We see 1999 as a turning point for Internet financial services. Finally, compelling reasons to bank online: saving time and hassle with e-billing, and finding better deals on loans. This year we’ll likely see some first movers rewarded with high stock valuations, allowing them to pull even further into the lead (see IPO Watch, for examples). For better or worse, the retail banking marketplace will never be the same.

MCI Worldcom’s opening screen when logging in to your long
distance account is full of useful info, help, and cross sales.
It’s a good model for banks and billers.

1. E-billing takes off with $25 to $50 million spent promoting it

We’ve been writing about it for nearly four years, but we are finally on the verge of really seeing bill presentment. If you want a good preview, sign up for the Internet offerings from one of the major long distance carriers. We recently checked out One Net Savings from MCI.com (screenshot above).

Much more interesting than the few pennies saved on long distance was the excellent online bill presentment and payment offering. New users are deftly moved into an ebilling option with automatic credit card charge or debit entry. I happened to be a current customer so I could immediately look at my last four bills online, even though I had never indicated that I was interested in e-billing. The implication: MCI already has all its customer accounts enabled for online access, it simply requires a real-time registration process — very slick.

2. Bank-branded “Pay” and “Buy” buttons appear on ecommerce sites

Clearly consumers are becoming confident in buying online, especially when leading Net retailers Buy.com and Onsale.com are selling inventory at cost, planning (hoping?) to make money on handling charges, advertising revenues, and ancillary products (same strategy as free checking I guess, but without the NSF fee income).

But there is still a lot of hesitation by new users and at unknown merchants. Even Amazon.com, with 6.2 million customers, still hasn’t sold a thing to more than 50 million U.S. Internet users. One way a Net seller could ease buyer concerns would be to provide a bank-branded purchase mechanism (see table for others).

For example, you are visiting ComputersAtCost.com and they have a great deal on iMacs. But can you trust them to deliver? Membership in the Online BBB might not be enough to convince you to pony up the $939. But if the “Buy Now” button stated that delivery is guaranteed by Citibank BuyNet (fictitious trade name) with a link for complete details on the service guarantee, who would be concerned? Same thing on biller sites. Banks could brand the “Pay Now” button and guarantee that the payment will be processed in an error-free fashion.

But, the big question is who pays whom for the co-branded button and payment services? It’s not as obvious as you might think. The Net is turning business models on their heads. If Buy.com can sell computers and software at zero gross margin or less (see Red Herring, 2/98 www.redherring.com , then an aggressive financial institution can offer payment services below cost to build Web traffic and mindshare. The big Internet retailers such as Amazon.com and eBay with nearly 10 million monthly visitors could demand payment from the bank for the privilege of sharing that bit of real estate.

Banks could pay for the exposure by providing below-cost payment services. For example, instead of charging a 1.75% discount rate for processing credit card orders, a bank might agree to process at a loss, say at a 1% discount rate, in exchange for first crack at selling financial services to these valuable ecommerce users.

Or a bank could negotiate an exclusive deal with the retailer by paying $x million for a package of advertising and promotion opportunities that included a branded buy button. Bank One/First USA have already locked up credit cards and more at three portals (MSN, Excite, and AOL) with long-term deals valued at almost three-quarters of a billion dollars.

Back-of-the-Envelope Business Case

 

Assume an Internet merchant with $250 million in annual credit card volume from 1 million customers. In exchange for below-cost credit card processing, the bank is allowed to brand the payment button and provide a subtle credit card pitch at the end of every purchase transaction (see First USA example below).

Cost:

•  Competitive discount rate = 1.75%
•  Subsidized Net rate = 1%
•  Annual cost of 0.75% subsidy = $1,875,000

Revenue:

Assume a 3% cumulative annual response rate

•  New accounts = 30,000
•  Acquisition cost = $1,875,000/30,000 = $62.50 More cost effective than direct mail plus good ecommerce positioning for the bank.

 

First USA delivers a pitch for its co-branded Ticketmaster card at the end of every online ticket purchase. The offer includes a $20 bonus and 4.9% intro rate.

Smaller companies might also be able to get a similar break by pooling their traffic through an online credit card transaction aggregator such as BillPoint (see screenshot below) which provides numerous value-added services in addition to processing card transactions for small mail-order and Internet merchants and individual sellers.

BillPoint handles credit card orders for merchants who don’t have a VISA/MasterCard merchant account.
Pricing is just 3% of the sales amount plus $0.40 per transaction with no monthly fees or minimums.

The Internet payments business may evolve as the ATM market has. There was a time not so many years ago when even prime locations paid the bank for the ATM to boost retail traffic and purchases. Nowadays bank and non-bank processors pay retailers a portion of every transaction for the privilege of using the important “co-branded” real estate in the merchant’s physical location.

3. Cobranded banking and bill payment centers on every major portal

Soon, every service you can think of will be its own co-branded “center” on a portal. AOL pioneered the strategy in banking with the launch of its Banking Channel in Sept. 1996 (OBR 10/96). On the Web, many of the players have already aligned with banks, but few have implemented anything. Citibank is aligned with Netscape (soon to be owned by AOL); Bank One will be on Excite; First USA has card deals with Microsoft, AOL and Yahoo!; E-Loan is closely aligned with Yahoo! for mortgages, and TeleBank has announced a strategic integration with Yahoo!

4. Web-based bill pay centers of every shape and size debut (see OBR 6/98)

With 1.5 billion bills generated each month in the U.S. consumer market alone, we expect to see a number of innovative approaches to grab the bill paying eyeballs. With all this competition, it probably goes without saying that the consumer price for e-billing will be zero or less. For example, billers may give discounts for users paying bills electronically (AT&T, MCI approach) and banks may include e-billing in special electronic accounts that are cheaper than brick-and mortar-based alternatives. Here are some of the bill pay choices that will soon be available:

•  portal/bank co-branded bill pay centers
  (see number 3 on)
•  financial institution-run centers where customers and non-customers alike can retrieve and pay bills
•  independent bill pay centers run without financial institution involvement using the ACH to withdraw funds from users accounts
  (see description OBR 6/98 )
•  credit card company bill pay centers where users can pay bills by credit card or check
•  discount broker bill pay centers, especially E*Trade and Ameritrade which have already hinted at such an offering

 

Here comes the new competition. The combination of Net fever and the real opportunity to create something from nothing will lead to an explosion of non-bank providers. Billserv.com was created in July by merging with a shell company. Their press release says they commenced operations Jan 6, 1999.

ThePaymentsAuthority.com www.thepaymentsauthority.com promotes direct debit in Michigan. It’s sponsored by the Michigan ACH Association.

5. Regional Web banking centers sponsored by multiple financial institutions.

Since bill payment is still a regional opportunity, we expect Web-based bill pay centers to be launched that focus on specific regional payment patterns. These centers may be organized by private companies, newly formed bank or CU consortiums, or by existing regional electronic payment players such as existing ACH, EFT and other trade associations. One not so great example is ThePaymentsAuthority.com (screenshot above), an effort of the Michigan ACH Association. Although the strategy makes sense, the Web site is just an electronic brochure that is both excruciatingly slow to download, and even harder to figure out.

MortgageSource is a loan marketplace run by Bank One.

6. Bank-run loan marketplaces debut

Bank One developed one of the earliest loan marketplaces, HomeByNet www.homebynet.com which debuted in 1997 (OBR 8/97). The site has gone through numerous facelifts and is now called MortgageSource. Bank One hasn’t put much emphasis into the program, but we hear that may be changing. Look for other large banks, and bank consortiums, to launch loan marketplaces to stem the loss of consumer mindshare funneled off by GetSmart, Intuit’s QuickenMortgage, Lending Tree, Microsoft’s HomeAdvisor, eStudentLoan.com and others (OBR 5/98).

 

7. Banking statement consolidators appear

From Ameritrade’s OnMoney to eCiti and others, Web companies wanting to boost traffic will try to get consumers to come back to their sites by aggregating any statement information available on the Web: bills, credit cards, checking accounts, brokerage accounts, frequent flyer accounts, and so on. PFM programs already do this for participating financial institutions, but the sign-up process is cumbersome. Web-based solutions promise to be far easier to use.

 

8. Pure Net bank spin-offs via IPO

We expect 25 to 35 Net-only banks to launch in 1999, at least half of them will be spinoffs from existing banks looking to cash in on Internet mania. The first such effort, USAccess Bank, a subsidiary of Porter Bancorp, a $500 million bank holding company in Kentucky, launched the last week of January. Coincidentally, Kentucky also gave us the first Net-only bank, SFNB a spin-off from Cardinal Bancshares which opened its doors in Oct. 1995 (OBR 10/95). It appears the next to go live will be Indianapolis-based First Internet Bank of Indiana in late Feb. Also in the pipeline are G&L Bank www.glbank.com NextCard’s new virtual bank and a host of others.

 

9. An explosion in advertising for Net based financial services

You don’t expect MBNA, Citibank and others to let First USA continue to enjoy a 20-30% share of online credit cards? Now that NextCard, FirstUSA and others have proven that online advertising delivers, everyone will want to get in on the action. Another factor: the billions of dollars of capital available to rising ecommerce players. So expect to see .com financial ads everywhere in 1999 touting credit cards, mortgages, equity loans/refis, car loans, bill payment, and credit cards.

 

10. A major credit card company will merge with an Internet portal

There are a lot of synergies between credit card companies and portals. Both deal with customers remotely, credit cards primarily through the mail and portals exclusively through the Internet. A merger could dramatically improve the competitive position of each, putting the card issuer in front of millions of portal users and creating an integrated card statement/portal view that could provide a meaningful point of differentiation. The portal would gain millions of page views as it posted the credit card statements of its cardholders, and potentially a big bump in market value if the Internet investment community liked the concept.

 

Bonus Prediction: Billers and banks take CyberCash’s Richard Crone’s credo to heart, “the bill is compelling content”

Banks and billers wake up to the enormous value locked up into what just a few months ago was a nagging cost function. Bills really are compelling content, something few users can afford to ignore. The billing data stream is perfectly suited for display in HTML email and Web site archives. Banks and billers start thinking about their customers in “Internet terms” leveraging Web traffic to increase revenues and shareholder value. Financial institutions and billers that don’t want to make the investment themselves will sell their billing traffic to the highest bidder. For example, Capital One could strike an agreement to post its 12 million customer billing statements (updated every day of course) exclusively in Yahoo’s billing center in exchange for a package of banner ads worth several million dollars.

All this makes us wonder what the bidders for the AOL credit card sponsorship were thinking. Bank One “won” the bidding war, paying up to $500 million for a five year exclusive. But is Bank One getting compensated for the traffic it could drive to AOL from its 25 million cardholders and 10 million bank customers? It doesn’t seem like it.