Coming off an 8 out of 10 performance last year, we’ve dusted off the crystal ball and looked into the New Year. Here are our 10 predictions. See if you agree.

One

Online Marketing & Splashy Promotions Make a Comeback

Online marketing got a bad rap in the late 1990s when overfunded Internet companies vastly overspent on ineffective marketing both on and off-line. With 70% of the country now dialed into the Net, banks will find that online marketing pays off, both as a component of multimedia campaigns and as targeted online-only, direct marketing programs. Reference: BofA’s fall campaign.

Two

Two-tiered Bill Payment Fees Emerge

In mid-1999 Yahoo became the first major player to price bill payment services more creatively than the $5-or-FREE model used by most banks. Recently several financial institutions have followed suit including Patelco CU  and Chase, which offers three choices (screenshot below).

Chase offers three bill pay choices: the free plan pays only your Chase card bill; the $4.95/mo plan is the typical pay-anyone program; and the $9.95 package is scan-and-pay through Metavante.

Three

Online Home Equity Lending
Takes Center Stage

As the refi boom abates with the stabilization and eventual increase in rates, consumers will look to home equity (HEQ) loans and lines of credit to finance home improvements and other major spending. Banks will improve the visibility and ease-of-use of their in-house origination systems. They will also look elsewhere for prospects, partnering with local brick-based companies and online specialists such as LendingTree to increase HEQ share.

DeepGreen Bank is currently the only major home equity-focused online brand.

We expect at least one HEQ-focused Internet lender to launch in 2003, probably funded by a deep-pocketed financial institution. The lender will mimic DeepGreen Bank’s model of low prices and quick service for high-credit, quality borrowers. See also, prediction number nine.

Four

ING Direct Becomes the First U.S.
Internet-only Bank with 1 million Customers

With just a 2+% rate to draw deposits, ING Direct growth will slow, but the company should be able to hit the 1-million-customer mark by the April 15 tax deadline.

Five

The Press Turns Very Positive on
Online Banking and Lending

Even during the hype years, the press has shown a lot of skepticism about online banking. In our experience, and we’ve been interviewed more than 1,000 times, the reporters who actually use online banking have usually been enthusiastic. But the non-users, a majority of the group, were often skeptical.

The high point came in 1999/2000 when positive reports outnumbered negative ones by as much as three to one. Late 2001 and early 2002 was the low with negatives outnumbering positives two to one. During the past six months, it’s been roughly equal. In 2003, we expect positives to outnumber negatives by as much as three to one again.

Six

FedEx Launches Guaranteed Payments

We have no inside knowledge, but we think the time is ripe for FedEx to introduce payment services, thereby leveraging its trustworthy brand and easy-to-use tracking infrastructure. The company needs to diversify its business to offset the eventual decline of overnight delivery as email continues to erode the need to send documents overnight.

Alternative: Airborne instead of FedEx.

Seven

Americans Begin to See Online Payments as MORE Secure than Paper

It’s a small group now, but by the end of the 2003 we expect as many as 25% of Internet users will agree with this statement:

It’s safer to transfer money online than by sending a paper check in the U.S. mail.

Within four or five years, most will agree as it becomes conventional wisdom.

Eight

“Micro Account Aggregation” Offered by Several Credit Card Issuers

The mass market will use account aggregation technology when it becomes less like Quicken (a lot of planning and work) and more like Google (saves time immediately). For example, credit card companies will embed an aggregation application into their menus that will allow customers to see their balances at other cards and instantly transfer the balance if they so desire.

Table 5

Account Aggregation Forecast: 1999 to 2007

millions of active households

Source: Online Banking Report, 12/31/02, +/- 40%

Nine

Several New Net-only Banks Debut

It’s been more than two years since a major Net-only bank has launched: ING Direct and DeepGreen Bank both arrived in mid-2000. We believe this drought will end in 2003 with at least two new Net-oriented banks. At least one will be focused on home equity lending (see also number 3). The new entrants will likely be owned, all or in part, by existing financial services companies. We don’t expect any venture-funded startups this year. See Table 3 below for an annual summary of Net-only bank activity.

Table 6

Number of U.S. Net-only Banks, 5-year Forecast

number of Net-only brands launched by year

Source: Online Banking Report, 12/02

1.   Net-oriented bank brands can be partly or wholly owned by brick-and-mortar financial institutions for a definition.

2.   Transactive Webs: Non-bank financial sites that support at least two of three transactional banking services: bill payment, interbank funds transfer, or statement aggregation; includes Yahoo Finance, GE Financial Network www.gefn.com, and AOL Personal Finance Channel.

3.   Merged, closed, or refocused on offline delivery channels.

4.   Households with at least one loan or deposit account at a Net-oriented bank.

5.   Net-oriented share of total online banking households ; note most net-only users also use online banking at a traditional financial institution.

Ten

Banks Boost Mutual Fund Offerings

Three factors will make mutual funds more attractive to mainstream consumers: (a) the lowest deposit rates in decades, (b) the end of the bear market, (c) potential tax code changes making dividend income tax free. As CDs mature and savings account returns are analyzed, consumers will look for alternatives on- and offline. To keep customer assets in house, financial institutions will pitch mutual fund alternatives. With stock-picking losses still fresh in many minds, we think bank customers will be most attracted to indexed mutual funds. For example:

•  X.com, in the days before it merged with PayPal to focus on email payments, offered a product line of interest checking, money market deposits, and three indexed mutual funds mirroring the S&P 500, bonds, and international equities .
•  A more recent example is ING Direct, which offers six indexed mutual funds that can be mixed and matched into model portfolios to various investor types.