CONVERGING MARKET SOLIDIFIES INDUSTRY LEADERS, MAKES ROOM FOR EXPANDED OFFERINGS
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Story Filed: Thursday, May 27, 1999 1:18 AM EST
May. 26, 1999 (RETAIL DELIVERY NEWS, Vol. 4, No. 10 via COMTEX) -- Internet banking vendors must expand their product offerings and solidify their financial stability if they want to generate business in a market under heavy consolidation.
Atlanta-based Security First Technologies' [SONE] acquisitions last week of its primary U.S. competitor, Edify Corp. [EDFY], and potential European foe, FICS, not only expand its product base but provides a platform for its invasion abroad.
S1 will house 1,500 employees, maintain offices in 12 countries and serve 26 of the top 50 banks and nearly 1,000 financial institutions. The FICS transaction is valued at $1.08 billion and Edify's at $345 million, making it the largest such deals to date. But the question remains, will bigger prove better?
Vendors Alter Services To Meet Demand
Undoubtedly those vendors that offer more services and are more financially secure will get first consideration from bankers.
"Financial institutions like [Citigroup] are spending $3 billion on these initiatives and want a strategic technical partner who has enough of a research and development budget to build best-in-class products and bring products to market quickly ... with minimal risk," says William Soward, vice president of business development at Santa Clara, Calif.-based Edify.
Before buying Edify Security First lost ANZ Bank as a customer. Initially unsure about supporting the demands an Internet banking system would require, the bank handed the reins over to S1. After migrating onto the Web sucessfully, the bank elected to purchase a system and maintain it internally from Edify.
Internet banking vendors have been losing cash and, for the most part, have been unprofitable, says Octavio Marenzi, research director at Netwon, Mass.-based Meridien Research.
Losses primarily have been the result of a "slow-to-buy market," with "well under 10 percent of national banks offering online banking services," Marenzi says.
Now Wall Street's price barometer for these firms, including S1, which increased its stock value tenfold in the last few months.
"The recent surge of pure online banking stocks like Atlanta- based NetB@nk and Telebank of Arlington, Va. are illustrative of customers coming on in mass," says Robert Martin, Internet analyst at investment bank Friedman, Billings, Ramsey & Co. The industry has hit a mass consumer acceptance point for these services. Banks will have to venture online to stay competitive with start-ups and non-bank entities, Martin says.
A recent Boston-based Dove Associates study measured the market for Internet banking at $500 million and expects it to climb to $2.7 billion by 2003.
Even still, S1 will have its challenges turning a profit in the interim, Marenzi says. Its year-end Dec. 31, 1998 losses were $29 million. That same period in 1997 showed $28 million in losses and the year before that it was $19 million. "The losses are getting bigger. It's certainly hard to see how that will turn [their loss record] around."
But that's not all, says Gary Craft, managing director, investment research at online investment banking firm E*OFFERING. FICS was pursuing a U.S. public stock offering, one which was likely to result in stiffer competition for its soon-to-be owner. Instead, S1 "now gets a strong European retail home banking presence and also a corporate wholesale Internet banking product line."
S1 is, in fact, "the de facto transaction infrastructure for banks ... and now controls some 60 percent to 70 percent of U.S. market share, " Martin says. "The biggest challenge for them will be integrating the three companies' systems together."
And that is where it could lose share to competitors. CFI ProServices, which intends to purchase ULTRADATA Corp. and Meca Software, plans to go head-to-head with the new S1.
Matt Chapman, chairman and CEO of CFI, says his firm's product offers a greater breadth of services ready for implementation today and without all the integration hurdles. "S1 has no experience in developing services for traditional banking functions or compliance. They have to rely on the financial institution to do it for them ... We've built our company on such basics," Chapman says.
S1 won't have to deal with integration entanglements for awhile. Company executives tell RDN that both UNIX and NT platforms will be supported and no significant changes to product offerings will be made in the next 12 to 18 months.
"Clearly [19]99 budgets are set and will continue," says Charles Ogilve, executive vice president, sales and marketing for S1. The merging entities are, however, working on organizing the companies under a singular product management and development group globally, he says.
And while the deal clearly means enhanced cross-selling revenue from customer swapping, S1 hopes its bank customers will begin to embrace what it calls "integrated financial portal concepts," Ogilve says.
That means a combination of transactional capabilities for consumers, small businesses and bank financial products tied into content for planning and advice. So the world of financial portals not only offers traditional banking services but an expanded view of customers that includes stock portfolios and insurance services, says William Soward, vice president of business development at Edify.
Yahoo! is a mile wide and an inch deep in offering information on many topics, but its services do not have any depth, Ogilve adds. Financial institutions, however, could capitalize on their financial information knowledge to give customers not only financial transactions capabilities like bill presentment, but also a means to discern financial information for future investments, Ogilive says. S1's deal with Intuit is a prime example, Ogilve says. The personal finance software developer has invested $50 million in S1 and has asked for options for another 9 percent, Ogilve says.
The companies intend to integrate their product lines to allow seamless exchange of data between S1's Internet-based applications and Intuit's personal financial management products, such as Quicken; tax preparation products, such as TurboTax; and small business accounting products, such as QuickBooks.
Competitive Landscape Altered
IBM/Integrion's influence in the marketplace has diminished, says Jeffrey Crowe, Edify's CEO and president. The consortium only has three active participants from the 17 it started with. Microsoft, [MSFT] Sun Microsystems [SUNW] and Hewlett-Packard [HP] are suppliers of hardware, operating systems or core platforms, not at an application level, leaving Brokat as the main competitor for S1 going forward, he says.
And what about the rest of the companies which also have announced plans to merge in the last two months?
All these companies still will be contenders, but primarily for the lower-end market, save CFI.
"It is a big market. There's a lot of business out there and we aren't getting all the business even as a combined company," Soward says.
"The pie is big and getting bigger," Soward says. "There certainly is room for a number of other players independently or combining forces to do what we have done."
Many of the smaller vendors in terms of install base have initiated their own mergers to gain market share, but may have some "difficulties fitting together," Marenzi says.
Home Account Network's deal to acquire First Data Direct Banking [FDC] symbolizes a "rejoining of the fold" as former First Data Direct head Charles White joins his former staff with his new company. Home Financial Network and InteliData's approaches are "very different philosophically," but if they can reconcile those differences, they shouldn't have too much trouble coming together architecturally since their install base isn't that large, Marenzi says. (Jeffrey Crowe, Charles Ogilve, S1, 404/812-6254; Octavio Marenzi, Meridien, 617/796- 2800; Robert Martin, Friedman, Billings,703/312-9500; William Soward, Edify, 408/982-2014; Jeff Larsen, Intuit, 650/944-5106.)
Demographic Snapshot
A recent survey of 16,500 U.S. households by DataQuest, a Gartner Group [IT] subsidiary, found the following consumer preferences for viewing and conducting certain transactions online.
Preferences For Consolidated Account Services
Would use this service?
Definitely 55 percent 45 percent
Maybe 32 percent 38 percent
No/don't know 13 percent 17 percent
Prefer this provider?
My utility 7 percent 6 percent
AOL 9 percent 8 percent
Web portal 11 percent 10 percent
Financial software co. 19 percent 18 percent
My broker 13 percent 23 percent
My bank 58 percent 63 percent
Willing to pay?
$5/month 6 percent 10 percent
$1-$5/month 29 percent 35 percent
Not willing to pay 65 percent 55 percent
Source: DataQuest
CFI Adds EC, Data Management To System
Portland, Ore.-based CFI ProServices Inc's. [PROI] plans to acquire information management software vendor ULTRADATA Corp. [ULTD] and home banking/e-commerce company MECA Software could give bankers a nice fit for merging front-and back-end systems.
MECA, the company known for financial planning software Managing Your Money, is still struggling to figure out how it will compete in the Internet banking arena, says Octavio Marenzi, research director at Newton, Mass.-based consultancy Meridien Research. CFI may help clear the cob-webs, leveraging its large branch automation installation base to broker Meca's Internet banking wares, he says.
ULTRADATA expands CFI's customer base and uses information management tools to track transaction history in real-time.
The new entity estimates its annualized 1999 sales to be more than $150 million, and will operate under a new name that has yet to be chosen, says Matt Chapman, chairman and CEO of CFI.
Each product has distinct advantages, Chapman says. ULTRADATA focuses on relationship building by making the bank aware of the nature of its bank/customer relationship in real-time. Meca, as a home banking engine is a nice complement to CFI's existing core banking service, Chapman adds. With MECA, banks can do push technology for target marketing. CFI has 250 financial institutions using its personal branch system, most of which are Internet banking- enabled, Chapman says. (Matt Chapman, CFI, 503/274-7280; Robert Majteles, ULTRADATA, 925/463-8321, ext. 2384; Octavio Marenzi, Meridien, 617/796-2800.)
Copyright © 1999, Phillips Publishing International, all rights reserved.
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