One

Email Payments Widely Adopted

Because of its phenomenal viral marketing component, we expect person-to-person payments to be widely adopted by Net banking pioneers in 2000. Then, as Net-banking platform vendors incorporate the feature into their standard software offerings, everyone else will be able to offer it in 2001-2002.

For the historical record, we’ll predict that by year-end you’ll be able to send email payments from 75 to 100 banks and non-bank Web sites, up from three at year-end 1999.

Two

The Bad Guys Gain a Little Ground
and a Lot of Attention

Online banking has been lucky so far. Except for X.com’s write-up in The New York Times (p. 6), banks have kept Net-based fraud under control,
and far more importantly, out of the press. That luck won’t continue in 2000.

Two factors will bring out more thieves and vandals:

· hackers will feel more comfortable stealing through non-bank virtual banking sites, such as statement aggregators or P2P payment sites, than at bank sites which have more perceived security

· the publicity surrounding online thefts will encourage copy-cat hackers and thieves

These problems, which will be (rightly so) sensationalized in the press, will cause politicians and regulators to take notice, and a number of government and industry controls will be explored. In addition, the credit card associations may take issue with the techniques used by P2P companies that charge payments to credit cards.

We won’t know the extent of the regulatory moves until 2001 or later. Ultimately, we expect the non-bank service providers will work through these issues successfully, but the negative buzz will give banks, potentially working with Checkfree and other tech vendors, a window of opportunity to launch similar services backed by more stringent safeguards.

Three

Online Mortgage Lending Backlash will End

During the past 12 months the media stories about online mortgage lending have come full circle. In 1996 and 1997, most media outlets dismissed the product, saying it was too important to do online. Then in 1998 and early 1999, during ecommerce frenzy, it was a fashionable example of doing “everything” online. By year-end, as interest rates rose and refi volume dried up, everyone jumped back on the its-too-important-to-trust-to-the-Web bandwagon.

We predict that within six months, the tide will turn again as people realize that the mortgage is an ideal place to build a significant (aka sticky) Web-based relationship with customers. Why?

1. Cost savings: The media isn’t doing the math. A recent negative story on online lending stated that it didn’t make sense because consumers could “only save one-quarter percent.” But the article neglected to point out that on a $200,000 mortgage, that’s amounts to a savings of $500/yr, or $2,500 over five years. That’s probably more than the average person could save on all other goods purchased online combined, except maybe insurance.

2. Consumer behavior: More that any other financial product (except stock portfolios), people track their mortgage. Most folks have a fair understanding of their existing rate and how it compares with current market rates. Far fewer understand when it’s advantageous to restructure their existing debt. Keeping users apprised of market rates and exactly when it’s advisable to refinance is where online banks, mortgage companies, and personal finance sites can deliver value and lock-in users. And even during rising rate environments, consumers can still take advantage of equity-secured financing to save a bundle on their overall debt expense.

We expect Web lenders such as E-Loan, Mortgage.com, and leading banks to do several things in 2000 to attract more business:

• package together more sophisticated first/second mortgage bundles that deliver cost savings in all interest rate scenarios
• focus less on single credit transactions and more on the bigger picture, using loan aggregation techniques such as screen scraping to lower users’ overall cost of credit.

In addition, the lending marketplaces, Lending Tree, PrimeStreet, LoanWise, and others will beef-up their marketing budgets to educate consumers, and the press, on the cost advantages of online lending.

Four

Net-Only Banks Innovate Like Mad

The days of attracting a base of customers with a high-rate offer are drawing to a close. Not because the high rates don’t draw dollars, they always will; but because the almost certain churn in hot money will fail to boost market caps.

Instead, Net-only banks will find ways to draw customers in and keep them using themes of security, transactional convenience (P2P payments, bill presentment, ewallets, etc.), simplicity, independent investment advice, privacy safeguards, and so on. We expect that these efforts will begin to win over profitable core customers. But it will still be several years before this trend begins to show up as measurable market share losses for Net-laggards.

We also expect Net-only banks to ink deals with brick-and-mortar distribution points for credibility and advertising, both non-financial companies (e.g., Costco, Office Depot, Starbucks, etc.), and financial companies. OneCore.com is an early example of a Net-only company partnering with banks to accept merchant deposits.

Five

Outbound Email use Expands Exponentially

Banks realize that for consumers, a visit to their bank’s Web site has about as much appeal as cleaning the gutters. Highly personalized email alerts are the way into the hearts and wallets of Web users. We predict that by year-end, U.S. banks and credit card issuers will be sending 30 million account-related email messages per month, a 15-fold increase from an estimated two million emails (+/- 50%) sent in Dec. 1999.

Six to Ten

Dot.com Merger Mania Hits the Financial Sector

With market caps coming back to earth (p. 9), we expect to see many pioneers scooped up by existing powerhouses who can leverage both the brands and intellectual capital of the Web companies. For the record, we predict at least two of the following combinations to be announced in 2000:

6. Net.B@nk with a leading online brokerage or card company

7. E-Loan with a leading online bank

8. ebank.com with a top-10 commercial bank

9. everbank with a Net-only bank or card company with more capital

10. eBalance.com with a portal, card company, or Net banking platform vendor 8

Recap of 1999 Predictions
made Jan. 1999

Source: OBR 2/00, 1/99