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

One

Online Marketing & Splashy Promotions Make a Comeback

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

Two

Two-tiered Bill Payment Fees Emerge

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

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

Three

Online Home Equity Lending
Takes Center Stage

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

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

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

Four

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

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

Five

The Press Turns Very Positive on
Online Banking and Lending

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

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

Six

FedEx Launches Guaranteed Payments

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

Alternative: Airborne instead of FedEx.

Seven

Americans Begin to See Online Payments as MORE Secure than Paper

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

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

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

Eight

“Micro Account Aggregation” Offered by Several Credit Card Issuers

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

Table 5

Account Aggregation Forecast: 1999 to 2007

millions of active households

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

Nine

Several New Net-only Banks Debut

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

Table 6

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

number of Net-only brands launched by year

Source: Online Banking Report, 12/02

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

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

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

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

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

Ten

Banks Boost Mutual Fund Offerings

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

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

from OBR, published Dec. 31, 2002

We hit on eight out of 10, down a notch from our 90% rate last year,
but good enough to send try again this year.

Last year , we said the years 2001 and 2002 would be a period of great opportunity for incumbent financial institutions, online lenders, and online banking technology providers. Despite the recession and cutbacks in corporate spending, we still believe those macro trends will continue. Banks, who were very cautious in spending in 2001, will embark on new projects now that online usage is pervasive among many of the most profitable customers. With our confidence buoyed from our 9 out of 10 performance last year, OBR has polished its crystal ball and looked into the new year. Trying not to sandbag as much this year, here are 10 predictions. See if you agree.

One

Account aggregation is used by 3 to 4 million households by year-end, begins to make a dent in the “Quicken segment”

Web-based account aggregation appears to be following an adoption curve similar to Quicken in the ‘80s. First, attracting a small but rabid group of users, then expanding into the larger sub-market of financial control freaks. These early adopters will be intensely loyal; they will identify problems and suggest improvements; and if listened to, will be vocal in recommending the service to friends, family, and co-workers.

But there is a big difference with today’s account aggregation compared to Quicken in the ‘80s: integration with and endorsement by the user’s primary financial institution. Also, account aggregation is easier to use than Quicken. Banks that figure out how to leverage this loyalty will begin to gain market share during the next few years. But it will still be five or six years before account aggregation becomes commonplace (see Table 2, below).

Table 2

Account Aggregation Forecast

millions of active households

Source: Online Banking Report, 12/31/01, +/- 40%  OB=online banking

Two

Online statement access and payment at biller sites becomes one of the most common online activities

We have long predicted the winning bill presentment model would consist of bills emailed directly from biller to end-user. We also thought the third-party aggregation/distribution model promoted by Microsoft’s Transpoint and Checkfree and others would engender a fair amount of activity at least initially. But with the combined Checkfree/Transpoint entity distributing only 600,000 bills in Sept. 2001, compared to upwards of 32 million users accessing bills directly at billers,¹ the third-party bill aggregation/distribution model appears to be dying.²

Consumers who want all their electronic billing statements aggregated in one place will do so with a self-service solution such as Yodlee,³ but for the vast majority of users who simply want to pay their bills with the least amount of time and energy, exchanging emails directly with the biller is the answer. Depending on user preferences, the email could contain a link to a secure payment site or may merely serve as a confirmation of an upcoming ACH (electronic) debit.

¹According to Gartner Group, 12/3/01, Research Note: SPA-14-8984

²Another data point: In December, Discover said 6 million cardholders had registered for Web access to their Discover Card, 22% of their card base.

³And a much smaller market of road-warriors and very early adopters will use scan-and-pay bill payment from PayTrust.

Three

The remaining Net-only bank brands show signs of long-term prosperity, especially in delivering loans and conservative investments

In 2000, Net-only bank brands came online at a rate of two per month. While it’s unlikely we’ll ever see that level of activity again, we believe the shakeout is mostly over and the remaining Net-only brands will turn profitable if they haven’t already. This will draw more investment capital and gradually expand their reach across the country. The total number of Net-only brands¹ won’t go much higher than the current total of 42, down 15% from the peak. New ones will come along, but existing ones will merge or close their doors. We project a net increase of a half-dozen Net-only brands during the next few years (see
Table 3, below).

Table 3

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

number of Net-only brands launched by year

Source: Online Banking Report, 12/31/01

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

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

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

Four

Loan auction marketplaces grow more popular and plentiful

Even though the Web is littered with online loan marketplaces that didn’t make it (PrimeStreet, MortgageAuction, etc.), those companies had the right idea; they were just ahead of their time and sunk by trying to grow too fast too soon.

The success of LendingTree has not gone unnoticed by existing lenders and independent entrepreneurs. A new breed of leaner loan marketplaces, some bankrolled by existing financial institution lenders, will attempt to grab some of LendingTree’s share. 

A good example of a smaller, successful loan marketplace is CityLoans, founded and operated by Alan Martin, a serial entrepreneur who has founded three companies since he left his job as Webmaster of Security First Network Bank in 1997. His latest startup, CityLoans, helps users shop the best rate from local lenders. Like LendingTree, it takes a single application and submits it to several lenders for a competitive quote. However, unlike LendingTree, all CityLoans bids are from lenders located in the same geographic location as the borrower, increasing the borrower’s comfort level with the process. CityLoans operates in each market with a unique URL incorporating each market’s predominant city, for example, AtlantaLoans.com, DallasLoans.com, and so on (see below).

CityLoans operates loan “microsites” in most U.S. urban areas, taking applications and passing them to local lenders for a fixed monthly subscription fee www.cityloans.com .

Five

Credit card statements become interactive

Now that nearly 15% of U.S. households are logging in to their credit card statements, we expect card companies to rapidly create programs to tap into this interest: balance transfer offers, aggregation of competitive statements (see number 1), and so-called dynamic statements, which offer Quicken-like features and integrated merchant support and advertising. Synovus was the first major credit card with an interactive statement called CardView. It uses Illuminated Statement technology from Encirq.

Six

Niche aggregation sites are developed specializing in bills, loans, or credit cards

Account aggregation is a technology with a myriad of useful applications in financial services. Even though just 1 out of 100 households use it today, its future is bright. Now that the underlying technology is stable, we expect developers to take the basic platform and build niche applications that appeal to certain customers or financial activities.

For example, credit card companies will offer “card aggregation” so that users can create a master credit card statement on one site. The sponsoring issuer then gets first crack at stealing loan balance from the competition. Credit bureau scraping can also be used to supplement the account information provided by the end user. NextCard and DeepGreen Bank have both used credit bureau data feeds in their balance transfer programs, although neither has added full account aggregation to their mix.

Another powerful niche opportunity is in the billing area. Banks and other financial sites could assist users in the management of bills by allowing them to aggregate all their bills on one site. Automated or manual online payment services could be layered on top of the aggregated bills.

Seven

Low deposit rates send bank customers back to mutual funds

The lowest deposit rates in several decades will increase the number of consumers shopping rates on- and off-line. To stem the loss of funds, financial institutions will increase the availability and visibility of mutual fund alternatives. Given the recent setbacks in the stock market, we think bank customers would be most open to low-fee indexed funds.

A couple examples of this approach:

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

Eight

Wealth management for the
mass market goes nowhere

One of the biggest buzzwords of late 2001, and one mentioned in nearly every speech at BAI’s most recent Retail Delivery conference, was “wealth management.” It’s an important service for the nation’s wealthiest 5%, but one or more financial advisors already serve most of those households.

Wealth management as a stand-alone service has little appeal to the rest of the population more concerned about managing their debt, college-tuition savings, and 401ks. The mass market is unlikely to see value in spending any of their spare time trying to figure out how to use services for the rich and famous.

However, there is value in adding financial planning modules to your Web offering. These modules should require a time commitment of no more than five minutes and each should tackle one issue, such as Roth IRAs, saving for college, and so on. We will cover this topic in more depth in an upcoming issue.

Nine

Email marketing to current customers grows in sophistication and frequency

At year-end (2001), Discover said it had sent 50 million email payment reminders to cardholders in the two years since it launched the service. That’s a customer-centric approach lacking at many card companies.

Users expect their online service providers to use email to keep them up to date. If you’re not using email, you are missing an opportunity to increase sales, lower service costs, and tighten bonds with your growing online base.

We expect a significant increase in the number of electronic messages sent by financial institutions to their customers. New tools and service providers make the chore of creating and managing email much easier and more cost effective than it was even a year ago. There are tools that automatically create HTML, text, and AOL versions of your communications. Messages can be customized on the fly to incorporate your customer’s product usage, preferences, etc.

The most effective email programs will include useful information culled from the user’s accounts, such as confirmations of deposits, congratulations on achieving savings goals, and so on .

Bonus Speculation

The NextCard brand lives on

NextCard appears doomed as an independent entity, but we believe another credit card company will snap up its brand and customer base. How about this scenario? CIBC buys the company and merges it with its Juniper Financial unit letting Dick Vague repeat his magic from his First USA days. Not a prediction, just a thought.

Ten

Yodlee has a great year, possibly pulling off an IPO, as consumer interest in paying bills creates a strong pull for Yodlee’s platform

Clayton Christensen, Harvard professor, author of The Innovator’s Dilemma, and a BAI Retail Delivery keynote speaker for the second time in three years, talked about Yodlee in his Dec. 15 keynote. He likes account aggregation and thinks it will have a significant impact on financial services, though he stops short of calling it a disruptive innovation (it’s a sustaining technology in Clayton-speak). However, like Intel and Microsoft, which earned most of the profits from the PC revolution, he opined that Yodlee would take home most of the profits from the new technology.

He is probably right in terms of outright fee income.  Yodlee, currently paid $6 to $12 per customer per year on top of a six-figure licensing contract, does a great job in capturing the added value to the checking account. However, a few bucks a year to Yodlee is small change compared to the value of the additional business a bank, credit card issuer, or brokerage can book through aggregation techniques (see #6). For example, a card company would only have to increase a customer’s outstanding balance by about $100 to cover the $6 annual cost paid to Yodlee.

No matter how you look at it, Yodlee is in a great position, boasting a:

•          Valuable service not easily replicated by competitors or its financial institution clients
•          Large stable of blue chip customers including Yahoo, Wells Fargo, Citibank, and Bank of America (a Yodlee investor); Bank of America even took the Retail Delivery stage with Yodlee’s co-founder Sukhinder Singh and raved about the program
•          90% share of the current market
•          Potentially high margin service if they can get to “scale”

We don’t know what the privately held firm’s P&L looks like, but if it’s close to breakeven, the company has a good chance of going public, especially if the riskier PayPal IPO makes it out.

This year we did much better in the predictions department, hitting on 9 out of 10, a vast improvement over last year where we struck-out on 3 of 6. It must have been the new crystal ball from eBay.