Today, Buxfer added funds-transfer capabilities to its online personal finance app (see announcement here, previous coverage here). The service is free through the end of August, but could eventually carry 1% to 2% fees to cover transaction costs.

Buxfer co-founder Shashank Pandit has been dangling this bit of news in front of me for the past two weeks. But he would only tell me that they were partnering with a big player to enable funds transfer (note to Amazon attorneys, he did NOT violate the NDA). I figured it would be Chase, Wells Fargo, or perhaps PayPal. Even with the rumors this week of Amazon's new payment services, I hadn't put 2 and 2 together.  

This morning it all makes sense. Amazon.com announced a potentially disruptive payment service, aptly called Flexible Payment System (FPS). And it's announced, in what else, a lengthy blog post at the Amazon Web Services blog (see note 1). The FPS website is here. The company even built an FPS Sandbox where users (see screenshot below), both individuals and companies, can play with the service without moving actual money around.

Buxfer is using Amazon Payments to allow users to settle their debts electronically, a vital piece of a social personal finance app. Online personal finance without payment capabilities is like the Internet without email. Even if the company ends up charging a small fee, the convenience would be worth it for many users. 

Implications
The Amazon service potentially makes it easier for smaller Web-based companies to take on traditional financial institutions. It won't alter the payments landscape overnight, like PayPal did in 2000, but it could usher in a rash of new entrants competing with banks and credit unions for the high-end personal finance customer (note 2). But the big stumbling block: consumer trust still favors incumbent financial institutions. In any event, the game just became more interesting. For more information, see Online Banking Report: Social Personal Finance.  

Buxfer homepage noting Amazon Payments

My default account page at Amazon's payments sandbox (I have not made any transactions, so the ledger is empty)

Note:

1. The post is signed by Jeff, which is Amazon evangelist Jeff Barr, not the slightly more famous other Jeff (Bezos). 

2. Another company using Amazon Payments is FreshBooks, a small-business billing service.

Amazon.com was the first Internet retailer to perfect the ultimate ease-of-buying device, “1-Click” ordering which allows registered users with a valid credit card on file to literally order a book by clicking a single button (above). We expect lenders to do the same, allowing registered online banking users with a credit profile on file to arrange for additional credit by clicking a single button, i.e., “one-click lending.”

Here is a win-win situation. Loans are the most popular and most profitable financial service sold online. What do you get when you mix profitable with popular? Rapid innovation, aggressive marketing, as well as the inevitable decline in margins. So expect to see aggressive moves from traditional banks, loan/mortgage brokers, non-bank Web companies, and Silicon Valley start-ups.

What can you do to maintain or even grow your loan business in light of the coming online onslaught? Think about the buying decision. A prospective credit customer is thinking about three things:

1. Will I be approved?

2. Is it fast and convenient to apply?

3. Is the price low, or at least competitive?

And if you excel at numbers one and two, there is less pressure on number three. That’s been the secret of credit card direct marketing for the past 40 years. How can you recreate a similar experience online? Follow the leader and use the Amazon.com approach, create a One-Click preapproved loan.

There are several ways one-click lending could be implemented. In the application model (below), registered users would initiate one-click loan requests. In the preapproved model (right), registered users would receive word from you whenever they had been preapproved for a loan.

For either program, the key is getting users preregistered. Consider integrating the one-click loan registration process into your online banking set-up, so all online banking users are automatically eligible.

Version 1: Application Model

1. Users preregister pertinent info such as name, address, employer, social security number, annual income, and so on.

2. Users select loan preferences and are served pre-disclosures for applicable loan programs.

3. The bank prequalifies users for a maximum amount of unsecured and/or secured credit that the user can tap using the one-click function. When the total amount is used, users could reapply for a larger amount. Time limits would be established for refreshing the information on file to maintain underwriting standards.

4. When and if the user decides to accept the loan offer, a simple click on the one-click loan button elicits a confirmation screen verifying the loan amount and terms. Final disclosures are delivered.

5. The company then processes the loan application pulling credit bureau records, verifying employment, appraising property, etc. Assuming everything checks out, the user is notified by email that the money has been transferred into their checking account.

Version 2a: Preapproved Model: All Electronic (may require regulatory approval)

Registered online users are run through a credit scoring model and preapproved for new or expanded credit. Prospects are notified electronically through Web-based messages and email. For security, the email contains a hyperlink to a password-protected area on the lender’s Web with complete details as well as the “I accept button.”

Version 2b: Preapproved Model: Direct (Snail) Mail Integrated with Web

Recipients of preapproved credit offers are offered the option of accepting the offer on your Web site where funds can be made available immediately with a “one-click” process (subject to verification of the identity of the respondent).

In the three years since Wells Fargo first posted account data on the Web (May 1995), a number of exciting innovations have emerged, but no one has redefined the banking market in the same manner as Amazon.com, Yahoo, CNet, Expedia, Auto-By-Tel, and Schwab have changed the competitive landscape in their markets. The leading contenders in the banking/lending arena are GetSmart, E-Loan, and NextCard.

The first two all-Internet banks, SFNB www.sfnb.com and NetBank (aka. Atlanta Internet Bank) www.netbank.com , despite thousands if not millions of dollars worth of publicity, have fewer customers than most moderately sized metro branches. And the big banks, such as Citicorp and NationsBank , locked into dial-up programs, have only recently made their moves to the Internet.

Lack of innovation has allowed smaller banks and credit unions to thrive and further expand their shares of the lucrative baby-boomer market. But things are about to change. Eyeing Amazon.com’s $6 billion market capitalization (7/7/98), entrepreneurs all over the world, but especially in Silicon Valley, are creating business plans to cash in on the Internet hysteria before the window closes.

Amazon.com has a lot going for it: book reviews, detailed recommendations, email alerts, quick searching, an easy purchasing process, and so on. But the reason we keep going back is that they minimize the time spent hunting/purchasing a book, leaving more time to actually read it.

The financial services industry is ripe for similar autosimplification services, simplifying a task with automation (see definition above). Eventually, why would you ever call your bank with routine questions such as when this or that deposit was posted

Amazon.com’s new look unveiled in mid-June with the launch of the Music Store. Note the personalization with links to recommended books for me based on my previous ordering history.

when the bank can easily zip you an email confirmation when it arrives (online brokerages already do this)? For bill payment, why write paper checks, why even think about routine bills when software can easily be programmed to automatically pay the bills with little interaction from the user.

We realize the business case for these “nice-to-have” features is weak in a Y2K-stretched budget. But your VC-funded (future) competitors aren’t waiting until Jan. 2, 2000, to begin competing. They are working fast and furious to sneak through the “Y2K window,” hoping to snap up your best customers before you know what hit you. Here’s our vision of the type of company you’ll be competing with next year.

Create a major Internet financial services hub with
1 million visitors per month within 3 years and positive cash flows. Position the company for sale to the public or a major financial institution within 5 years.

AmazonBank.com could work under a variety of ownership scenarios:

•  An extension of a traditional bank or thrift, which later could be spun off as an independent entity like Security First Network Bank or Atlanta Internet Bank, or operated as an independent unit.
•  The banking arm of a non-bank financial services company such as a brokerage or insurance company, e.g. The Principal National Bank www.principal.com/bank .
•  A mortgage/loan brokerage such as E-Loan.
•  An existing Web-based company such as Yahoo.
•  An extension of a software company such as Quicken.com.
•  A new venture-funded start-up such as NextCard.
•  A joint venture between traditional players and Web-based entrepreneurs such as some of the ventures American Express has recently backed.

For this exercise, we will choose to start from scratch as an independent and Web-based information company and mortgage/loan broker. Our goal is to transform into a fully chartered banking entity at some point, but that depends on how the market responds to our initial efforts. In the real world, NextCard and several others appear to be following this strategy which offers three advantages.

Advantages:

•  Speed to market: We don’t have to play endless games of telephone tag with regulatory agencies seeking approval every step of the way.
•  Credibility: Partnering with established firms gives us immediate credibility and a track record. NextCard’s Web even displays the FDIC logo of its card-issuing partner Heritage Bank.
•  Flexibility: We can offer “best of breed” products simply by choosing our partners wisely. And with 30,000 financial services companies operating in the U.S., it shouldn’t be a problem finding partners.

Disadvantages:

•  Margins: We’re splitting the revenue stream with partners.
•  Control: Our success will be highly correlated with the performance of our bill pay, transaction account, and credit line vendors.
•  Customer ownership: We’re sharing the knowledge of customer behavior with partners who may later use it to compete with us.

As an independent start-up, we have simple goals revolving around survival, growth, and cashing out.

1. Build Traffic: We need visitors, millions of them, to break through the noise, increase credibility and create paper value like Yahoo, Excite and others.

2. Create a Modest Short-Term Revenue Stream from Product Sales: To attract attention and investors, we want to quickly show positive cash flows from product sales (this does not mean the entire company has to be profitable).

3. Attract Blue-chip Investors: To establish trust and credibility we want equity involvement from one or two name players, preferably financial companies such as American Express.

4. Cash Out: Once we build an entity of sufficient size to start thinking IPO, we want to sell-out to a major financial institution who can leverage our user base and Web platform with its infrastructure and customer base.

Here is the bill payment front door
of our hypothetical Web bank.

The product model for AmazonBank.com is Quicken, but more interactive, easier to use, and built totally on the Web. Similar to traditional banks, we’ll build the customer relationship around a transaction account. But we won’t try to make customers switch to our checking account; in fact, they will be encouraged to maintain their local checking account so someone else can service all the labor-intensive tasks, such as cashing checks, writing money orders, and operating safe deposit boxes. More importantly, users will be able to use local ATMs free of charge and we won’t have to pick up the tab.

We’ll make our money on the loan side by serving the user’s every lending need, from credit cards to mortgages to business loans. We’ll offer checking and credit card accounts, but they won’t be required.

Net Earnings is building a small business financial hub www.smallbusinesscenter.com around four categories: credit checks, loans, insurance, and payrol/accounting services.

How to Build a Virtual Checking Account

Your goal is to build a virtual account that interacts with the user’s existing “local checking” account via the Internet (user does not close the account).

1. Develop a private-branded bill payment front-end with a virtual check register and virtual checks.

2. Develop a Web-based form that allows users to ACH funds to and from their Virtual Checking 

3. Integrate bill payment, bill presentment, messaging, and reminders.

Phase One: Product Line at Launch

The first phase of our hypothetical start-up will last
18 to 24 months. During that time we’ll focus on five banking services, five autosimplification services, and two localization techniques (see table at right). We hope this suite of services is so innovative that users will come to our site just to take a look. But we won’t rely on sexy product offerings alone; we’re also use guerrilla marketing techniques described later.

*All transactions will run on private or co-branded servers owned and operated by our partners.

Phase Two: Expanding Products & Features

Once we get phase I operating smoothly, we’ll expand our feature set with a new product or service every three months or so. This will create excitement with existing customers and attract attention among prospects. We’ll be very careful to integrate the new with the old so that our Web site retains a tight focus on financial simplification. Here is an example of the new product introduction schedule:

Step 1: Build Traffic

Since this is a hypothetical exercise, we may as well aim big. Our goal is 1 million or more visitors per month within 3 years. The same approach could also work on a smaller, local scale.

To get to the one million mark, we’ll have to spend a lot or be very clever (probably both). GetSmart, with 750,000 visitors per month, has earmarked $13 million in online marketing for 1998 and $50 million over the next three years to drive traffic to its loan referral site.

We will attempt a less expensive approach, hoping the novelty and value of our services drive traffic through word of mouth, moderate marketing expenditures, and persistent PR.

Our goal will be to engage users within 60 seconds of arriving at our site with something useful and free. The front page will have links to four interactive areas where users can do something right away.

1. Billing Center/Virtual Checking

2. Loan Center

3. Financial Message Center

4. Financial Datebook

Primary Draw

1. Virtual Checking with Bill Pay: When the two big players, MSFDC and Integrion/Visa/Checkfree get their bill presentment programs off the ground in 1999 and 2000, we expect lots of hype and consumer interest. We’ll tap into that with a unique Web-based approach. Our virtual checking account will allow users to easily pay their bills drawing funds from any bank or brokerage account, or from the credit line attached to virtual checking.

Our Virtual Checking will be free for the first 10 payments each month, then $0.50 per transaction thereafter. Users will be required to maintain an integrated credit line. The credit line will be set up with a 2-minute loan process such as that offered by NextCard or Beneficial Finance.

We will make it desirable and cost effective to take advances from our credit line to cover any bills that can’t immediately be paid from local checking. Advances will automatically be sent via EDI/ACH to the user’s local checking account. The credit line advance function will be integrated with bill payment so users can pay a bill and take a cash advance all in one motion.

Pricing on the credit line will be moderate, with APRs tiered by balance level and averaging 13-14%. We need rates high enough to cover bill pay program expenses, but not so high as to discourage revolving. Bill pay will be linked to messaging services and reminder services as discussed below.

Secondary Draws

2. Financial Datebook/Reminder/Message Service: A Web-based datebook with a twist, integration with bill payment/presentment for a complete service description). We want to be the first widely known bill reminder service. The service will be free and require no banking relationship, just a minimal Web site registration.

The bill reminder service is a Trojan Horse. If we get a critical mass of users organizing their bill payments on our Web, we can easily integrate electronic bill presentment when it becomes widely available in late 1999 and 2000.

Although our primary positioning will be a provider of financial reminders, the service can be used to remind yourself of anything: birthdays, project deadlines, to change the furnace filter, and so on.

We won’t clutter the program with banner advertising, but we will consider integrating a few key merchants into the reminder service. For example, when establishing a reminder for your spouse’s birthday, you could also select a one-time or recurring gift such as flowers from 1-800-FLOWERS. Merchants would pay slotting fees and/or commissions to be included in our reminder service. (Alternatively, you could give your merchant customers free access as part of their overall banking relationship.)

Money will also be one of the primary gift choices, since it fits well with our positioning. Users will be able to send a gift check with accompanying email or snail mail message, or simply ACH the funds directly into the recipient’s checking account (they would need to have the recipient’s account number). Following is an example of the functionality in this area. We’ll provide far more detail in our third annual Report on Bill Payment/Presentment scheduled for November and December.

* Default for customers is credit line; can also enter any valid credit card to charge the gift. Users will receive confirmation from UPS/FedEx/Flowers when gift ships and is delivered

** Users will be reminded of their standing gift order two weeks in advance in case they want to change or cancel the scheduled gift.

3. Bank Account Meter: Another unique aspect of our Web will be a bank account meter operating in the lefthand corner of the screen providing a graphical representation of the user’s bank balance. It’s meant to be populated by the local checking account provider, but it could also be used with our proprietary checking account. Following is a description of how it works.

Bank Balance Meter: How it Works

•  User establishes high and low marks for their meter, e.g., $0 and $2,000.
•  When a registered user arrives at the site, cookies automatically retrieve actual bank balance(s) from participating financial institution(s). If the user’s bank is not participating, an advertisement is displayed from one that does.
•  The balance is represented graphically as an appropriate level on the meter. To reduce privacy and security concerns, the actual dollar value is not shown until an optional password is entered. Therefore, only the user who set the original parameters knows, for instance, that a full meter corresponds to a $2,000 balance.
•  Users click on the meter to go directly to their bank for account detail (password protected).
•  Users can also choose to receive email notices at any meter level.

4. LoanFinder Services: GetSmart, with 750,000 visitors per month, has clearly demonstrated the demand for loan referral services. Our LoanFinder will be designed first and foremost to draw traffic with free calculators and email-based alert services, primarily focused on the mortgage refi market. It will also provide referrals to multiple lenders in the same manner as GetSmart. We’ll take a complete application to qualify the user for our integrated credit line, then pass the application to participating lenders as requested by the user.

At right is a mock-up of the basic functionality of LoanFinder. We’ll build out this area in excruciating detail this fall in our third annual report on online lending.

5. (Optional) Financial Search Function:
If we can find the right partner, we’d like to incorporate a search function into our hub at launch. At Online Banking Report, we’ve maintained a list of True Internet Banks and Credit Unions (e.g., those that provide Web-based checking account access) since December 1995, when the list totaled just seven financial institutions. With $0 cumulative marketing dollars, this area receives more than 50,000 hits per month — an indicator of the demand for personal finance info, especially if it’s geared towards Web users.

According to Cyberdialogue, 75% of Web users have searched for investment or product information .We are heavy users of search engines and have found them relatively ineffective in pinpointing credible personal finance info. That is changing as the search engines add personal finance and loan centers. For example, Excite’s co-branded area from Intuit and Yahoo’s Loan Center with rates from Bank Rate Monitor and loans such as E-Loan.

We think there is a major opportunity to draw traffic, and less importantly, advertising revenue (but no distracting banners), by setting up a search site that ONLY deals in personal finance info. FinanceWise in the UK is attempting to make this work at www.financewise.com

Our financial search engine has three components:

1. Guided links to the best info online.

2. Meta-search tool that allows users to query multiple search engines for financial info, e.g., Metacrawler www.metacrawler.com To make it easier to search, we would provide lists of pertinent terms that users could simply click on to initiate a search.

* If yes to any of the questions, then an application is presented.

** Different questions would be asked for homeowners versus non-
homeowners.

3. Proprietary search of “certified” personal finance sites that we spidered and stored on our servers. We would look to partner with someone like Northern Lights or NewsPage to provide pay-per-view content in addition to the free sites.

Step 2: Create a Modest Short-Term Revenue Stream

We must demonstrate to potential investors that we’re not just one more start-up chasing elusive ad revenue. We‘ll earn our living the old-fashioned way, with product, service, and information sales (see primary revenues in table below). Anything we pick up from marketing partnerships and slotting fees is gravy (see secondary revenues in the table below).

Components of Short-Term Revenue

Primary:

•  Outstanding balances on the credit lines attached to Virtual Checking.*
•  Leads generated for banks presenting balances on our “account meter.”**
•  Leads generated for LoanFinder lenders.

Secondary:

•  Slotting fees and revenue sharing from merchants involved in our recurring gifts service.
•  Slotting fees and revenue sharing from companies listed in our financial search service.
•  Sales of aggregated user data, behavior, and opinions gathered from our user base.

* Since we’re not a financial institution, the credit lines will be operated by one or more partner financial institutions. We’ll look for partners that will pay us a portion of net interest margin (interest earned less cost of funds, less loan losses). Since we crave current revenue, we’ll take a lower cut now, 2 to 3% of outstanding balances, so our partner can beef up loan loss reserves on these accounts. Eventually, as we work with partners to bring losses down below those experienced with credit cards, we’ll try to boost our take to 4 to5%. These percentages assume the partner financial institution(s) keeps all penalty fees to cover operating costs. There is no annual fee. We’ll handle all customer service. Loan payments and statements will be private-branded and serviced through our Web site.

**Why would a bank allow users to view a graphical representation of their balance at our site? Because if they don’t we’ll direct users to banks that will. Initially, we’ll provide the link free of charge to participating banks. Our main revenue will come from directing users of non-participating banks to banks supporting the feature with a message such as, “Your bank balance could be shown here; click to find out how.”

Step 3: Attract Blue-Chip Investors

All this will take money, lots of it. We hope to find the equity from name financial institutions rather than venture capital funds. Here’s why:

•  Better terms: Financial institutions may be willing to invest on more favorable terms because the investments will be strategic, offering valuable inside information on how to run a Web-based financial services business. Innovators such as American Express, Bank of Montreal, and Wells Fargo, would be high on our list of potential investors.
•  Credibility: We would leverage the cache of these name-brand investors to build credibility with the press, users, and potential marketing partners.
•  Guidance: An active board with representatives of major financial institutions could dramatically improve the execution of our business plan.

E*Trade plans to remake itself as a “financial portal” dubbed Destination E*Trade. The teaser in the upper-right corner talks about the “hot site” coming soon.

Step 4: Cash Out:

Long-term (in 5 to 10 years), we expect many Web-based start-ups to be crushed and/or absorbed by major financial institutions and/or non-bank financial services companies including Web-based entities such as Yahoo and Quicken.com.

If you read the technology press at all, you are probably growing tired of all the buzz around “portals.” Portals are the on-ramps to the Internet, currently the key spots for advertising revenue and investor enthusiasm. The busiest portals today are Yahoo, whose name is practically synonymous with the Internet, and the major browser default pages at Netscape, AOL, and Microsoft, which is creating a new branded portal called Start www.start.com . Users can tweak their browsers to start on any Web page, but most simply maintain the default setting. Owning a default site is like being able to license the blinking 12:00 display on a VCR.

Most analysts expect only a handful of portals to survive and the early leaders, Yahoo, Excite (partially owned by Intuit), Infoseek, and Netscape, have seen dramatic growth in their stock prices this summer. Financial institutions, even one-stop shops such as Citigroup, have little chance in competing with Microsoft in the portal realm. But financial institutions of all sizes can build personal finance hubs, becoming the central point for financial information, planning, and transactions.

Quicken.com: The #1 personal finance hub.

We expect most Web users will gravitate to single financial hub that will aggregate data across multiple financial institutions; serve as the bill payment/presentment center; and consolidate various types of debt obligations. Intuit’s Quicken.com (screenshot above) has the early lead in the race to become the dominant personal finance hub.

Source: adapted from a ramework reported in Ziff-Davis’s AnchorDesk, 7/1/98, www.zdnet.com/anchordesk/story/story_2263.html

The first commercially successful electronic financial hubs were Managing Your Money, Quicken and Microsoft Money. But the shrink-wrapped hub is now the “dinosaur,” a remnant of the world before the big bang of the Internet. An ironic turn of events since 1994’s “dinosaur-Gates” controversy about bypassing banks via Microsoft Money. Should You Build a Financial Hub?

Not everyone should try to be a hub. As long as your sales and retention goals can be satisfied through traditional channels, your Web site can serve quite well as an extension of your call center delivering data, handling routine transactions, and answering customer queries.

But if you are looking to pick-up incremental sales and/or new households from your Web presence, we think you should consider becoming a financial hub. With so many outsourcing and cost-sharing opportunities, it doesn’t have to be a costly undertaking. Even if you don’t have the resources to create a financial hub on your own, you can team with others to make it work. For example, all the credit unions in Portland could contribute $1 per member to build a Portland-based financial hub used as the start-point for financial activities at each credit union. The hub could be personalized in such a way to appear proprietary to each participating credit union.

The goal of this double issue is to help you think through the design of a cost-effective and compelling personal finance hub. The information will be structured a bit differently than normal. We were inspired by a recent Wall Street Journal article describing an autonomous team of engineers and thinkers at Intuit dubbed “Quicken killers.” It’s their job to develop features and concepts that if successfully implemented by the competition, would put Quicken out of business. In that spirit we offer our vision of a “bank killer,” an unregulated Web-based company that cherry-picks the most profitable banking customers and passes them on to the highest bidder. We’ve named this hypothetical institution, www.AmazonBank.com , with the goal that it would do for financial services what Amazon.com did for books.

In this report we’ll lay out the business plan and high-level product design. Over the next six months we’ll drill down into detailed product designs for the various building blocks of a financial hub (table below).