In Product of the Month we showcase the most innovative online retail bank product or enhancement we’ve uncovered in the previous month. This month the innovation award goes to Carolina First Bank, which demonstrated that risk-taking can still pay off in a big way.

When was the last time you paid 4.0% on checking accounts? Atlanta Internet Bank is paying a premium for deposits at  www.atlantabank.com

Atlanta Internet Bank (Atlanta, GA; $43 million deposits; 2,900 accounts) successfully completed its IPO selling 3.5 million shares on July 29, 1997. The new entity is called Net.B@nk and trades on NASDAQ as NTBK. Atlanta Internet Bank opened its virtual doors in October 1996 originally offering a 7.0% teaser rate for the first six months (6.18% APY) on new money-market deposit accounts (MMDA) . At the end of March, the bank had built its deposit base to 2,680 accounts with $43 million deposited primarily in MMDAs (see footnotes of Table 1 below). The per account average deposit is still more than $16,000 (but down from $24,000); achieved in large part from paying one of the highest MMDA rates in the country.

Share Price of Net.B@nk since IPO

The market has not been able to sustain the $12/share IPO price. Recent trading has been in the $9 range.

The Atlanta Internet Bank public offering went off at $12 per share, raising $42 million in the offering underwritten by Morgan Keegan and Interstate/Johnson Lane. The stock has not been able to maintain its IPO valuation, falling to around $9 per share in recent trading (Aug. 14), giving Net.B@nk a valuation of just over $50 million with 5.65 million shares outstanding. The creator of the new bank, Carolina First Bank, sold 150,000 shares in the offering bringing in $1.8 million, retaining 1,175,000 shares for a 19.7% stake valued at around $10.5 million. CFB will also be reimbursed for its $2 million investment in Atlanta Internet Bank prior to the IPO.

Analysis

AIB still faces a difficult task creating a viable brand in cyberspace, especially with Wall Street breathing down its neck for immediate results. So far, it doesn’t appear the bank has had much success attracting transaction accounts. As of 3/31/97 only $400,000 of its $43 million in deposits were in checking, despite rates of 3-4%. Assuming an average balance of $4,000 (hypothetical), that’s only 100 accounts.

The bank is just beginning its lending activities which it will need in order to make a profit on the 5.5% MMDAs its deposit base is built on. The first loan product is a 12% APR overdraft protection line of credit attached to checking accounts. Users apply for overdraft protection by ticking a box on the checking account sign-up form. This feature alone puts AIB’s offering one notch above SFNB’s, which after nearly two years on the Net, has yet to offer overdraft protection from a credit line (though it does offer automatic transfers from another deposit account).

The ultimate mini-app. New customers simply tick a box on the checking account application in order to apply for overdraft protection.

We would advise AIB to put much of the $30 million in new funding into a state-of-the-art Internet lending operation — perhaps off-loading much of the portfolio risk to others. As the first true Internet bank (SFNB is more of a technology company), AIB could pick and choose from the various consumer lending consultants eager to build a reputation in cyberlending.

If AIB becomes a profitable Internet-only operation, it is worth every penny of its $51 million valuation. But there is no mistaking who the big winner in this IPO is, Carolina First Bank. Not only did they receive $3.8 million in cash for their $2 million investment, they still own nearly 20% of a start-up company with a market cap of more than $50 million. Plus CFB gets an unknown future revenue stream from its correspondent banking relationship with AIB.

A Home Run for 1998

If you are looking for a home-run for your 1998 business plan, you might consider emulating CFB’s strategy. There is probably money available on Wall Street for a few more banks to do the same. But you have to move FAST. If you’ve been shopping a business plan for an Internet banking spin-off, now is the time to get final approval. Your best bet is to launch in 1997, and go public in mid-1998 when online banking will be on the cusp of going mainstream. Of course, if the market tanks between now and then, you may be stuck with your $2 million investment.

How to MAKE MONEY FAST on the Internet*

1. Cross the border into a neighboring market, preferably in a bustling urban area.

2. Create a new name and downplay the link to the parent company (so your current customers don’t get offended by better pricing).

3. Develop strategic relationships with high-profile technology companies (at little or no cost, since they have just as much to gain as you do from the free publicity) and put out lots of press releases.

4. Attract talented executives with the promise of autonomy, stock options, and excitement.

5. Pay high rates initially to get some accounts on the books before going public.

6. Create a simple, good looking Web site.

7. Go public in a raging bull market.

8. Do it first.

*If you are a bank. (Our apologies to the 132,456 e-mail spammers who have already used this title.)

Contacts: Three of NetB@nk’s top execs are recent alums of Checkfree. All had been employed at Servantis at the time of its purchase by Checkfree.
D.R. Grimes is CEO (previously CIO Checkfree); Robert Bowers is CFO (previously CFO Checkfree); Tom Cable is CTO (previously VP Checkfree), 888.256.6932, tcable@mindspring.com .
Margueritte Sun follows Net.B@nk at Interstate/Johnson Lane, 404.240.5112.