A year ago we took our first look at the marketing and delivery of credit products online. At the time we were somewhat surprised by the lack of activity and innovation online. A year later our opinion has changed little, but we are encouraged by all the work being done behind the scenes — projects that should come to market during the next 6-12 months.

You still have time to get your online lending initiatives off the ground before the competition gets brutal. Here’s why it will. Let’s say we’ve got a smidgen of seed capital and our eye on the 40 million households soon to be online in the U.S. We’ll let the existing players keep their marginally profitable checking accounts, their expensive ATM networks, and all that brick-and-mortar investment. We just want the loans. Especially the big ones secured by home equity. A good-sized home equity loan with a reasonable interest rate can have a net present value (NPV) in the $2,000 to $5,000 range (assuming $30-40,000 average balance,
2-3% net interest margin, and 4 to 5-year loan life). If the Web site were to generate 85 of these gems each month (1,000/yr), we’d have more than $30 million outstanding in a year, generating $600,000 to 900,000 in annual revenue. And that’s just from the loans booked in the first 12 months. Run that out for five years, and we’ve got a $3 to $4 million business running on a couple PCs.

If you’re skeptical that a start-up company could generate this type of volume, you’ll be interested in our overview of E-Loan E-Loan just received mortgage application number 1,000 less than four months after launch. After 40 years of credit card direct marketing, it’s pretty clear that U.S. consumers will take money from almost anyone offering a convenient loan package and a competitive rate. It won’t be any different online.

Is your top management, or board, wondering when you’ll make a payoff from all the dollars invested online? It’s a legitimate question. If you don’t have a good answer, then you’re not working the loan side hard enough. From a revenue-generation standpoint, checking account access and bill payment might better be thought of as simply a means of getting customers online in order to market loans to them in a highly personalized way.

Arkansas National’s banner ad on BankRate’s Web, www.bankrate.com .

Look at Arkansas National Bank’s innovative marketing approach. The $182-million bank is featuring its 7.92% APR credit card in banner ads at one of the key venues of online credit card information, Bank Rate Monitor, www.bankrate.com . Once the bank gets the consumers’ eyeballs on its Web www.arknatl.com , it loads the bargain-rate card up with a companion checking account, overdraft protection and online bill payment. But it’s presented in a way that doesn’t make it feel like “bait and switch.”

By this time next year, a typical user’s online session looking at their bank or credit union accounts, will also include targeted messaging for loans and lines of credit. The innovators will offer instant credit approval with just a few clicks of the mouse. E-mail rate update services will be as common as payment calculators are today.

Throughout 1998 we expect to see aggressive moves online by mortgage brokers, finance companies, non-banks, and the direct banking divisions of major commercial banks. We’ll see pitches for all types of credit products, from credit cards, to personal loans, to home financing. There will be banner ads galore, sweepstakes, low-low rates, free computer premiums, and instant credit approval. The most concerted efforts will be in the lucrative home equity market with the large line sizes, lower credit losses, and insatiable consumer appetite in areas where home prices have appreciated.

But the big players aren’t going after these loans yet. In fact, during our recent test of five search engines, we found only one where a financial services ad popped up when searching on the term “home equity loan,” and that was a financial planning message from John Hancock. However, First USA is showing a home equity loan banner on “personal loan” at InfoSeek and Bottomline Mortgage is advertising home improvement loans on “refinance” at AltaVista.

Even more surprising is how few total hits we got on the term “home equity loans” (the parenthesis are important at some search engines). Only four in Yahoo’s directory and only 1,800 in AltaVista’s simple search. Evidently, most financial institutions aren’t even using that term on their Web sites. That’s something you can correct during the next five minutes. Send the following e-mail to your Webmaster now.

Bottom line: you still have time (9 to 15 months we’d estimate) to protect your turf by building your own cyberloan offerings. All else being equal, your customers are going to borrow from you. But increasingly the “all else” is going to include online loan services along with rate, line size and a convenient application.