One

Biller Direct Bill Payment Model Pulls Ahead…Way Ahead

As we’ve long predicted, consumers are logging directly into biller sites, viewing bills, and paying them in large numbers. At year-end 2001, Gartner Group estimated that 32 million U.S. users were logging into their statements online, up from 20 million a year earlier. Of the total, 83% or 26.7 million were viewing credit card statements.¹ Next month we’ll take a look at what’s happening in the online payments space, and how banks can improve the user experience.

If you’ve ever tried to explain the benefits of bill payment to your customers, spouse, or neighbor, you must check out Verizon’s Flash demo. It may have cost a fortune, but it’s worth it. Bill payment has never seemed so intriguing. Verizon effectively communicates the benefits via animation, voiceover, and a musical score; an HTML version is available for those with dial-up connections.

 www.verizon.com/pages/tour/?loc=HP

¹Source: Gartner Group, Research Note:
 SPA-14-8984, 12/3/01

 

Two

Net-Banking Usage Soars, Again

For the seventh year in a row, Net banking usage grew by more than 40% year-over-year. That’s tough to continue to do as the overall market gets larger. This year, we expect growth of 5 to 6 million households about the same number as this year, but the growth rate will slow to +25% to 35%  

Annual Growth Rate of Online Banking and/or Bill Payment Households¹

¹Percent change in households using any online banking or bill payment function

 

Three

Major Banks Launch Account Aggregation

          

We believe in account aggregation for the long haul and even named Citibank’s myciti.com , a site for the most part outsourced to Yodlee, our number one innovation of 2000  and number five of all time. But given the sparse customer demand for the service, it was surprising how many large banks made it a priority in 2001. By year-end, 57 companies were live with account aggregation through industry leader Yodlee, with another 40 to 50 waiting in the wings with signed contracts. Registered users across all 57 live sites numbered just over 2 million according to the company. Yodlee says that about 1 million, half of all registered users, are active. A handful of banks and credit unions also offer aggregation through UMonitor, Teknowledge, and others.

Four

PayPal Dominates Email Payments

Against all odds, PayPal has emerged the champ of alternative online payments with more than 11 million registered users in 37 countries, nearly breakeven on a cash flow basis in Q3 2001, and an IPO in registration that just might make it out in early 2002  Ignoring BillPoint’s volume at parent eBay’s site, PayPal enjoys a 90% to 95% market share in the email payments business (OBR estimate).

PayPalSucks.com, aka NoPayPal.com is one of several active Web sites dedicated to trashing PayPal.

But the Net pioneer has also been challenged by fraud losses, peeved customers hurt by the company’s sometimes heavy-handed fraud-fighting policies (see PayPalSucks.com, left, and PayPalWarning.com), and competition from Citibank (C2it, AOL QuickCash) that recently eliminated most fees in an attempt to gain share. PayPal’s focused drive to profitability has resulted in near-monthly policy tightening and fee increases. PayPal prices per transaction are now on par with MasterCard and Visa merchant services. It will be interesting to see if the company can hold on to its customer base built on free and below-cost transaction services. So far, customers seem to be sticking with the pioneer. 

Reference: CommerceNet recently published (Nov. 9, 2001) an insightful analysis of PayPal’s success written by Russ Jones of the NuVantage Group. The 18-page PDF file can be downloaded free-of-charge at   http://www.commerce.net/research/ebusiness-strategies/2k1/2k1_14_r.html

 

Five

It Was the Best of Times, the Worst of Times
for Credit Card Pioneer NextCard

(A)  NextCard Was the First Pure-Play to Land One Million Customers: As of Sept. 30, 2001, NextCard reported 1.2 million cardholders with just over $2 billion in outstandings. A year earlier the company had 600,000 cardholders with $1.1 billion outstanding. Despite being torpedoed by the economy, fraudsters, and Federal regulators ultimately torpedoed the company, NextCard’s achievements during its 3-year run at the fore-front of online lending are substantial. The credit card pioneer has two listings in our Top 20 Innovations of All-Time as well as two items in our Top 10 Innovations & Milestones of 2000. Earlier in the year, before the bad news of Oct. 31 (see below), the company won kudos from many analysts as it hit the 1-million-customer mark and appeared to be headed towards breakeven by year-end.

(B)  Credit Problems and Fraud Bring Down NextCard: On the last day of October 2001, NextCard, one of the few high-profile consumer dot-coms left standing, was brought to its knees when severe restrictions were imposed by the OCC and FDIC. Regulators made several rulings that dramatically recharacterized the lender’s balance sheet, thereby causing it to be classified as significantly undercapitalized under federal banking regulations due to its risk-based capital ratio dropping below 6%.  As of Sep. 30, 2001, the company’s risk-based capital ratio stood at 5.38% compared to 17.35% on June 30. But because NextCard had been required to maintain 12% risk-based capital, the company is in need of $140 million in additional capital, an amount the company does not think it can raise as an independent entity.¹ While the company still has hopes to salvage value in a sale, investors didn’t have much faith, immediately sending the company’s market cap down to about $25 million, compared to more than $500 million just a few months earlier (Aug 21, 2001).  Despite all the bad news, we believe there is significant brand equity and expect the NextCard brand to live on .

¹For a more thorough explanation of the problems, see NextCard’s earnings release dated Oct. 31, 2001, http://nxcd.client.shareholder.com/news/20011031-63420.cfm

Six

LendingTree’s Growing Popularity
Legitimizes the Online Loan Marketplace

Buoyed by a surge in demand for mortgage refis and lower-rate home equity loans, LendingTree continued its impressive growth taking an estimated 2.7 million applications in 2001, closing more than 275,000 loans, for a total volume of nearly $11 billion.² The company estimates it grabbed 10% to 15% of all online loans in the United States during 2001. But more importantly these days, the company says its on track towards profitability within the next one or two quarters

²OBR estimates based on actual results during the first three quarters annualized

 

Seven

Online Share of Mortgage Refinances Surpasses Five Percent

With online mortgage sites making dramatic improvements in features, functionality, and ease of use, early adopter financial consumers are finding the Net a convenient way to refinance their mortgages. In late summer (2001), IDC estimated that more than 6% of all mortgage refinances were originated online in 2000 and more than 9% will be in 2001. The top online lenders boast some of the best financial service sites across all categories. In Q2 we gave five lenders Best of the Web designations for their innovative approaches to online lending: IndyMac, E*Trade Mortgage, E-Loan, MortgageBot, and LendingTree .

Leveraging the highly rated Quicken brand, Quicken Loans has grown to be the 27th largest direct-to-consumer lender, originating $3.1 billion in loans during fiscal 2001 (ended July 31, 2001).

 

Eight

ING Direct Puts Some Pizzazz into Savings Accounts

In a long overdue innovation, a major Internet bank created buyer interest in savings accounts. ING Direct earned our Best of the Web designation in Q3 with their heavily marketed savings and loan products featuring a distinctive orange ball in television ads, print, outdoor, and collateral material. The company also makes it exceedingly easy to set up and fund multiple savings accounts, making it a good choice for families running separate accounts for children or other budgeting reasons.¹

¹Full disclosure: OBR Editor Jim Bruene has done several consulting projects for ING Direct.

 

Nine

Simple Credit Card Balance Transfers Debut at Several Lenders

For years we wondered why the major credit card companies, which spend hundreds of millions marketing balance transfers, hadn’t added this relatively simple functionality to their Web sites for existing cardholders. In 2001, the feature was finally introduced at several major card companies including Bank of America, First USA, and NextCard. NextCard’s was a step ahead of the competition with a system that tapped real-time credit bureau data so users could simply point and click to make a transfer. Its system earned a Best of the Web award in February and was named to our Top 20 innovations of all time. Alas, the system is no longer operative due to the company’s drastically reduced lending capacity under the terms of its agreement with regulators.

Ten

Major Net-oriented Bank Brands Wind Down

Several of the higher-profile, and higher-cost, Net-only efforts were sold, disbanded, dramatically scaled back, refocused off-line, or merged back into their parents including (parent in parenthesis): CompuBank (sold to NetBank), Wingspan Bank (Bank One), Security First Network Bank (Centura/Royal Bank), USA Bancshares, eBank.com, BankZip (Patriot Bank and 3 others), LighthouseBank (Brookline Bancorp), First WebBankDirect (Sovereign), and First-e in Europe.

 

Table 1

Online Banking Report’s “Best of the Web 2001” Winners

 

Company	What
NextCard	Real-time balance transfers for existing cardholders
CheckSpace (renamed Fidesic)	Bank-branded, turnkey email payment and invoicing system
LendingTree	Loan marketplace
IndyMac	Mortgage lending
E*Trade Mortgage	Mortgage lending
E-Loan	Mortgage lending
MortgageBot	Mortgage lending
ING Direct	Attractive and easy-to-use savings products