I was flying to New York Saturday morning when I read the news in The Wall Street Journal that NetBank had gone under, the largest bank failure in 14 years (note 1). While the WSJ headline, NetBank Failure Shows Online Limits, implied that online delivery shared some of the blame, NetBank's downfall was primarily from poorly underwritten loans, both prime and sub-prime, and most of those originations came the old-fashioned way, through face-to-face mortgage broker sales.

Over the years I've been acquainted with a number of NetBank employees and have written extensively about their innovations since their launch in 1996, as the second Internet-only brand. Interestingly, the three major U.S. Internet-only brands launched in 1995, 1996 and 1997 are gone: the first Internet-only bank, Security First Network Bank was sold to Centura (owned by RBC) and Compubank was sold to NetBank. 

But no matter what the reason, a failure of one of the key names in U.S. online banking certainly gives the industry a black eye. My hope is that a forward-thinking bank buys the NetBank brand from the government and relaunches it with much fanfare next year. Sure, there's some negative brand equity this year, but the NetBank name is a classic and shouldn't go to waste (note 2).

ING Direct, which now lays claim to the retail deposits (note 1), has taken over the NetBank hompage for now (see screenshot below):

For more information:

• FDIC info on the closure here
• NetBank timeline from the Atlanta Journal Constitution here
• It takes a failure for a bank to make TechCrunch here
• American Banker's good summary of the failure, complete with quotes from federal regulators, here

Notes:

1. The company was taken over by federal regulators, who will sell off the assets and return all deposits up to the $100,000 insurance limit. About $1.5 billion in retail deposits, and 102,000 customer accounts, have been purchased by ING Direct. The estimated $110 million shortfall will be covered by the deposit-insurance reserves funded by premiums levied to all banks. The failure does not have direct cost to taxpayers.

2. We said the same thing about NextCard in 2001, but no one followed our suggestion. Now the most well-known website and brand of the most prolific advertiser in the late 1990s has been reduced to a link farm collecting rent from Google Adsense.

After a string of divestitures and the shuttering of money-losing operations, NetBank is returning to its core retail banking roots (see coverage here and here).

Whether the company remains an independent entity is up to its management and shareholders, but at least one analyst is speculating about a 2007 sale.

While not in a position to judge the value of the entire enterprise, I do know the brand itself has considerable value. The URL alone is worth millions. It could make a nice entry point into the U.S. market for an international bank looking to capitalize on the direct banking model, e.g., ING Direct.

The bank was launched in 1996 as Atlanta Internet Bank and went public in mid-1997. It was renamed NetBank in 1998 after securing the rights to the domain name for a reported $150,000.

NetBank was the second Internet-only U.S. financial institution, the first to go public, and the first to become relatively well known.

Maybe I'm biased as a fan, but I think Netbank's Concert Connection, sponsoring a free Wallflowers concert, is a great stunt. Especially if the bank can leverage it to gain exposure in more than just the Austin market.

Here's the offer (click on inset below to see landing page): Customer's who plunk down $500 into a new checking account, or $1500 into a CD or Money Market, get two free tickets to a private Wallflowers show in Austin, TX on Sept. 17. The money must be kept on deposit for at least 90 days or the bank will deduct $85 to cover the tickets.

The bank's press release says it will be promoting the offer with a mobile vehicle along with billboards, print and radio ads. The concert venue holds 5,000, so Netbank can use the offer to attract a maximum of 2500 new accounts.

Analysis
This is an expensive promotion for a single market, with the concert alone cost an estimated $100,000 or more, not to mention the cost of promoting it in the Austin market. It might make more sense to sponsor an entire Wallflowers tour, providing tickets to new Netbank customers around the country. That would be even more costly, but would guarantee broad exposure to the offer.

Yet, we still like the Austin promotion for several reasons:
1. Free publicity: There's nothing like a free event to garner media exposure.
2. Lasting brand impression: Unlike other media campaigns, this event should provide a more lasting brand impression, especially with the 25-35 crowd attracted to this music.   
3. Dylan connection: The Wallflowers, led by lead singer Jakob Dylan, son of rock legend Bob Dylan, is an especially good choice for this promotion. Along with its younger fan base, the band will also attract attention from an older crowd that might drop $1500 into a CD to see if Jakob can carry on dad's legacy.
4. Concert tie-ins: Even though the event is primarily oriented to Austin-area consumers, it will pull in business from Wallflowers fans all over Texas. But to reach beyond Texas, Netbank should consider negotiating rights to offer the concert as a free download for all its customers. Other tie-ins with merchandise, fan clubs, and so on are also possible.

The downsides:
1. Demographic mis-match: Alt-rock fans aren't usually old enough or wealthy enough to be parking big cash piles in a bank. Many will deposit the bare minimum and pull it out after 90 days or when their CD matures.
2. High acquisition cost: As you can see by the mini-business case below, the acquisition costs are hefty. Assuming Netbank ends up with 500 new accounts that remain open after the 90-day minimum, the cost per new account is $2000 or more.
3. Extra customer service load: The first law of marketing applies here: for every customer delighted with your offer, another is mad because they missed out on it for some reason. We can already see brewing discontent on the Wallflowers bulletin board from rabid fans that don't have the extra cash to plunk down into Netbank to earn the tickets (we have one word of advice for them: eBay). Also, there can always be headaches when third parties are involved. As we were researching this article, we noticed that the ticket fulfillment site, Tickets.com, was not functioning properly. We were able to download two Wallflower tickets without fulfilling the offer requirements. We notified Netbank right away who will likely have it fixed within hours. Now if we could only find a business reason to be in Austin on Sept. 17....

Back-of-the-envelope business case:
Cost = $150,000
$100,000 for the concert + $50,0000 out of pocket promotional expenses (assumes radio exposure is bartered for with free tickets)

Accounts generated initially: 1500 x $2000 average deposit = $3 million in deposits worth $30,000 to $60,000 per year assuming a 1% to 2% spread (will depend on deposit mix)

Long-term accounts generated: 750 assuming a 50% fallout after the first year

Acquisition cost: $150,000/750 = $2000 per long-term account

--JB

JP Morgan Chase and Citibank led all banking and lending companies in online ad spending according to the most recent American Banker survey of financial services spending (May 2005).

Chase’s $50 million in online advertising was 21% of its entire advertising expense, the highest among major banks, and considerably above the 11% online share across all financial services companies. In comparison, Citi’s $49 million spent online was only 9% of its total advertising expense, slightly below the industry average.

NetBank, the 16th biggest online advertiser, was the percentage leader, funneling all but $100,000 of its $4.9 million in advertising into online initiatives. Two other major online advertisers spent more than half their money online last year: ING Direct spending 60% of its $40 million total online, and MBNA spending more than half its $14 million online.

Lending Tree, Quicken Loans, HSBC, Sovereign and East-West Mortgage all devoted about one-third of their advertising into the online channel.

Top-20 Financial Institutions Online Advertisers*
2004 Online Advertising (% of total advertising)*
1. JP Morgan Chase  $50 million (21%)
2. Citigroup              $49 million (9%)
3. American Express $28 million (9%)
4. Bank of America    $25 million (9%)
5. ING Direct            $24 million (60%)
6. Lending Tree        $22 million (31%)
7. Ameriquest           $16 million (13%)
8. Quicken Loans       $10 million (33%)
9. Wells Fargo           $9.2 million (14%)
10. HSBC                  $8.3 million (39%)
11. MBNA                  $7.0 million (51%)
12. Wachovia            $6.3 million (7%)
13. E-Loan                $6.1 million (21%)
14. NetBank              $4.8 million (98%)
15. Discover             $4.7 million (6%)
16. GM                     $3.8 million (4%)
17. Royal Bank          $3.2 million (12%)
18. Sovereign           $2.8 million (33%)
19. East-West Mtg.    $2.7 million (32%)
20. WAMU                $1.9 million (2%)

*Banking, Lending, Mortgage, or Credit Card segments only, does not include online brokerage, insurance, or investments.

If you look at the brokerage and mutual fund category, the spending accelerates. Four online brokers Ameritrade ($65 million), Scottrade ($63 million), Schwab ($58 million), and E*Trade $52 million) each outspent even the largest financial institution, and Netstock Direct ($32 million) outspent all but Citi and Chase.

Top-10 Brokerage & Mutual Funds

2004 Online Advertising (% of total advertising)

1. Ameritrade   $65 (64%)

2. Scottrade     $63 (87%)                              

3. Schwab        $58 (35%)                              

4. E*Trade        $52 (77%)                              

5. Netstock       $32 (99%)                              

6. Harrisdirect  $24 (78%)                              

7. Vanguard      $12 (31%)                              

8. TD Bank        $10 (17%)                              

9. Fidelity        $5.3 (4%)                               

10. T.Rowe Price $3.8 (5%)

Download the Excel file with more details.    

--JB                     

Innovators in small business online delivery

Today much has changed. Everywhere you look, banks are innovating to serve the small business market more effectively. According to Watchfire’s GomezPro unit the best small business banking sites are Bank of America and National City, tied for first place in its year-end 2003 scorecard (see Table 55, right). 

Other online innovators in the small business market:

•          Barclays Bank (London; $800 billion) uses its website to target startup businesses with a broad array of support services that many startups would find essential, including a free business checking account for the first year. It’s so impressive, we’ve given it our second Best of the Web award this year
  (see next page).
•          PNC Bank (Pittsburgh, PA; $70 billion) and NetBank have both announced plans to offer remote check deposits, something most U.S. banks will support within a few years. One of the last reasons to visit the branch will be eliminated when clients can feed paper checks into a scanner instantly depositing the cash into their account and storing the image into their online banking archive
  This service is a shoo-in for an OBR Best of the Web once it goes live.
•          NetBank (Alpharetta, GA; $4.1 billion) which launched a new small business initiative a year ago, has attracted 1,600 businesses with $38 million in deposits ($24,000 average deposit). If it keeps to the announced third-quarter launch, NetBank may be the first bank to offer remote paper check scanning

Barclays provides valuable services for startups

Why do the U.K. banks do a better job serving small businesses online compared to their U.S. counterparts?¹ Perhaps U.S. banks are underestimating the value of services targeted directly to small business owners. Or maybe they’ve found it too difficult because business owners won’t bother switching bank accounts to save a few bucks a month. That’s why it makes so much sense for Barclays Bank to focus on startups at its business website <business.barclays.co.uk>. After all, if you succeed in being a startup’s first bank, you have the inside track to retain its business over time.

Barclays business homepage (see below) is dominated by a shaded area asking the important question, Starting a business? Even though the vast majority of visitors already have a business and a banking relationship with Barclays, those most likely shopping for services are startups. The bank also offers Pain relief in a box, a proprietary business management and accounting program targeted for tiny businesses or startups that haven’t settled on an accounting software system.

¹Two out of three of our Best of Web winners for small businesses are headquartered in the U.K.

Barclays’ small business Starter Accounts consist of the following features and benefits:

•          Current account (checking) with an overdraft facility; free for the first 12 months, 18 if you also maintain personal accounts at Barclays
•          Savings account
•          Loans, subject to credit approval of course
•          Insurance
•          45-minute free consultation with a business/marketing consultant
•          45-minute free consultation with an accountant
•          30-minute free consultation with an attorney

NetBank and PNC to offer remote deposits

According to recent press reports, both NetBank (American Banker, May 20) with 1,600 small business clients and PNC Bank (Wall Street Journal, June 8) with 200,000, will launch remote deposit service for their business customers. Although details of the yet-to-be-launched services are sketchy, it is expected that business customers will be able to scan paper checks into a remote device that transmits images to the bank for immediate deposit. PNC estimates the scanners will rent for $15 to $25 per month. No word on pricing from NetBank. The NetBank service is expected in late third quarter and PNC expects to roll-out by yearend. Alogent http://www.alogent.com/  is the technology provider for NetBank.

Benefits for small business owners:

1.   Saves time/money: Frees business owners from the daily/weekly trek to the branch, something 80% of online self-employed households reported doing during the past 30 days according to Javelin Strategy

2.   Improves cash flow: Checks can be deposited immediately rather than collecting dust waiting for the owner’s next trip to the branch

3.   Streamlines record keeping:

i.    the original check can be filed as a paper receipt if desired

ii.   a back-up electronic image is stored at the bank if questions arrive

4.   Improves customer service: Check images can be quickly retrieved and emailed if
a dispute arises

5.   Saves storage space/cost: Paper checks can be destroyed much sooner, eliminating storage and security issues

6.   Improves management control: Owners can spot-check deposit activity by looking at actual check images, rather than staff-entered accounting entries

Speaking as both as a small business owner and an industry analyst, this is a great service and a strong candidate for a Best of the Web award once it becomes operational.

According to an article in the May 20 American Banker, NetBank is about to launch a remote deposit service for its business customers. Although details of the yet-to-be-launched service are sketchy, it is expected that business customers would scan paper checks into a remote device that transmitted the images to NetBank for immediate deposit.

This service has two important benefits in addition to the obvious: freeing small business owners from a trek to the branch:
1. Improves cash flow since checks can be deposited immediately rather than on periodic trips to the branch
2. Streamlines record keeping in two ways:
(a) the original check can be filed as a paper receipt
(b) an electronic image is stored at the bank and is available if questions arrive

The service is not expected until August at the earliest. The technology provider is Alogent.

Speaking as both as a small business owner and an industry analyst, this is a great service and a strong candidate for an Online Banking Report Best of the Web award once the service becomes operational.

NetBank is one of the most interesting companies to follow. As the only publicly traded pure Net-only bank, it provides a rare glimpse of what’s really happening. However, since the company does not report the number of customers, only the number of accounts, it’s difficult to calculate a true customer acquisition cost. For instance, how may of the 16,000 accounts added in Q1 were from net new customers or were from existing customers adding an additional CD account?

Table 1

millions of dollars and thousands of accounts

Source: Company reports compiled by Ian Leff,  www.kickassbanks.com/8qg.htm  Web traffic from PC Data Online
Web traffic is the average number of unique monthly users during the quarter

Table 2

millions of dollars

Source: Ian Leff,   www.kickassbanks.com/8qg.htm              ¹Discontinued

Net.B@nk

www.netbank.com

D.R. Grimes, CEO of the latest Internet darling, Net.B@nk (Atlanta, GA; $388 million; 25,000 online accounts), indicated on a recent Radio WallStreet www.vcall.com/log.asp?callid=411 Webcast interview that the bank was looking at offering electronic safe deposit boxes “the Internet equivalent of a traditional safe deposit box people are used to.” Grimes also said that the bank doubled their checking account business in the first quarter, calling them “our core customers.” The bank is also looking at insurance products.

Net.B@nk

www.netbank.com

The new look at Net.B@nk.

NetBank (Atlanta, GA; $388 million; 21,000 online accounts) introduced a new look for its Web (screenshot lower left). Graphics and layout are modern. Speed is mixed in our tests, good on IE 4, sluggish on Netscape 4. Drop-down navigation boxes across the top avoid a cluttered look. Mouseovers are used in the three central pictures to describe the services available. You can’t miss that the bank is transaction-enabled, with large bank and brokerage logon buttons on the left side of the screen.

Finally, there is an attractive offer on the first page for free 3.05% checking, although the bank shoots itself in the foot with a curious design decision. The bank provides no imbedded link or button to purchase or find out more about the offer. And it’s no HTML glitch either, it’s been that way for a month. Users must find their own way to the deal by trial-and-error.

The button immediately below the offer, which we expected to be an online checking account application, instead triggers a pop-up window showing the bank’s 15-minute delayed stock quote (NTBK). Maybe we’re becoming cynical, but this seems like a case of misplaced priorities. A company stock quote is a good feature in “About Us.” But elevating it to the home page leaves prospective customers wondering, “Does this company really want my banking business, or are they simply trying to hype the stock?” Net.B@nk should be proud of the run-up in its stock price (see OBR 1/99 ), but they shouldn’t let that interfere with its primary mission, signing up new accounts.

Contact: D. R. Grimes is CEO, (770) 343-6006.

USAccess Bank,
a virtual bank from Porter Bancorp, launched on January 27 with a full service offering and grand plans.

The newest entrant in the Net-only bank field was publicly launched the week of Jan. 27. USAccess Bank is a newly formed unit of Porter Bancorp (Louisville, KY; $500 million), a privately held bank holding company. We also hear that First Internet Bank of Indiana (Indianapolis, IN) may open its virtual doors with a month.

Unlike the three Net-only banks that preceded it, SFNB in Oct. ‘95; Net.B@nk in Oct. ‘96, and CompuBank in Oct. ‘98, USAccess Bank launched with a complete product line that includes loans, checking, insured money market, CDs, and bill payment. The other three started with checking accounts and deposit products only. We like USAccess Bank’s implementation and will analyze it in detail next month (OBR 2/99).

When Carolina First spun off Atlanta Internet Bank (since renamed Net.B@nk) in July 1997 and hit an immediate jackpot (see table right), we expected many banks to take the same approach. The downside was small ($2 million investment in Carolina First’s case) and the upside so high ($60 million for Carolina First’s so far), we thought it would be a popular strategy in 1998 (OBR 8/97),  We were wrong.

It’s been 19 months since the Net.B@nk IPO and no bank has repeated this feat. In fact, the very first virtual bank, Security First Network Bank, was practically donated to Royal Bank last year (the deal closed in Sept. 1998) in a complicated deal that involved an equity investment in SFNB’s parent S1. But that was before the recent spike in virtual bank and broker stock prices (see table ).

Carolina First’s $60 Million Jackpot

Source: Company reports and stock prices, 2/3/99

Riding the Internet Bubble

Source: Yahoo Finance, 1/99

Buying tickets in the Internet lottery

The run-up in Internet financial services companies in the past few months has not gone unnoticed in the banking community. As a result, we expect 25 to 35 or more Net-only retail banks to open their doors this year, many with plans to go public as soon as possible assuming the IPO window remains open.

Many will begin life, like USAccess Bank, as autonomous units of traditional financial institutions. It’s kind of like buying a million lottery tickets, but with the odds in your favor. Even if the IPO bubble bursts, you could run the division as a sideline or sell it off to the many companies hungry for ecommerce opportunities.

Haven’t started yet? Take heart. Porter Bancorp went from inception to launch of USAccess Bank in about six months. So even if you have yet to start the project, you still have an outside chance to launch in 1999. But the concept won’t be nearly so novel, or lucrative, by year-end. If your bank has been dragging its feet, despite your impassioned pleas, you can at least route the Carolina First results for a satisfying “I told you so.”

If you still have a chance for funding, buy yourself BizPlanPro, hole up in a hotel for a week, and develop the plan that could propel you to Internet stardom in 2000 and beyond. We’ll repeat the basic formula (see table right) which has changed little from when we first reported it 18 months ago (OBR 8/97).

Creating YourOwnNetBank.com

1. Create an autonomous Net banking unit.

2. Stock it with talent from inside and outside the bank. You’ll need both perspectives for quick movement and credibility at the parent company.

3. Find a catchy “e-name.” You’ll probably have to buy it from one of the many domain-name brokers. Most names are fairly inexpensive.

4. Target a segment not currently served by the parent, e.g. eBay users, or as Carolina First did, consumers in a nearby metro area.

5. Jack up your rates to bring in accounts and deposits to begin a buzz about your company. Consider the extra half-percent a marketing expense.

6. Develop an innovative e-billing and payments program to show the Internet investment community you’ve got your handle on a new “business model.” Maybe even apply for a patent, that will look good in the offering prospectus.

7. Purchase high-quality loans from the parent on favorable terms to lock in a profit.

8. Go public with only a couple million shares of float to create upward momentum in the stock price.

9. Pray the bubble doesn’t burst before you are vested.

Source: Online Banking Report, 1/99

IPO Watch: Net-Only Financial Companies

Source: Online Banking Report, 1/99

E-Billing and Payment Index

*Previous articles are available in the OBR Digital Archives, www.onlinebankingreport.com

Net.B@nk

www.netbank.com

Net.B@nk debuted a leasing section on its Web.

NetBank (Atlanta, GA; $283 million; 15,000 accounts) has added a small business service to its home page menu, equipment leasing from Republic Leasing Company www.republicleasing.com a division of Resource Bancshares (DeKalb, IL; $156 million). Users can complete a mini-app online to get the process started.

The co-branded leasing section also offers a fast lease calculator and not more than a few hundred words on the advantages of leasing. As a prospective user, we’d feel more comfortable with a little more info about Republic Leasing, but if the bank stands behind the deal, we’d take their money.

Contact: Dwight Galloway is President of Republic Leasing, (815) 756-6321. D.R. Grimes is CEO at Net.B@nk, (888) 256-6932

Previous Articles: OBR 8/97; 9/98

Investors looking for a pure retail Internet banking play will have one if Atlanta Internet Bank goes through with its planned IPO. Security First Network Bank, the other publicly traded Internet banking company is more of a technology company than a financial institution.

Atlanta Internet Bank, which opened for business last October, filed for its IPO in March. The parent company is named Net.B@nk Inc and will trade under the symbol . The 3.0 million share offering carries an estimated price range of $10-$12/share. After the IPO, 5.6 million shares will be outstanding for an indicated market value of $56 to $67 million. Not bad for a bank with 1,750 accounts and $42 million in deposits as of March 18.

Net.B@nk reported revenue of $68,000 in 1996 incurring a net loss of $3.84 million. The company plans to use $25 million of the expected $30.2 million in IPO proceeds for basic capital; $2.2 million to fund the recent purchase of Premier Bank; $2 million for previously provided vendor services; and the remaining $1 million for working capital.

Carolina First Bank (Greenville, SC; $1.4 billion), the current owner of the Internet bank, will receive a 23.5% stake in the new company, on paper worth $13 to $16 million. A nice gain on the $914,000 invested so far in the operation of its Internet division. Also, Carolina First expects to contribute another $1.3 million in operating funds prior to July 31. Net.B@nk management will retain a 36% stake. Lead underwriter is Memphis, TN-based Morgan Keegan <www.morgankeegan.com>