Jenna, here's the second article regarding CKFR
Digital Benjamins
April 26, 1999 - 7:20 PM
By Nathan Beckord
- Chat with Nathan on his message board.
Your money is going digital.
There are dozens of Internet business concepts with significant overhanging feasibility questions - including reverse auctions, at-cost distributorships, online sales of goods such as cars or clothes - but the "webification" of banking and related financial services is as close as you'll come to finding a "given" in the new Internet economy. The host of reasons is extremely compelling, and the momentum swell has already begun.
Benefits Of Online Banking
Perhaps the most oft-cited report dealing with online banking lists average end-user transaction costs: branch/walk-in, $1.07; telephone, 54 cents; ATM, 27 cents; via the Internet, 1 cent. In addition to its low cost, online banking is more efficient due to the replacement of paper-and-envelope processes with electronic systems, substantially reducing the number of keyed-in errors. Banking is a competitive business which is becoming more so with continued consolidation. Initial capital expenditures for online banking systems are high, but the potential savings, coupled with new methods for retaining customers, has the pinstripes drooling.
E-stamps notwithstanding, it's still a pain in the ass to write a check, enter it into your register, find a stamp, reconcile the debit in your register, drop the letter off at the post box and enter it into your Quicken PFM program. Bill payment via the Internet effectively cuts out most of these steps. Often cited as the killer ap which will launch widespread adoption of online banking, bill presentment has been steadily picking up steam over the past 12 months.
Online bill payment services furnish consumers with greater control over payments and cash flow. They also save time and enable the tracking of bank and payment functions from any Internet access point (still primarily the pc, but alternative devices are on the horizon). Like an ATM machine, such services enable 24-hour banking and help organize financial records in one place. The ability to offer a consolidated view of someone's economic status and financial outlook, supplemented with information, advice and cross-selling opportunities (mutual funds, credit cards, mortgages, etc.) is another prime motivator.
Under existing bill payment systems, subscribers pay roughly $5 to $10 per month to designate a set of recipients who can then be paid simply by filling in the amount owed and clicking "send". The bank then remits the payment through electronic funds transfer (EFT) or via an automated clearing house (ACH) network, or it sends a paper check drawn from the subscriber's account. Use of such bill payment systems has come primarily from tech-savvy early adopters and customers who have migrated from first generation dial-up proprietary systems. Foot-dragging by the banks, along with general unfamiliarity and concern over Internet security, has kept the number of online subscribers low - on the order of 4.5 million to 5 million.
The Killer Ap
Bill presentment (the aforementioned killer ap) is being heralded as the catalyst which will accelerate such paltry subscriber figures and launch electronic banking into the mainstream. It's still something of a chicken-and-the-egg quandary, because consumers haven't shouted loud for the service due to the fact that few companies are presenting bills online and billers have been lax to roll out expensive presentment services for so few customers. But bill presentment could prove to be a win-win service for all involved. It overcomes liability and processing issues for the bank, speeds up and saves on processing costs for billers, and creates a much more convenient and palatable system for customers to pay what they owe. The bills are presented to customers in much the same form as paper bills, including the ability to view itemized lists and pay automatically by hitting an "approve" icon on the browser. Added features could include animated comparison and "proof" functions which enable reverse look-ups on an itemized phone bill.
One sticking issue is where consumers receive their bills. Originally, it was thought companies would present bills directly - i.e., you'd visit PG&E's home page to view and pay your utility bill or go to MBNA's Web site to pay your credit card bill. Companies favor such a system because they maintain a higher level of control and can cross-sell services to the consumer through banners and other mechanisms. However, consumers have been slow to embrace such a complicated billing system and it is unlikely the "direct billing" model can grow to the scale which is key to the economics of transaction processing.
The second school of thought is that bills will be consolidated at financial institutions' Web sites. Consumers tend to prefer electronic billing through bank sites, primarily for reasons of convenience. They want bill presentment integrated with their checking account and combined with a pay-anyone solution, so all bills, not just those presented electronically, can be paid at a central location. Finally, interest is stirring at leading Internet portals and non-bank financial Web sites, which view the ability to present bills as another source of attracting eyeballs and recurring visitors. More on this later.
Companies To Watch
Checkfree Holdings (CKFR) is arguably one of the purest plays on the rise in Internet banking. The company has several lines of business, including ACH and portfolio accounting services, but its core is processing - for banking, bill payment, bill presentment, brokerage and other services. Revenues are generated through contracts the company signs with financial institutions and billers. Checkfree typically negotiates an implementation fee with such companies, which is a monthly base fee per customer account on the service, plus a variable per-transaction fee which decreases based on the volume of transactions. It makes for a nice recurring revenue model that is loved by institutional money. With 40 multi-year billing contracts, 1,000 financial institution customers and a subscriber base of 2.6 million, Checkfree's future is inexorably tied to growth in the sector. Investors were reminded of that last fall when the company's closely-watched subscriber growth figure came in lower than expected and the stock price plummeted.
However, analyzing the figure in a vacuum can be misleading, because a significant percentage of Checkfree's bill payment subscribers have historically come through one of the major personal financial management programs, such as Quicken or Microsoft (MSFT) Money. The vast majority of new subscribers will come from the rollout of banks' Internet offerings - a much larger potential market than what is accessible through PFM programs. Subscriber growth should also benefit from Checkfree's position in the recently reorganized Integrion network, an alliance of 20 major banks along with International Business Machines (IBM), Checkfree and Visa. Integrion is pushing its Interactive Financial Services platform, which offers financial institutions a network through which electronic transactions flow from multiple consumer access points to a bank's host system or processor.
Checkfree may be shifting its strategy somewhat, looking towards the portals in an attempt to reduce its dependence on bank rollouts. Details are still fuzzy, but in January CheckFree announced it would spend $6 million on an Internet distribution contract, including $2 million for capital expenses. Analysts cited Yahoo! (YHOO) as the likely partner, which appeared to be confirmed when a test site at Yahoo (bills.yahoo.com) made a brief appearance, promising to enroll users in a bill payment service. Similarly, Netscape's Netcenter announced its intent to host online billing services for customers who use its Internet billing software, and Excite (XCIT) chose Bank One (ONE) to provide online banking and billing to Excite's 17 million-plus users. If nothing else, such increased portal activity should help jumpstart the overall market. It should encourage banks - still viewed as likely successors in the bill aggregation game - to step up program launches or risk being left behind.
Checkfree faces competition from private companies such as Travelers Express, Online Resources, Princeton Telecom and IBS, but no competitor today can match Checkfree's cost structure. The company has 1,100 electronic links to billers and a scale made possible by acquiring previous competitors Servantis Systems and Intuit Services Corp. However, Checkfree doesn't have a lock on the market. The biggest threat remains something of a wildcard: the Microsoft, First Data (FDC) joint venture known as Transpoint. The venture has been slow to get off the ground and lags significantly behind Checkfree's processing capabilities, but has deep pockets as well as a minority investment from Citigroup's (C) Citibank and 23 billers signed up to pilot its system. Potential Checkfree investors should monitor developments at Transpoint closely, but the converse is that rumblings from the alliance over the past two years have created several attractive buying opportunities for Checkfree shares.
Another option for investors is BillServ.com (BLLS), a bulletin board company from Texas. BillServ has partnered with Checkfree and is focused on helping small billers put their bills online. The upstart company's lServ system collects and presents bills from companies which can't afford the cost of implementing Checkfree's custom software, then sends the bills to Checkfree and other billing aggregators. The company recently acquired the domain name Bills.com and is building its own bill-payment portal. The goal is to provide free Internet billing using a portal business model, which will be subsidized partially through advertising.
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