with the brick-and-mortar bank. As a result, they are able to offer consumers higher interests rates on their
deposits and are able to lend money at lower interest rates. The rational consumer will increasing turn to Internet banks because of these more favorable rates. Also,
since competition is not yet prevalent within the space, Internet banks are able to maintain larger spreads than traditional banks.
What About the Traditional Bank Invading the Space?
Traditional banks have been left in an awkward position. The traditional banks realize the lower cost structure of Internet banking but cannot take advantage of
Internet banking without cannibalizing themselves. This is a similar predicament as the one that is causing the big brokerage houses such as Merrill Lynch from
aggressively embracing the Internet. If they do enter the Internet arena, they will either end up cannibalizing their own traditional business or will have to maintain the
same rates on the Internet as they do in their traditional business. The fact that they have an established brick-and-mortar business creates a barrier to entry for
traditional banks. It is impossible for banks to maintain both brick-and-mortar offices as well as establish a competitive Internet presence and compete effectively
with the branchless Internet banks.
Demise of the Branch Office
Banking on the Internet is, in fact, merely the culmination of a long process of decreasing reliance of the customer on his or her branch office. When was the last time
you stepped foot in the branch office of your bank? Such conveniences as the ATM and the direct deposit have caused the branch office largely to become an
archaic relic of days long past. Of course, it may take years for everybody to become comfortable with branchless banking, but it is likely that at least a significant
percentage of the population ultimately will. Even if I am wrong and only a small percentage of the banking populace moves to Internet banking, such a market will
be large, given the size of the total United States banking market. Internet banks are increasingly offering a wide range of services to their customers including
mortgage lending and credit card services, competitive with those offered by traditional banks. The breadth of the offerings is sure to increase in the coming months
and years and may ultimately culminate in large Internet financial superstores.
Internet Banks as Financial Portals
Perhaps more than any other type of financial sites, Internet banks have the potential to become monstrous financial portals. These sites are inherently sticky because
customers need to come back often to perform account functions. Ultimately, these banks may swallow up smaller, specialty financial sites and include them under
one umbrella. A host of businesses offering financial services over the Internet are set to go public in the near future. Some of these Internet businesses, including
those focused on mortgage lending and credit card services, would seem to offer great synergies with the Internet banks. With relaxed laws, other synergies may be
obtained through agreements and, ultimately, mergers with online brokerages.
Netbank and Telebank
The two leading branchless banks are Netbank and Telebank. These two banks have a great deal in common. Both banks offer similar interest rates and options for
customers. Both banks are already profitable and profit growth is expected to accelerate in the future. Also, both Telebank and Netbank have recently secured
additional financing that should allow them to more effectively ward off the increasing competition that is sure to follow. In light of the recent runup in shares of the
two I-banks, Netbank and Telebank look expensive on a short-term basis if valued according to their projected future earnings. It remains to be seen whether these
banks can translate their breakneck account growth into similar earnings growth. However, I suspect that estimates of future earnings growth are wholly inadequate
and will be revised upward in the future. Of course, when valued against other Internet stocks, these companies still look cheap, even given current earnings
projections.
Telebank seems to be well-positioned within the sector. It has entered into a number of key agreements recently, not the least of which is an agreement with Yahoo!
The agreement currently centers around the use of an ATM Refunder, which credits a customer's Telebank account for ATM fees that another bank charges the
Telebank customer for use of the bank's ATM. If a deeper relationship were to spring out of this relationship with Yahoo!, it would be a major coup for Telebank.
Another key alliance is an agreement with First USA to issue a Telebank credit card with a very competitive APR. Telebank has stated its intention to establish itself
as a major personal finance site on the Internet and it surely will announce key strategic initiatives that further this goal in the near future.
Netbank, likewise, seems to be executing quite well in the early rounds of the race to grab Internet banking share. Netbank recently announced that they provided
more than $100 million in financing for home mortgages to consumers during the last half of 1998. Also, Netbank has developed key relationships with top Internet
lending companies including the First Mortgage Network, American Finance, and mortgage.com. Even more recently, Netbank announced that it had opened a
record 8,000 new accounts during the first quarter of this year bringing its total to nearly 25,000 accounts, almost triple the number of accounts that it had this time
last year.
In the Internet banking space, as in other Internet industries, it is likely that the first entrants will get bigger and subsequent entrants will find it increasingly difficult to
compete with the likes of the leaders like Netbank and Telebank. In the end, I cannot think of any two companies more perfectly positioned to capitalize on the
impending banking revolution than these two current Wall Street darlings.
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