Net banking companies and service providers have finally jumped into the IPO market. We were beginning to think the sector might be passed by Net mania. If all goes according to plan, within the next four to six weeks, five Internet banking companies will go public. NextCard was the first out of the gate selling 6 million shares at $20 per share on May 14 to raise $120 million. The stock briefly hit $40 before settling into a trading range in the low 30’s for a market capitalization of about $1.3 billion, or $20,000 per credit card account.

NextCard and E-Loan are leading Net-only providers of credit cards and home loans respectively. Online Resources and nFront are Net banking platform providers. Princeton eCom (formerly Princeton Telecom) is an ebilling provider and payment processor.

The companies’ S-1 registration documents paint a mixed picture. While the companies are all well positioned strategically, their end-user account totals prove that online banking is not yet a bona fide consumer hit. For example, NextCard with 66,0000 accounts, the most of any Net-only player , only approved 2.9% of 900,000 credit card applications it attracted in Q1 1999.

NextCard Approval Rates

Source: company reports, 4/99

E-Loan, the exclusive mortgage provider on Yahoo!, turns out to be primarily a California phenomenon, booking 84% of its 1998 volume and 69% of Q1 ’99 volume in the home state.

E-Loan’s California Connection

Source: company reports, 4/99

Online Resources and nFront, despite success in attracting bank clients, only have an average of 350 end-users for each live bank installation. In comparison, Wells Fargo is adding 10,000 new users every week (OBR 3/99).

nFront & Online Resources Client Bases

Source: company reports, 4/99

¹Average calculated across launched banks only.

²Percent of bank customers at launched banks using online banking.

What does all this mean? Something you already know; it’s extremely difficult to attract new deposit and checking accounts on or off-line. The first Net bank, SFNB, still has only about 15,000 accounts after 3.5 years. NetBank, after 2.5 years of offering premium rates, has only 29,000 accounts. NextCard, who we think has one of the best Net financial services businesses in the country, has only 66,000 accounts, despite taking 1.7 million applications. And E-Loan with an exclusive and very prominent position on Yahoo!, only booked 703 loans outside of California during all of 1998, less than 60 per month.

This is great news for existing financial institutions. Your customers are “sticky” whether through loyalty or apathy. But don’t count on it to last. Your most profitably customers, the 30-to 45-year old, high income, high borrowing user is growing increasingly comfortable with ecommerce, and will head for the exits once the online players come up with more compelling product offerings.

IPO Scorecard

Source: company reports, all figures as of 3/31/99 unless stated otherwise

Notes: (1) Market cap based on common stock outstanding after offering times maximum offering price in prospectus, except NextCard which is actual on 5/17/99; (2) Includes loan referrals; (3) Company also incurred $2.32 million in activation costs for another $58.00 per account, so acquisition costs might be better stated as $58.00 plus $108.25, or $166.25; (4) Company also incurred $1.52 million in activation costs for another $58.46 per account, so acquisition costs might be better stated as $58.46 plus $98.27 or $156.73; (5) Assuming company had 100 clients as of 12/31/98; (6) Assumes constant client base of 250.