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.
Market Need
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.
Objective
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.
Company Structure
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.
Strategic Plan Summary
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
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:
Strategic Plan Detail
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.
We plan to turn our business into cash well in advance of being crushed. Three
to five years into the business plan, we will turn to an investment banker for
guidance. An initial public offering would be contemplated, but more likely the
company would be sold to a major financial institution, perhaps one of the
initial blue-chip investors.
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Our sister publication, Online Banking Report, released its latest report, 2007 Online Banking Planning Guide. The 60-page report is packed with more than 1,000 ideas, tactics, and strategies for use by banks, credit unions, mortgage companies, credit card issuers, brokerages and insurance companies.
