E-commerce will have an impact on the IPO business right away. If new firms can cut costs by automating processes, pressure on old-line firms to match those moves will be intense. Last month, Goldman Sachs & Co. bought 22% of Wit Capital--demonstrating the interest old-line firms have in the new tools. This week, software maker Novell Inc. (NVL) invested in Hambrecht. But E-IPOs won't cause a revolution until more issuers agree with Hajducky than Walsh.
By Timothy J. Mullaney in New York and Joseph Weber in Toronto, with Paul C. Judge in Boston
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THE MIXED BLESSINGS OF ONLINE BANKING
Don't call Mitchell H. Caplan a banker. Sure, he's president and chief executive of $2.3 billion TeleBanc Financial Corp. of Arlington, Va., a leading Internet bank. But Caplan sees more to his future than taking deposits and making loans. ''We are first and foremost a direct-marketing company,'' he says. ''It just so happens that the products we sell are FDIC-insured banking products.'' TeleBanc's goal for now, Caplan says, is to attract as many customers as it can. The company's ultimate reward, he says, will come later, when it hopes to sell insurance and other fee-generating products. ''I want to dominate our space,'' Caplan says. ''Just like Amazon.com.''
Caplan's ambitions reflect the intriguing possibilities--and risks--of Internet banking. Companies such as TeleBanc (TBFC) and Atlanta-based Net.B@nk Inc. (NTBK) have accumulated small profits and lofty stock market valuations by setting up online. Traditional banks--the leaders include Wells Fargo & Co. (WFC) and Citigroup (C)--are beefing up their Net capabilities to retain and attract customers.
LOW COSTS. But whether the Net will make banks more profitable or less, bigger or smaller, is unclear. ''The Net is an opportunity for banks,'' says Michael L. Mayo, bank analyst at Credit Suisse First Boston, ''and it is a threat.''
There's no question the Net will enable banks to process transactions far more cheaply than they do today at branches. It will help them gather deposits and better track customers' tastes. The Internet could even position banks to take an expanded role as cyberspace centers for all bill payments.
But the Internet could also increase costs for traditional banks if customers demand service on the Web and in the branch. If Internet banks get too aggressive in raising deposit rates, that could erode profit margins or lead to unwise lending. Nonbanking companies could even replace bank checks with electronic payment systems.
To be sure, there is no such thing as a pure Internet bank. What's now called Internet banking only means customers can check account information, make transfers, and pay bills. Deposits must be sent by mail or wire, and withdrawals usually require automatic teller machines--often owned by other banks, which charge fees. TeleBanc, as its name indicates, conducts business by phone as well as online. Net.B@nk, which casts itself as a purer Internet company, takes customer phone calls.
Still, however defined, Net banking is promising. CSFB estimates that banks' transaction costs on the Net are less than 1% of those at a branch. A year ago, 17 of the top 100 consumer banks offered full Internet banking, says Christopher E. Musto, senior analyst at Gomez Advisors Inc., which tracks the industry. Now, he says, 39 do.
The problem is the payoff. Cost-saving technology is an old story at banks. ATMs are cheaper than tellers, and so are telephone centers. But customers want it all. So as cheaper technology has been employed, banks have wound up with higher costs. ''I have never told my clients that by getting on the Internet, they will get rid of costs,'' says Jeffrey S. Irby, partner with KMPG LLP's financial-services practice. ''Customer retention is the big issue.''
Encouraging customers to switch from tellers to the Net requires a retailing touch most banks have yet to demonstrate. When First Chicago Corp. tacked on a $3 fee in 1995 for visiting a teller, it became a national laughingstock--Tonight Show host Jay Leno joked that for $3.95, the teller would ''talk dirty'' to you. Even now, many banks discourage customers from using Net services by charging fees.
S&Ls REVISITED? Branchless banks, by contrast, have taken advantage of lower Net costs by offering higher deposit rates. But again, there is a catch. Internet banks have yet to show they can find highly profitable uses for this money. Caplan's bank, which admittedly is spending heavily on advertising, managed a return on equity of only 2% last year.
To longtime banking observers, this combination of high deposit rates and low returns spells trouble. Bert Ely, president of consultants Ely & Co., fears Net banks could take too many risks. ''This is what happened to the savings and loans in the 1980s,'' he says. ''They were paying up to get what they could in deposits, and they took on high-risk assets.'' Attracting customers with high rates, he adds, means loyalty lasts ''as long as rates are good.''
Net operators say that just isn't so. Telebanc's customers ''are rate-aware but not rate-sensitive,'' argues Caplan. And TeleBanc's low returns, he says, are all part of the plan: investing only in ''plain, generic, and clean'' assets, mostly single-family mortgages. The idea is to produce a return while building a customer base that can be sold other fee-generating products. ''What I'm trying to do is get to scale,'' he says. With more than 50,000 accounts, he adds: ''We're just touching on scale.''
Net bankers believe their customers will only be rate-conscious in the short term. On Apr. 27, for instance, Security First Network Bank began offering a no-fee checking account paying 6% interest through the end of 1999--more than quadruple the average rate nationwide. Eric W. Hartz, president and chief operating officer, says the bank will decide later whether the rates are sustainable. But he adds that it's worth the risk. ''If we can get folks to come in here,'' he says, ''they are going to stay.''
WEB WARS. Underlying this confidence is a belief that the convenience of Net banking will produce customer loyalty. One key is the role of Web sites in bill payments. Eventually, the thinking goes, most bills will be sent to consumers via the Net. Banks' sites would be a logical place to send the bills because consumers could check their finances while paying. Banks could charge fees from utilities, merchants, and others for providing this service. And bank Web sites would be required stops for consumers.
But it's uncertain whether banks or others--utilities or Web portals, say--will play this role. ''It's the banks' race to lose,'' says Linda A. Weber, E-customer director at technology consultants American Management Systems Inc. ''They have huge opportunities here, but so do lots of other folks.''
Investors, though, should be prepared for the fallout. The bank Web wars have begun. And the result, says Jeffrey M. Lynn, financial-services consultant at IBM, ''will be huge winners and a ton of losers.'' Soon, just appending dot com to your name won't be enough.
By Gary Silverman in New York
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