Building a “Real” Virtual Bank (NetBanker)

Definitions

Virtual \Vir"tu*al\ adj: being such in essence or effect though not formally recognized

Virtual Banking: noun: banking services delivered outside a brick-and-mortar environment

Real Virtual Banking: oxymoron: banking delivered outside a regulated financial institution

Sources: Webster; Online Banking Report, 11/99

Call us obsessed, but we’ve been anxiously awaiting the arrival of the banking equivalent of Amazon.com (see Building
the Amazon.com of Financial Services, OBR 6/98). Every year we go through the exercise of putting together a business case for the development of a Real Virtual Bank (see definitions above). During this process, we always get the urge to start one ourselves. So next year, we’ll do that in a virtual sense, building it within the pages of OBR and
on a portion of our Web site we’ve dubbed, TheBankofDreams.com.

PayTrust’s “mybank” automatically retrieves the user’s bank account information, subtracts uncleared PayTrust payments, and displays the results.

While we believe that traditional brick-and-mortar financial institutions will continue to serve the lion’s share of online users, a hybrid company will soon emerge, one that provides many of the same services as a traditional bank, but without actually being a bank. Sort of how Quicken operates on the desktop as an electronic checking account without actually holding the deposits. We call this a Real or Truly Virtual Bank.

Why would you want to forego the sure deposit income associated with a bank charter and FDIC insurance? A few reasons:

Cost of compliance: Let someone else hold the deposits and deal with SAS 70 audits, call reports, CRA mapping, OCC auditors, and so on.
Capital reserve requirements: Regulated financial institutions must maintain capital ratios that limit their flexibility compared to non-regulated Web companies.
Speed to market: Regulatory approval has delayed some launches by a year or more.

Problems in Building the Amazon.com of Financial Services

Factor	Problem	Solution
tradition	By definition BANKS have branches and checking accounts, anything else is an oddity.	As more people view the Net as THE way to take care of personal and business tasks, traditions will change.
security concerns	Viruses, hackers, Y2K nutballs, etc. have all contributed to a climate where rational users are reluctant to entrust money to an entity that doesn’t have a recognized brand name and/or strict regulatory oversight.	These concerns will dissipate just as they do for every new-fangled product through a combination of habit, government and industry initiatives, and safeguards.
money	Until this year, investors were reluctant to fund start-up Net-only banking operations because the first two, SFNB and Net.B@nk, were such slow starters (that fear ended in April when Net.B@nk’s stock rocketed through the $100/share mark (then $200, pre-split), before coming back to earth.	Money is not an issue right now; for example, PayTrust CEO Ed McLaughlin told us he has access to “unlimited capital” (translated: potential investors call him, not the other way around).
regulatory hold-up	It’s been a long, slow process to get regulatory approval for Net-only charters; the logjam is showing some signs of improving, but is still 12 to 14 months at the OCC.	This is a wild card, but with Glass-Steagall falling, improvement is expected.
lack of perceived user benefits	It was easy to see the value of the expanded selection Amazon.com brought to the book business; or eBay’s auction format compared to haggling at a real flea market. But what does a Net-only bank have that a traditional bank (with online banking) does not? The answer, so far, is little but clever names and shrewd marketing; Net.B@nk is the leader in banking; E-Loan in lending.	Entire new categories of financial services, impossible to deliver without the Internet, have begun to pop up this year (see the next section).