Has the threat from Net-only banks vanished for good, or is it merely lying dormant, like a virus prepared to attack your best customers when the business cycle turns?

As mentioned on page one, with the highly visible failures of three Net-only pioneers, SFNB, CompuBank, and Wingspan Bank, it’s tempting to write the obituary for the whole segment. But that ignores the impressive inroads made by aggressive entrants such as ING Direct which has signed up more than 200,000 accounts for its Orange product line; Virtual Bank which turned profitable with its full-service Net-only bank just 15 months after launch; DeepGreen Bank which is booking $100 million in home equity lines from 7,000 applicants (Aug. ‘01 actual results per company); and PayPal, LendingTree, and NextCard, which all have more than a million customers now.

You can also look to Europe where more innovative Net-only companies (e.g., Egg, Smile.co.uk, First-e, and Virgin Money) initially made more inroads than similar U.S. companies. However, these companies have been hit by the downturn, with First-e announcing (Sept. 7) that it was withdrawing from the UK and German markets.

But it doesn’t look like any of the grandiose forecasts made by some of the early Net-only companies will come to pass in this decade anyway. We remember being told by a Net-only bank founder that his new company would be among the five largest U.S. banks within 5 years. At this point, I doubt the execs at BofA, Wells, Citi, JP Morgan Chase, or Bank One, are too worried about being unseated by a startup.

In fact, in the U.S., the total market share of Net-only banks is less than the rounding error on total industry revenues. Households using any Net-only bank account number more than 1 million (not including PayPal’s 10 million), that figure is only about 7% of all households banking online.

During second quarter, many of the developments have been negative. No surprise there. Several of the more well-funded entrants bailed out including: CompuBank sold its accounts to NetBank; BankZip folded leaving its four community bank founders with millions in losses; Sovereign ended its foray into Net-only banking folding its 1stDirectBank effort back into the parent Web site; and Brookline Bancorp announced that it was throwing in the towel after spending $25 to $30 million on its Net-only brand Lighthouse Bank. The brand will be sold or incorporated back into the parent site.

On a more positive note, there was one new launch in June, New Jersey-based interStateNetbank. And a number of companies turned in positive numbers including NextCard, which increased its account total to 881,000 accounts as of Mar. 31, Juniper Bank with 140,000 accounts in its first 6 months, and LendingTree, which transmitted 350,000 good applications to its lender network in first quarter.

For the past year, we’ve been reporting Web traffic at online financial institutions under a license agreement with PC Data Online. In April, PC Data Online went out of business, with some of the company’s assets, including our account, being transferred to the newest player in the Net traffic game, NetScore  www.netscoreonline.com  a joint venture of ComScore Networks, and Diameter, a DoubleClick-owned company.

Consequently, March was the last month of traffic reports using PC Data’s online panel and methodology. This month we begin reporting traffic through the NetScore methodology, which is very different than that of PC Data. The primary difference is that NetScore counts Web access on the machine level, whereas PC Data counted at the individual user level. While individual usage is the better gauge as far as online banks are concerned, NetScore’s machine counts do have some distinct advantages compared with PC Data:

• Includes at-work and at-school access, whereas PC Data was primarily a home-based panel.
• Includes Worldwide traffic, whereas PC Data only tracked U.S., Canadian, and Italian usage.
• Includes a much larger sample size, tracking 1.5 million machines, compared to 110,000 individuals at PC Data.

For more detailed information on NetScore’s methodology, go to www.netscoreonline.com/public/methodology.htm .

Regardless of which methodology is better, much of the value comes from the trend lines. For now, there are only three months of NetScore data available, Feb., March and April, so we’ve also shown PC Data historical data even though it is not directly comparable (see Table 1).

In April, only seven Net-only banks made NetScore’s top-10,000 list, compared to 13 Net-only banks in PC Data’s March top-13,000 list. Minimum traffic level to make Netscore’s list was 54,000 unique U.S. users in April. By comparison, it took at least 91,000 unique U.S. visitors to be included in PC Data’s March top-13,000 traffic report.¹

According to NetScore figures, NextCard is by far the busiest financial site. This is hardly surprising given the ubiquity of its banner advertising. PayPal held down the number-two spot, while Juniper Bank remained at number three.

The fourth busiest net-only bank is newcomer, Virtual Bank, which had 425,000 unique machines access its Web site in April. The average U.S. visitor appeared somewhat interested in what Virtual Bank had to offer, visiting 4.1 pages during the month and spending slightly more than 4 minutes at the site. Non-U.S. visitors bailed after 1.6 pages on average and about 2 minutes. In comparison, NetBank had far more involved users, each spending more than twenty minutes on the site during the month (see Table 1).                                                     

¹In March, NetScore reported only 10,000 sites with at least 60,000 unique U.S. users.

Table 1

North American Web Traffic at the Busiest Net-Only Banks

thousands of unique users by month

Source: NetScore, 5/01  www.netscoreonline.com    PC Data Online, 4/01     n.m. = not measured     ina = info not available    
international = users accessing from outside of the U.S

*min:sec; average time spent at the site by each unique user in April

1.)    Includes duplicate (non-unique) users across different companies

2.)    By our definition, myciti.com is not a Net-only bank, because it is clearly being marketed as a Citibank service.

3.)    By our definition, OnMoney and PayTrust are not Net-only banks because they don’t hold customer deposits, either directly or indirectly; PayTrust’s PayMyBills.com also received 179,000 worldwide unique visitors in April.

Table 2

Status Reports on Publicly Launched Net-only Banks (alphabetical order)

Source:  Online Banking Report from published reports and interviews, 5/01

¹ Since PayPal is paying interest on balances held in PayPal accounts, it will continue to be classified as a Net-only bank.

Table 3

Status Reports on Truly Virtual Banks¹ (aka “Transactional Portals)

Source: Online Banking Report, 5/01

1.)      To make our list, a truly virtual bank must not have a bank charter; must not call themselves a bank; must not hold customer deposits or assets; must market directly to end users; and offer at least 2 of these 3 banking services: account aggregation, payment services (bill pay, bill presentment or email payments), interbank electronic funds transfers

2.)      Date when a specialized personal finance informational area was launched

3.)      Date the specialized financial area first qualified as a virtual bank under the definition in footnote 1

Table 4

Status Reports on Net-only Banks in Formation (alphabetical order)

Source: Online Banking Report from published reports and interviews, 5/01

DeepGreen Bank’s banner ad campaign on Yahoo’s Loan Center.

GE Financial Network was back in the PC Data top 13,000 in March.

Monthly Highlights

During March, 13 Net-only banks made the PC Data’s top-13,000 list, each with at least 91,000 unique visitors. Total traffic at these 13 busiest banks was up 11.4% over February; but traffic is still off 10.1% from the December peak.

Seven of the 13 banks showed month-over-month gains, led by Juniper Bank which picked up 582,000 unique users for a total of 854,000, a three-fold gain over the previous month. Juniper moved into third place, trailing only PayPal and NextCard. 

PayPal maintained a narrow lead over NextCard for the top slot with 7.7 million unique users in the United States and Canada. The email-payments specialist posted a monthly traffic increase for the first time since October. March traffic was back to within 11% of the Oct. ‘00 peak of 8.6 million unique users.

During March, each unique U.S. PayPal user viewed almost 39 pages on average, spending more than 62 minutes on the site, a 50% increase in hourly usage per user compared to February. This means users were using the service more frequently. Total page views were 283 million, with a total of 7.6 million hours logged.

Everbank posted an impressive 33% gain, growing 35,000 users to a total of 142,000 for the month. It was their third month on the chart in the past year and the highest number of users ever.

Back on the chart for the first time since Sept. is GE Financial Network  www.gefn.com  with 111,000 unique users (see screenshot above).

Finally, Ameritrade’s OnMoney.com, a Super Bowl advertiser a year ago, may have reached bottom with 100,000 unique users in March compared to 106,000 in February. As recently as June, the virtual banking site recorded 3.2 million users.

thousands of unique users¹ by month

Source: Comscore.com (from former PC Data Online database), 4/13/01  n/o = not offered

n.m. – not measured, e.g., not enough viewers to measure in PC Data’s top 13,000 Web sites (<91,000 visitors in March)

¹Unique users as measured by PC Data’s 100,000+ member panel www.pcdataonline.com/methodology )

²Includes PayPal.com

³Includes some duplicate (non-unique) users across different companies

⁴In March, 13,315 Web sites had 91,000 or more unique U.S. users, the minimum traffic level to be measured by PC Data that month

⁵We don’t even know if it’s legitimate, but according to its Web site, Paritate is headquartered in Latvia and offers Internet-only banking worldwide; according to PCData Online numbers – most visitors bailed out after the home page loaded; in Dec. the average visit lasted just 50 seconds; the Web site says it will pay referral agents 10 cents per click-through, the likely reason for its impressive numbers.

⁶By our definition, myciti.com is not a Net-only bank, because it is clearly being marketed as a Citibank service.

⁷By our definition, OnMoney and PayTrust are not Net-only banks because they don’t hold customer deposits, either directly or indirectly.

Table 1

Status Reports on Publicly Launched Net-only Banks (alphabetical order)

Source: Online Banking Report from published reports and interviews, 11/00; Web traffic source: PC Data Online  www.pcdataonline.com  11/00; unique users as measured by PC Data’s 100,000+ member panel

Table 2

Status Reports on Net-only Banks in Formation (alphabetical order)

Source: Online Banking Report from published reports and interviews, 11/00

Web traffic source: PC Data Online  www.pcdataonline.com  11/00; unique users as measured by PC Data’s 100,000+ member panel

Table 1

Launch Monitor

Number of Net-only brands launched by year

Source: Online Banking Report, 8/00

 **publicly announced or acknowledged to OBR, see Table 4

The summer of 2000 saw a half-dozen launches of Net-only bank brands as banks hurried to get out before the fall “checking account season.” Although we haven’t looked at all the companies in depth, DeepGreenBank had the one of the most interesting products earning our third Best of the Web 2000.

There were also a number of notable developments at existing Net-only banks. Refer to Table 3 for a complete list of all launched Net-only banks and Table 4 for those still in formation

• X.com’s PayPal service launched an important new feature, guaranteed payments to verified merchants; the company also blasted through the 3 million user mark and increased monthly unique users to more than 6 million (see
  Table 2, upper right)
• WingspanBank told customers they could expect to soon be making deposits at any of 24,000 ATMs nationwide
• National Interbank, and yet-to-be launched Juniper Financial announced deposit-taking agreements with Mail Boxes Etc.

NextCard pulled ahead of X.com in their race to be the most highly trafficked financial services provider. Each have nearly twice as much traffic as the other ten combined. Total traffic increased 12% in July and 24% in June. Only NetBank, eTradeBank, and OneCore showed month-over-month declines in July (see Table 2, upper right).

Web Traffic at Net-Only Banks

unique users¹ by month

Source: PC Data Online www.pcdataonline.com , 8/29/00

n.m. – not measured, only 12 had enough traffic to be measured by PC Data

¹Unique users as measured by PC Data’s 100,000+ member panel

²Includes PayPal.com

³Includes some duplicate (non-unique) users across different companies

X.com released a clever new bank account verification scheme that replaces snail-mail verification. The company authenticates checking account ownership by sending two small payments of unspecified amounts (less than $1 each) to the users bank accounts. Users wait 2-3 days for the ACH deposits to post at the bank, then log into PayPal and enter the exact amount of each debit. Assuming the numbers match, the user is considered verified and can begin transferring money to and from the bank account via ACH (electronic transfer). To encourage verification, a $10,000 sweeps was launched.

Table 3

Status Reports on Publicly Launched Net-only Banks (alphabetic order)

Table 4

Status Reports on Net-only Banks in Formation (alphabetic order)

Source: Online Banking Report from published reports and interviews, 8/00

Web traffic source: PC Data Online  www.pcdataonline.com  8/00; unique users as measured by PC Data’s 100,000+ member panel

Despite the downturn in consumer Internet stock prices, the Net-only banking crowd continues to grow in number and funding. This month we add GE Financial Network  www.gefn.com  an impressive effort cobbled together from the product lines of CompuBank and PayTrust; and Umbrellabank, Chicago-based Argo Federal Savings Bank, a wholly owned subsidiary of Argo Bancorp

Source: Online Banking Report, 5/00

Source: Online Banking Report, 4/00 NEW: Not included on our Net-only bank overview

Below are the results of our research into the product offerings of the Net-only banks. Personal and business accounts are shown separately.

Notes: Fees as listed on Web site only, we did not phone for more info.

Source: Online Banking Report from company Web sites, 2/00

Below are the results of our research into the product offerings of the Net-only banks. Personal and business accounts are shown separately.

Source: Online Banking Report from company Web sites, 2/00

Notes: (1) Minimum daily balance is used unless an average daily balance is noted in a specific bank’s required balance description.

Below are the results of our research into the product offerings of the Personal and business accounts. Net-only banks accounts are shown separately.

Scenario: Activity each month of 15 checks, 15 bill pays, 4 ATM withdrawals at other bank ATMs, no direct deposit

Source: Online Banking Report from company Web sites, 2/00

Below are the results of our research into the product offerings of the Personal and business accounts. Net-only banks accounts are shown separately.

Source: Online Banking Report from company Web sites, 2/00 Notes: (1) Minimum applies unless average daily balance is noted.

(2) Retrieving rates requires filling in dollar amounts and term to return rate.

Below are the results of our research into the product offerings of the Net-only banks. Personal and business accounts are shown separately.

Source: Online Banking Report from company Web sites, 2/00 Notes: (1) Minimum daily balance to avoid service charge,

Business checking not offered by: American Express, Bank Direct, citi f/i, everbank, National InterBank, Net.B@nk, NextBank, Principal Bank, SFNB, Telebank, USA BancShares, WingspanBank, X.com

Below are the results of our research into the product offerings of the Personal and business accounts. Net-only banks accounts are shown separately.

Source: Online Banking Report from company Web sites, 2/00

Notes: (1) Minimum daily balance, unless average daily balance noted.

Below are the results of our research into the product offerings of the Net-only banks. Personal and business accounts are shown separately.

Index

Product Overview

Source: Online Banking Report from company Web sites, 2/00

Notes:

(1) Gomez Advisors’ www.gomez.com rankings are based on over 150 criteria spanning five categories: Ease of Use, Customer Confidence, On-Site Resources, Relationship Services, and Overall Cost.. The Internet Banker Scorecard reviews banks that allow customers to view their checking accounts, transfer money and pay bills on the Web; Gomez currently focuses on Internet-only banks (of any size) and traditional banks with $5 billion or more in retail (not total) deposits. Scale is 0-10, with 10 being a perfect score. In the Overall Cost category, a score of 10 indicates the lowest cost.

(2) BankRate.com reviews site content, design, and interaction. Scale is 1 to 4 points, with 4 a perfect score.

(3) Smart Money ranked 19 banks based on Web site information, products and services, security, customer service, and fees. The 19 banks invited to participate in the survey were the 13 largest consumer banks based on deposits and 6 Internet-only banks.

(4) Top9.com ranks banks according to number of unique visitors in a given month using unique visitor totals from PC Data.

(5) X.com is incorrectly categorized on Top9.com as a “Professional Service.” For our table, we’ve reclassified them as a Bank and renumbered accordingly. X.com totals do not include PayPal, which had 1.1 million visitors in Feb.

Net banking companies and service providers have finally jumped into the IPO market. We were beginning to think the sector might be passed by Net mania. If all goes according to plan, within the next four to six weeks, five Internet banking companies will go public. NextCard was the first out of the gate selling 6 million shares at $20 per share on May 14 to raise $120 million. The stock briefly hit $40 before settling into a trading range in the low 30’s for a market capitalization of about $1.3 billion, or $20,000 per credit card account.

NextCard and E-Loan are leading Net-only providers of credit cards and home loans respectively. Online Resources and nFront are Net banking platform providers. Princeton eCom (formerly Princeton Telecom) is an ebilling provider and payment processor.

The companies’ S-1 registration documents paint a mixed picture. While the companies are all well positioned strategically, their end-user account totals prove that online banking is not yet a bona fide consumer hit. For example, NextCard with 66,0000 accounts, the most of any Net-only player , only approved 2.9% of 900,000 credit card applications it attracted in Q1 1999.

NextCard Approval Rates

Source: company reports, 4/99

E-Loan, the exclusive mortgage provider on Yahoo!, turns out to be primarily a California phenomenon, booking 84% of its 1998 volume and 69% of Q1 ’99 volume in the home state.

E-Loan’s California Connection

Source: company reports, 4/99

Online Resources and nFront, despite success in attracting bank clients, only have an average of 350 end-users for each live bank installation. In comparison, Wells Fargo is adding 10,000 new users every week (OBR 3/99).

nFront & Online Resources Client Bases