bankofdreams.com¹

Over the next 12 to 18 months we will build the “ideal” Internet bank within the pages of Online Banking Report and on our Web site. The first step is the market analysis that begins this month with a look at the current crop of Net-only banks. Next month, we’ll drill down into the numbers, update our semi-annual forecast and review key industry metrics.

Net-Only* Banks Becoming a Competitive Factor

A year ago we predicted there would be 25 to 35 Net-only banks, or bank divisions, launched in 1999. We underestimated regulatory hold-ups and only 17² made it out of the starting gates in 1999, bringing the total Net-only banking universe to 24. Another dozen or so have announced intentions to launch in the first half of 2000, pending regulatory approval.

*Definition: Net-Only Bank

We previously defined Net-only banks as those that operated without any branches and were not divisions of traditional brick-and-mortar banks. By that strict definition, only four true Net-only banks exist: Net.B@nk, CompuBank, First Internet Bank of Indiana, and NextCard/Bank. If you include non-banks offering banking services through partnerships, OneCore and X.com would make the cut. But going forward, we are expanding the definition to include any entity that positions itself primarily as an Internet bank, regardless of its ownership; and even if the company operates one or more brick-and-mortar branches. Using this definition, there are 24 operating Net-only banks in the United States (see list on the next page), and dozens more around the world.

If you’ve wondered why we devote so much ink to the Net-only banks, it’s not because we necessarily think these companies will be the winners. It’s way too early to make that call. The brick-and-mortar companies have enormous leads in almost every meaningful category, brand awareness, trust, profits, market share, etc. Net banks will have to work hard, make big bets, and have a little luck, in order to make it in a market already saturated with 20,000 financial institutions. Because these companies will be working so hard, and with a higher tolerance for risk, we expect many of the biggest innovations and flops of the decade to come from Net-only financial companies. For example, look at the past few weeks alone:

•  PayPal and X.com hit 300,000 users each during their first 100 days after launch
•  X.com became the most-visited U.S. bank Web site
•  PayTrust was sued by First Union for “violating customer trust”
•  everbank.com launched with 15-minute loan approval and lands in the Gomez top 10
•  Virtual Bank bagged $38 million in venture capital and signs on to aggregate statement using VerticalOne’s platform )
•  E*Trade received enormous, mostly positive press, with its irreverent Super Bowl ads featuring monkeys and a man with money “coming out his wazoo.”
•  CompuBank, which attracted only a few million in deposits during its first year in business, landed $38 million in venture capital from Goldman Sachs, Softbank, and others to relaunch as a bank for small business

We will continue to pay close attention to the Net-only startups, where we expect to find numerous examples of what to do and what NOT to do. We also realize there are hundreds of banks and credit unions toiling away behind the scenes doing equally important work wiring their existing customers. If you can share your successes or failures with others, please drop us a line, tips@onlinebankingreport.com .

¹For those unfamiliar with U.S. movies, Bank of Dreams is a take-off on the popular 1989 flick, “Field of Dreams.”

²We are only aware of 17 start-ups (listed on the next page). There were probably a half-dozen or more that launched quietly during the year, bringing the total closer to 25.

U.S. Net-only¹ Bank Scorecard

Source: All 9/30/99 data is from the FDIC including assets, deposits, number of deposit accounts, and FTE (full time equivalent employees); more recent data, if applicable, is from company reports; e = estimated

Notes:

(1) Does not include pure lenders such as E-Loan or People First Finance; brokers such as Schwab, or bill-payment-only companies such as PayTrust; does not include an estimated 50 to 100 banks in various stages of formation.

(2) The only standard metric at this time is number of accounts, not number of customers; many customers have multiple accounts, e.g., a customer with a 6-month CD, a 12-month CD, a checking account, and a money-market account has four accounts; as a rule of thumb figure the total number of customers is about 50% of the account total, but this could vary widely.

(3) As of 9/30/99, unless stated otherwise

(4) Internet banking was added to the services of the parent, American Bank of Lehigh Valley in Sept. 1999, but hasn’t been marketed as Net-only yet.