Anatomy of a Start-up

www.DeepGreenBank.com

DeepGreen’s home page is relatively uncluttered, but at 100 words, it still trails NextCard’s “gold standard” of 25 to 30 words

Although you have to scroll down to see it, the “Get $5,000, $10,000, $15,000 wired to your checking account in 20 minutes….” (above) is a great hook and powerful selling message.

The newest Internet-only entrant came out of beta on August 16. Company execs were in Seattle and briefed OBR on the company’s innovative products: a no-doc online Home Equity Line of Credit (HELOC) and a “penalty-free*” CD. The CDs are standard fare, but the HELOC is superb. Despite some reservations that we’ll discuss later, we are giving the HELOC an OBR Best of the Web 2000 designation, only the third one of the year

There are serious flaws in the customer experience that must be addressed for the bank to be successful. The management team has an impressive track record in financial services and marketing, but their lack of Web experience shows. The good news is that most of these problems can be easily corrected and we have no reason to believe they won’t be.

*All-Access is a two-year rising rate CD that allows penalty-free withdrawal every three months, and has a 7-day interest penalty at other times.

The Company: Currently, DeepGreen is structured as a highly autonomous, but wholly owned subsidiary of Cleveland’s Third Federal Savings Bank ($6.2 billion), a mutual savings bank owned by its depositors. Most of DeepGreen’s 41 employees work out of Cleveland, but the bank’s administrative offices are in Chicago where CEO Selitto was located prior to joining DeepGreen. The Internet unit has its own charter (purchased from a Florida thrift in Sept. 1999), its own board of directors, and its own technology. For now, Third Federal is committed to funding the unit, but down the road the bank will consider other sources of capital, including an IPO if appropriate. It spent the past nine months building the product and concurrently working with the OTS to approve its business plan (which happened in July).

The Technology: The bank made a significant investment in developing proprietary technology to gain a lead in the marketplace. It licensed Sanchez’s e-profile system as its base platform, but has customized the software using IT expertise from KPMG. Web site and graphic design is from Seattle’s Girvin.

The HELOC Product: What could be so exciting about a HELOC, offered by 10,000 or more financial companies in the USA? We’ll have to admit to being a little biased. Having been a loan product manager in the early ‘90s, we’ve long been frustrated with how overly complicated and expensive the home equity loan process is for top-notch borrowers. DeepGreenBank is working on both fronts with a simple mini-application on the front end and electronic appraisals on the back-end. Its tagline speaks to this positioning, The Online Bank for Grown-ups (above).

The stopwatch, combined with the eye-catching “online first”, “$15,000,” and “20 minutes,”
make a dramatic impression.

Here are the features that make DeepGreen’s HELOC stand out from the crowd:

• Mini-application: The entire application process takes just a few minutes using information from your wallet (no looking up account numbers or property assessments).
• No-doc underwriting: Because the company only accepts A-rated credit applicants based on credit bureau scores, there is no income or employment verification. In fact, the company doesn’t even ask about income or employment. Line size is based entirely on credit bureau data and property value. Fraud detection software is used in the underwriting process to filter out fake applications.
• No physical appraisal: The bank uses the applicant’s estimate of home value, along with information contained in public databases to determine the loan amount. The bank uses electronic appraisals exclusively, no physical appraisals (full or drive-by). By regulation, this limits loan size to $250,000; however, the bank hopes to convince regulators to allow electronic appraisals on higher loan amounts.
• Bundled unsecured QuickCash: Since HELOC regulations require a 72-hour right of recession, the bank has cleverly bundled an unsecured line of credit, called QuickCash, with the HELOC. Approved applicants can choose to have up to $15,000 of QuickCash wired into their checking account within 20-minutes of applying. The unsecured loan is automatically rolled into the HELOC provided the user applies for and is approved for the home equity loan. No interest is charged on QuickCash loans rolled into the HELOC.
• Real-time balance transfer: Using an approach first seen at NextCard, approved applicants are automatically offered an opportunity to pay off their existing loan balances. Users are presented with a table of outstanding loan balances pulled directly from credit bureau data. To transfer a balance, users simply check the appropriate box and type in the amount desired.
• Low ongoing rate (not a teaser): Loan pricing is competitive, with a variable rate pegged to prime rate less 5 basis points (currently 9.45%).

• Line usage incentives: Rate reductions are provided to encourage line usage and automatic ACH (electronic) payments as follows:

HELOC Rate Discount Schedule

What	Discount	Cumulative	Current
Base rate	n/a	n/a	9.45%
ACH payment	0.25%	0.25%	9.20%
25% line usage	0.20%	0.45%	9.00%
50% line usage	0.20%	0.65%	8.80%
75% line usage	0.20%	0.85%	8.60%

Source: DeepGreenBank, 8/25/00                                                

• No fees: The loans carry no points, no origination fees, and no annual fees.
• Lowest possible monthly payment: For the first five years, only interest must be repaid; no principal payments are required.
• 100% LTV: Loan amounts up to 100% loan-to-value ratio (LTV) are allowed.
• 7/24 closing: Closings take place at the user’s preferred location (home, office, yacht, etc.) anytime day or night including weekends and holidays. The user must sign the documents and show a picture ID. For security reasons, funds are wired after closing. Stewart Title handles the closings.

 

Management Team: Company execs are long-time mortgage industry veterans having founded and operated Amerin Guaranty Corporation, a mortgage insurance company sold to Commonwealth Mortgage Assurance Corporation, now known as Radian Guaranty (NYSE: RDN).

The DeepGreen Team

Title	Name	Previous Experience
CEO	Jerome Selitto	Founded Amerin Guaranty Corp., a mortgage insurance company sold to Radian Guaranty in 1999; prior experience included stints at Kidder Peabody, PaineWebber, First Chicago Capital Markets, and Florida Federal Savings and Loan.
CMO	Philip Yee	Headed Norwest’s mortgage marketing division before it merged with Wells Fargo; prior experience includes Marketing SVP at Amerin and the mortgage units of Chemical Bank, Bank of America, Prudential, and Great Western Bank.
CTO	David Hadley	Director at Lakefront Consulting; prior experience in Andersen Consulting’s Media Technologies Group.
CCO (chief credit officer)	Jocelyn K. Smith	Another Amerin veteran where she was Dir. of Risk Management; prior experience includes operational and underwriting work at Franklin Mortgage, Homebanc Mortgage Service, and Mortgage Guaranty Insurance Corp.

Source: company, 8/16/00

Strategy: The bank is launching as both a B2B and B2C company. They have been in discussions with a number of banks and portals on providing co-branded HELOC lending services “powered by DeepGreenBank.” The bank is also planning a consumer launch this fall that will include print advertising in major markets, direct mail, online banners, and opt-in email. Advertising will be product focused alternating between CDs and HELOCs with a “rate plus benefits approach” according to CMO Philip Yee.

At this point, the bank has zero appetite for the so-called bricks-and-clicks strategy currently in vogue with the press and many analysts. The bank is betting that users will flock to online lending if it’s easy to use and delivers on the promise of an all-electronic interactive loan.

DeepGreen believes that its ease of use combined with upfront pricing will be more compelling than the unknowns consumers face when using a loan marketplace such as LendingTree. The bank doesn’t rule out participating in lending auctions to boost volume, but it doesn’t believe that auctions are the winning model for online lending.

The bank plans to be aggressive on price. Bank executives predicted that its initial CD rate would be the highest in the country. When we checked www.BankRate.com  on Sep. 6, its 6.91% rate on the 6-month CD was in fact the highest in the nation, with a 3 basis point edge over www.umbrellabank.com . The 1-year rate was also number one by 4 basis points. www.BankRate.com   does not publish a national ranking for the 2-year term. An upcoming DeepGreen feature will allow users to research competitive rates at www.BankRate.com  right from the bank’s Web.

 

What’s Next: The founding team has a wealth of mortgage banking experience, so it’s only natural that they are eyeing the first mortgage market; however, rather than trying to be another E-Loan or www.Mortgage.com , they plan to specialize as a portfolio lender in the non-conforming* arena. This allows DeepGreen to offer higher-margin products that appeal to underserved markets, such as self-employed and those looking for jumbo mortgages (greater than $250,000). The bank is also looking at offering other liability products such as checking and money market accounts.

*Non-conforming mortgages are loans that cannot be sold in the secondary market to Fannie Mae or Freddie Mac due to loan size
(greater than $257,000) or credit quality.

 

The Tax-Advantaged Borrowing section is typical. The design draws attention to the key HELOC selling benefits: “Tax Break” (below the happy family) and “Get a bigger break” (lower right).

Analysis

Web Site Design: The overall look and feel is excellent and makes a great first impression. The site quickly communicates its purpose: to sell HELOCs and CDs. The sales pitch is benefit oriented, drawing you in and not wasting your time.

But it can be improved. Unfortunately, they’ve buried the most compelling message, Get $15,000 in 20 minutes at the bottom of the home page requiring users to scroll down to see it. The home page word count could be pared back from 100+ words to 50 or so.

Navigation is good but could be better. The five choices around the ubiquitous “happy family” graphic could be reduced to three by moving the Tax-advantaged Borrowing link to the Home Equity page, and moving the About Us link to a less prominent position on the bottom row of text links.

And why not lose the overused “happy family” graphic altogether and instead substitute the much harder hitting, Get $15,000 in 20 minutes?  It’s far more meaningful to the borrower and stakes out a comparative advantage for the bank that’s difficult for competitors to match.

While the FAQ section is comprehensive and well written in everyday language, it could be better organized and divided into sub-sections.

Rates are displayed prominently on most pages providing the sense that the bank is quite proud of its prices. An important message for visitors, the vast majority of which will never have heard of DeepGreen.

Security and privacy are addressed at length and the bank uses VeriSign Secure Site on the home page for added credibility. The bank should also consider using the American Banking Association  www.aba.com  SiteCertain system for even more credibility .

Grade

A-

 

Product Design: On the loan side, the HELOC is perfectly suited for the financially savvy prospects DeepGreen hopes to reach. Even though the non-discounted rate is higher than the national average of 8.62%*^, the combination of no fees and below-prime rate provides applicants with something to brag about to their neighbors. Customers that take advantage of the entire discount schedule can drop their rate to 8.6%, two basis points below the national average.

The initial balance transfer option along with ongoing access via a Visa Debit card and paper checks make it ultra-convenient to use. The bank should also make the balance transfer process an ongoing product feature (not just for initial applications).

On the deposit side, we think the bank is making things harder for itself and its users. Currently its product line is limited to four CDs: 6-month, 1-year, 2-year and the featured All-Access CD. All-Access is a rising-rate “no-penalty CD” which includes an option to withdraw the money each quarter with no penalty and only a 7-day interest penalty at other times. The CD is being positioned as the place to park money for those who want security and flexibility. However, if that’s the market the bank wants to reach, it should feature a money market deposit account that consumers already understand and trust

Grades

Loans: A
     Deposits: C-

^ð

*Source: www.BankRate.com , 9/5/00; national average rate does not take into account potential closing costs and annual fees.

Pre-purchase Customer Support: The bank needs a major upgrade in its Web-based customer support. Other than the well-done FAQ section, the bank doesn’t do nearly enough to answer applicant questions along the way. They need context-sensitive Help throughout, a demo application, and in general more handholding through the process.

The bank should also consider adding live chat in order to answer customer questions immediately. For example, during the all-important balance transfer module, some of the choices are confusing. Without a simple way to ask a quick question, users will tend to simply bypass this feature, depriving the bank of loan balances they would have otherwise captured. NextCard learned this lesson in 1999 when it added live chat in critical areas and saw its abandoned application rate fall by 20 to 30% while lifting balance transfer rates a similar amount .

When we tried to signup for a CD we received this curious error message on our IE 4.0 browser.

There was a serious glitch in the application when using an IE 4.0 browser (it worked fine with Netscape 4.6). After choosing the online application, this error message popped up (see screenshot above):

Internet Explorer cannot open the Internet site https://www.deepgreenbank.com/menu-js.htm . An error occurred in the secure channel support.

It turned out that the navigation frame would not load. For users who pushed forward past this ominous sounding error message, the application could still be completed but navigation was severely hampered.

Grade

C-

Application Process:

·         Home Equity Line of Credit: This is where DeepGreen shines and why we think it has a good chance of gaining a foothold with online borrowers. The application is both easy to complete and unbelievably fast. In a demonstration of an actual live application, the user was approved in less than a minute for a $15,000 unsecured loan, followed by a $59,000 HELOC several minutes later. The entire process including filling out the loan app and scheduling the closing takes approximately five minutes; and the user doesn’t have to do any preparation prior to submitting the loan. Applicants can interrupt the application process at any time, saving their application and coming back to it later. The only thing that needs improvement is more guidance and customer support along the way.

An electronic transfer process
is built into the CD signup form.

• CDs: We tested the CD process by purchasing a
  6-month CD. Overall, the signup process worked well. It took 6 minutes and 10 seconds to setup and fund a new account, an acceptable time period. That included printing out the disclosures but not reading them. More important than the elapsed time is how the process “feels” to the user. This is impacted by design, navigation, and feedback. DeepGreen does a pretty good job, but it should beef up the help area.

Another weakness is that they don’t require users to retype critical information such as email address, password, and mother’s maiden name. Most Web sites have adopted redundant entry of these critical items to cut down on data entry errors. The bank does require a confirmation on social security number, and users have a chance to review all data prior to hitting submit. But the bank neglects to prompt users to verify the info and doesn’t provide instructions for correcting any errors.

The application also had a few minor usability flaws, such as not allowing you to type in your date of birth; you are forced to use drop-down boxes.

Grade

B
(could easily move to an “A” with more help functions)

 

CD customers can choose to have interest automatically credited to a non-DeepGreen account each month.

Disclosures are via a link; users are not required to wade through them.

Immediate Post-purchase Customer Experience (CDs): We weren’t in the market for a home equity loan, so we were unable to evaluate customer support for new borrowers. We did buy a CD and found the experience less than satisfying.

Aside from bare bones and sloppily written thank-you screen (screenshot below), the bank failed to use the Net to provide even a minimal amount of post-purchase support. We ranted on this last year when Wingspan launched and DeepGreen has not learned from the mistakes of its nearby competitor.

Here’s how one new CD customer reacted to the online purchase. After taking the time to wade through pages of disclosures, complete a 6-minute application, and ACH the money for the new CD, the bank didn’t so much as send a single autoresponse email thank-you or confirmation. In fact, during the next 6 days we heard nothing from DeepGreen via any channel: email, phone, snail mail, or fax. Finally, on day seven the shortest and driest welcome letter we’d ever seen arrived in the mail. It consisted of a four-sentence unsigned form letter reiterating our account details along with nine pages of disclosures, all printed on standard copy-machine 8.5 x 11 20-pound white paper.

If a branch treated new customers like this, they wouldn’t have any. It’s as if you walked into a branch and gave the teller $1,000 to open a new account. After thanking you the teller turned and walked away and never came back, leaving you standing at the window wondering if you’d just lost $1,000. How confident are you in a bank’s ability to serve you on the Internet if they don’t even use email to acknowledge a new customer.*

Grade

D-
(only CDs tested)

 

The snail mail confirmation arrived in a timely fashion (7 days), but that’s not how it should work on the Net. A stream of emails should begin immediately after the customer hits the Submit button. For example, www.X.com  sent us 7 emails and a fax within the first 24 hours of establishing a new account. You simply cannot over-communicate to a new customer who just trusted you with a few thousand dollars.

 

Sloppy copywriting on the thank-you screen
detracts from the initial user experience.

Online Banking Service (post login): Becoming a customer was a big disappointment after such an impressive Web site and product line. The first shock came when I logged back into the bank to look at my account. It takes an unbelievable SEVEN screens, five of which are in the slower secure area, and some horizontal scrolling, before you can view your account balance. Here is the painful process:

1. Press the Login button on top right of the home page; so far so good
2. Enter username and password on login screen
3. Click through the privacy/security statement screen and hit Continue. Why do I have to see this every time?
4. Select from one of four buttons: apply for a HELOC, look at an existing HELOC, get a new CD, look at existing CD
5. After choosing “look at existing CD,” you must still wade through another screen with two choices: CD Inquiry, or CD Withdrawal
6. After selecting CD Inquiry, I finally arrive at my account, but it still doesn’t list the dollar balance; you must highlight the account number in the screen and then choose one of four options presented in a drop-down box; this is confusing and I didn’t figure it out until my third try
7. After selecting Display Account Summary, my CD information and balance are finally shown

As if that wasn’t bad enough, there is also a serious security error that should have been caught in beta testing. When using Netscape 4.6 (we didn’t test other browsers), even after you think you’ve logged out, you really haven’t. You can go right back into your account without entering a username and password. There is a timeout feature, so if even if you left your terminal after what you thought you logged out, a thief would have to come along within the next 10 minutes to cause any harm. It’s unlikely there would be any financial loss, but the error is unsettling causing even a novice user to question the bank’s ability to safeguard their account.

A few other less important faults:

1.    The user interface is poorly designed. It uses a triple frame that is slow and cumbersome and required horizontal scrolling even on a 19” monitor set for 800x600 resolution.

2.    You cannot use the browser “back” key in the secure areas. Users are forced to use the navigation keys in the left-hand frame. However, you are not always given a navigation choice that takes you back to the previous screen. So you are forced to meander through menus just to get back to where you were. It’s Web navigation circa 1996.

3.    After logging in, the Web site allowed us to change email and snail mail addresses with no security challenge. The bank didn’t even bother to send a heads-up email to our old email address to inform us that a change had been made. Only experienced users would notice this security lapse, but it should be fixed before some thief exploits it. To it’s credit the bank uses a security challenge (mother’s maiden name) before allowing the account password to be changed.

4.    After your session times out, there is no way to get back to the home page without retyping the URL.

5.    Ten days after establishing a new CD, we tried to test the withdrawal function. Unfortunately, the bank delivered a vague error message: “You do not have permission to modify this account. Please contact the specialist for more information.” What do they mean I don’t have permission? Who is this specialist? How do I reach them? Most users faced with this message would frantically call customer service to see if their money had been lost.

Grade

D

When trying to withdraw funds, we received a vague error message (top of the middle frame): “You do not have permission to modify this account. Please contact the specialist for more information.” This is not a very customer friendly approach.

Also notice how poorly the account inquiry area is designed, requiring both horizontal and vertical scrolling to see the account information.

Another glitch: after typing in a typical home scenario, the bank’s Equity Calculator told me, “Your estimated DeepGreen credit line” was equal to $300,000. But the bank only lends up to $250,000.

 Summary: Despite a buggy Web site and a decidedly poor post-purchase customer experience, overall we are deeply impressed with the bank’s strategy and product design on the lending side. We look forward to watching them blaze trails in the non-conforming first mortgage market as well. The bank has some work to do, but what startup doesn’t? The true test comes when we check back in a few months and see whether they’ve improved and expanded the site.                        

Overall Grade

B

 

Reviewed by Jim Bruene, 8/28/00

e-profile main online banking screen; note preapproved Visa message in upper right-hand corner.

Sanchez Files to Spinoff e-Profile

 

Capitalizing on the popularity of its e-Profile  www.e-profile.com  Web banking platform division, Sanchez Computer Associates  www.sanchez.com  has filed an
S-1 to spin-off the unit in an IPO. According to the document, as of July 10, 2000, the unit had 11 signed e-Profile clients not including three clients that use a data processing system from a previous acquisition. Four clients are currently in production on the e-Profile system with 579,000 end users (source: American Banker, 7/31/00). Seven clients are listed in the prospectus:

• 1stwebbankdirect, a division of Sovereign Bank (Wyomissing, PA; $36 billion)
• American Express Membership Banking
• DeepGreen Financial, a wholly owned subsidiary of Third Federal Savings and Loan Association
• Lehman Brothers Bank, a subsidiary of Lehman Brothers Holdings Inc., a global investment bank.
• Morgan Stanley
• Dean Witter
• WingspanBank.com, a division of Bank One’s (Columbus, OH; $273 billion) First USA unit
• X.com