Launched in Oct. 2007, Xpenser (see note 1) is a financial tool designed for tracking items for business expense reports. Monthly traffic is about 6,000 unique visitors according to Compete.

To understand Xpenser, visualize how Mint works, then think of the opposite.

• Mint is full automated; Xpenser is all one-off data entry.
• Mint has graphics that will blow you away; Xpenser has lists.
• Mint requires you to divulge your banking usernames and passwords; Xpenser just needs your email address.
• With Mint, you can track your bank accounts, investment accounts and net worth; Xpenser only helps you submit your next expense report.

Xpenser's mission from its website:

We were fed up with how painful expense reports and tracking were. After many experiments we found a workable solution: record expenses as soon as they happen and forget about them.

How it works
After a registration process that requires no more than your email address, you can begin immediately submitting expenses to the service via:

• Email by sending a message to e@xpenser.com with the free-form expense listed in the subject line
• iPhone optimized site (see inset); it's not in the App Store, but you can add an Xpenser button to your iPhone by navigating to the Xpenser website and pressing the + button
• SMS by sending a text message to 66937 (MOZES), using "exp" followed by the free-form expense description
• Voice via Jott or Dial2Do (both free services)
• Twitter via direct message from your registered Twitter account
• IM via Yahoo Messenger, AOL Messenger, MSN Messenger, or Google Talk
• Browser search box in Firefox or IE 7+ (see below)
• Secure website via standard input form

Once the expenses are collected, users go online and move each expense to the appropriate report. Transaction amounts and descriptions can be edited.

The company is building open APIs, so developers, including banks, can use the service to kick-start their own personal finance tools. The company says it will build premium fee-based versions with long-term archives along with other features.

Xpenser competes directly with Expensify (see note 2), a company that will be demo'ing at our upcoming FinovateStartup conference.

Data entry via the browser search box
Although, it's not a core piece of the program, I was perplexed when I saw that one of the methods of entering expense data into your Xpenser account was through the "search box." That was probably what convinced me to sign up for the account.

Here's how it works in Firefox (also works in IE 7+ and any browser that supports OpenSearch):

• Navigate to the Xpenser website
• Click on the drop-down area next to the browser search box
• Add Xpenser as a "search engine"
• Then simply type the expense amount and description in the search box making sure that Xpenser is the selected as search engine (see second screenshot below), and press enter; Xpenser recognizes your account through cookies and adds the "search term" to your data file

That feature is so clever, it's almost creepy. I'm not sure a bank would want to use this feature since it could capture any search term the user inadvertently input while the bank's "search engine" was selected in the browser search box. 

Xpenser main account page (30 March 2009)

Input via the browser search box (30 March 2009)

Notes:
1. Not to be confused with FinovateStartup alum, Expensr, now part of Strands.

2. Expensify has abandoned the decoupled debit business model it was using when we wrote about it's launch last fall (previous post).  It now offers the choice of a prepaid MasterCard or an American Express-issued card.

3. For more information, see our Online Banking Report on Personal Finance Features for Online Banking and our Online Banking Report on Social Personal Finance. 

Remote deposit capture (RDC) via mobile phone has to be the coolest way to make paper checks disappear from your office and reappear in your account. But from a usability standpoint, it leaves something to be desired, limiting its appeal to geeks with a check to deposit every once in a while. 

Businesses with several checks or more every week need something more convenient and easy to use. Proprietary scanners connecting to PC-based software apps work well, but require installation and training, not to mention $30+ per month in service fees.

Enter FAXTellerPLUS, a new solution from Hawthorn, NY-based EFT Network, that uses the common fax machine for the input mechanism. The bank runs the software on its end freeing the user to get back to their business once the fax transmits.

Today's press release says the four banks using the system are processing "thousands of transactions per month."

How it works:

1. Bank sends customers a special sleeve that holds up to 3 checks to be transmitted and includes info on the customer so deposit can be directed to the correct account.
2. Customer transmits the check (front and back) to the bank via standard fax machine.
3. Bank sends confirmation back to customer via fax or email.
4. Funds are deposited in customer's account and images viewable online.

If this works as billed, it could put RDC into the hands of micro- and small-businesses as well as consumers with access to fax machines at home or work. If any readers have used or tested the system, please let me know your experience by commenting here or emailing.

A new financial market will open Monday where businesses as small as $1.5 million in annual sales can borrow against their receivables with prices set in an auction market.

New Orleans-based The Receivables Exchange opens for trades on Monday (17 Nov) after an 18-month development cycle.

Businesses register with the exchange, a process that entails uploading financial statements and completing an application. The Receivables Exchange conducts due diligence on the potential participant to ensure that it is legitimate.

Businesses must meet the following criteria:

• Minimum of $1.5 million in annual sales
• At least 2 years of operating history
• Registered to do business in the United States

Upon approval, the business can list specific invoices for financing, with a minimum total value of $10,000. Then accredited investors (SEC definition here) bid to provide short-term financing until the receivables are collected. Sellers are encouraged to upload PDF copies of invoices, proof of delivery, and so on to get the best rates. However, many documentation requirements are optional.

Sellers select the terms they are willing to accept and the bidder that beats those terms by the widest margin wins the credit. If no bidder meets the minimum terms, the auction ends without a trade.

Co-founders: Justin A. Brownhill and Nicolas R. Perkin

VC backers: Prism VentureWorks LLC and Fidelity Ventures

Analysis
In an era of tight credit, it's a welcome addition to the financing tools available for small and mid-sized businesses. Larger businesses typically have more options through commercial paper and other capital markets.

The startup expects banks to be valuable sources of referrals. Although, at this point, there are no referral fees or revenue-sharing options.

So far, The Receivables Exchange has signed up sellers with a total of $2 billion in annual sales. And there's been a lot of interest. Founder Nicolas Perkin says his company has been approached by 20 $1+ billion companies.

But what about the other side of the trade, the lender/investor? The company says it has access to $8 billion deployable capital. Of course, that doesn't mean that the capital will be easily enticed into actual deals.

Starting Monday, we'll see what the buy side thinks. Are they willing to risk their capital in the unproven market? If The Receivables Exchange can drive out fraud and deliver on its promises, we think the answer will be yes.

The Receivables Exchange homepage (11 Nov 2008)

Next up is Digital Insight, now part of Intuit. Karen Van Kirk, director of small business solutions, will conduct the demo.

Calabasas, CA-based Digital Insight will be demonstrating its Small Business Finance Works online banking platform.

FinanceWorks has all the same functionality of Quicken Online. The small business version has been designed to be simple and easy to use for the small business manager. The accounts receivable function includes integrated email capabilities to send personalized payment reminders on the fly.

The service includes integrated remote deposit-capture capabilities.

Earlier this week, Visa launched its Facebook Business Network. While the first to use Facebook, several other major financial institutions have opened small biz networks on the Web in the past six months:

• Advanta's Ideablob launched last September at DEMOfall (previous post here). It's a unique website with monthly contests awarding $10,000 to the best idea, as voted on by users. It's an intriguing concept with decent traction, almost 30,000 unique visitors last month according to Compete (see chart below). (Full disclosure: I just realized I'm wearing an Ideablob t-shirt; schwag can still pay off!)
  
• American Express's OpenForum: As the name suggests, it's a business forum and resource directory, not unlike Bank of America's (see below). American Express has added posts from several prominent bloggers such as John Battelle's Searchblog and Anita Campbell's Small Biz Trends to keep the site fresh. The site has 5,400 members and monthly traffic of about 11,000 unique visitors, up threefold from a year ago.  
  
• Bank of America's Small Business Online Community, a general forum and resource directory, launched in October 2007 (see original post here). It's primarily a forum, with some additional articles on the side. Total membership is just under 15,000.
  
• Capital One's Slingshot, launched in February, is primarily a business directory. But it does aim for community involvement with user-submitted business reviews and comments on certain topics.
  
• HSBC's (UK) Business Network: Another forum-and-blog site similar to AmEx's OpenForum. So far it appears lightly used, with just six blog entries this year and 270 member profiles.
  
• Intuit's Quickbooks Group: Although not a financial institution, the Quickbooks site is a good example of an active community with more content, including ten blogs, and as much traffic as the others combined (not including BofA which is unknown) with nearly 90,000 unique visitors, almost double the number a year ago.
  

 Unique website visitors in May 2008 (source: Compete)

Talk about turning the tables. Now individuals are lending to businesses. Has the credit crunch gotten to that level?

Small business lending, or the lack thereof, was highlighted in today's Wall Street Journal in a column by Jane Kim that ran on the front page of the Personal Journal section, Where Either a Borrower or Lender Can Be: Small-Business Owners Turn to Online Networks for Funds as Banks Tighten Credit (here).

The article includes three examples of small business owners, frustrated with the stinginess of bank lending departments, that turned to person-to-person exchanges for loans. Apparently, all three had excellent credit since Mr. Walsh was able to borrow $22,500 at 10.25% and Mr. Kelley $18,500 at 10.97%, both from Prosper. And Mr. Kalempa received $15,000 from LendingClub for 9.6%. You don't get funded for loans of that size unless your credit is good and your story even better.

Small business owners may not have time to shop for credit, but they do network. And given how unique positive borrowing experience are, these P2P success stories will be told and re-told dozens of times. The credit-crunch induced conservatism of the banking community, especially towards growing businesses, could be an HUGE opportunity for the new P2P marketplaces.

It could be the crossing-the-chasm market niche that the loan exchanges need in order to gain traction and profitability as they position themselves for the mainstream consumer marketplace. The credit markets are huge and complicated and it's impossible to predict how this plays out. But if I worked in small business banking product management, I'd circulate this story to senior management and start working on my response to the P2P lending threat. 

Jeff Bezos may have grabbed the cover of Newsweek for the latest high-tech gadget, the Amazon Kindle, but that's old hat for him. The bigger news in online banking circles is Richard Branson gracing the cover of the December/January issue of Fortune Small Business (click on the inset to read the magazine online). His smiling mug is shown tossing hundred-dollar bills out of a teller cage. 

The reason: Virgin Money USA (previously Circle Lending) is one of six new products/services the magazine included in its annual "The Next Little Thing for 2008" series. To be part of the article, the innovation must be coming from a "small business," although I'm not sure Virgin qualifies as small anymore.

The 1.5 page story discusses the Business Builder "friends and family" loans that Virgin will administer for a one-time cost of $199 to $299 plus $9 per payment. The company says it plans to offer a business loan product later in 2008 or 2009 that will match outside money to the original friends and family loan, provided it's been paid on time. 

Could 2008 be the year of person-to-person lending? Given Branson's track record, there's a good chance the relatively unknown service will take off next year.   

Note:

1. According to my recollection. 

As promised in its teaser print buy, American Express delivered my Plum Card invitation in the wee hours Monday morning (2:06 AM Pacific time, see screenshot below). The message, with my first and last name in the salutation, was short and sweet and directed me back to the main website to apply at <plumcard.com>.

It's all first class work, but the generic call-to-action surprised me a bit since I'd put my name on the "wait list" last week (see post here). I expected a more personalized invitation and link. The website doesn't appear to recognize me either (see screenshot below).

Email Invitation (1 Nov 2007)

Plum Card homepage (5 Nov. 2007)

I don't know how I missed this one, but Advanta, a major credit card issuer with 1.2 million small business customers, launched a new Web 2.0 microsite on Sept. 24 at the high-tech DEMOfall conference (press release here). Just being there amongst the digerati was a coup for the card issuer, but they did much better, managing to come home with a coveted DemoGod Peoples Choice trophy at the conference.

The Web 2.0-laden site is called ideablob, and it's a place where entrepreneurs, inventors, and anyone else can post their business idea and compete for the monthly $10,000 prizes (contest rules here).

One month after launch, the site is generating a fair amount of activity. The eight October finalists showcased on the homepage (see below) have received the following: 

• 691 total votes (must be registered to vote, can vote on more than one idea)
• 216 total comments (must be registered to comment)
• 10,300 total views (anyone can view the idea)

Traffic to the site should grow rapidly once word of the $10k prize circulates. That's a large incentive for the millions of Internet users who think they have a better idea. 

Advanta, which uses fairly subdued branding on the site (see small "inspired by Advanta" under the main ideablob logo), is positioned to gain in three ways:

• By associating its brand with innovation, social networks, and a Web 2.0 attitude
• Assuming a good viral kick, and $10k/mo should do it, the site could generate leads more cost effectively than through other channels
• Publicity in blogs and traditional media

Bank of America launched a good business networking site recently, but without the fun of the $10,000 in prize money (see previous coverage here).

Advanta's ideablob main page (25 Oct 2007)

An idea page

In the past 10 years, we've seen dozens of bank-powered sites targeting small businesses. Citibank ran one for a few years called Bizzed. Back then, they were called "portals." Now, they are "social networks." But the purpose remains the same: Create a destination site for business owners to learn how to run their business better while reinforcing the bank brand as small business savvy.

In general, it's a good idea. But it's extremely difficult to get traction with small business owners who usually lack the time and/or interest to read extensively about how to run their business (note 1).

Bank of America's effort, Small Business Online Community, tries to get around the attention problem by creating forums where specific questions and answers can be posted (press release here). Again, not a new concept, but probably the best way to get something like this off the ground.

Analysis
I registered (see note 2) and spent a few minutes poking around the site. In addition to the forum, the site includes columns by business experts and reader-submitted stories. It will be interesting to see if the so-called user-generated content in the latter category is all self-serving promotions from the small business participants, or meaningful perspectives that allow conversations to begin.

The well-designed site, with Web 2.0 touches, is off to a good start from a registration standpoint. This morning alone (as of noon Eastern time), 300 new members had signed up. They may all be bankers in disguise, but it's still far more than I would have expected.

Other than the small "powered by" link in the upper right corner, the site doesn't appear to have any direct involvement from the bank. Frankly, I'd like to see bank officers weighing in on the financial topics, as long as they take a consultative approach and disclose their affiliation. But I understand the bank's initial restraint.

Note:

1. However, entrepreneurs in the research phase, what is sometimes called "pre startup," often devour reams of material. And since they are often highly interested in financing opportunities, a bank-sponsored site could gain their attention.  

2. A couple nitpicks:

• Usernames are case sensitive; a twist that tripped me up when trying to log in the first time. The bank should remove that stipulation, especially in a less security-sensitive application such as this.
• Lots of the material is available as RSS feeds, but other than the little orange icon, it's not very obvious how to subscribe via RSS or email. 

It's extremely difficult to win the transaction accounts of small businesses. By the time you know of their existence, they already have their bank accounts in place. And most small businesses are too busy to bother switching accounts to save a few bucks a month, or even to get better products or services.  

One way to grab market share is to find businesses when they are in the pre-startup phase, before they've set up banking accounts. In pre-startup, the prospective business owner is in pure research mode, spending little or no cash. To find these businesses, you need to offer online information that startups value and can find at your site, such as new-business planning advice. Then entice the owner to establish bank accounts with a package of services that appeal to a new business owner.

Bank of America is on the right track with its sponsorship of Microsoft's new Startup Center <startupcenter.com>. It's more like a product placement than a "banner ad" sponsorship. The BofA logo is never even seen in the main content area.

However, the bank's content is tightly integrated throughout, especially in the Finances area. For instance, if a business owner wants to "set up a checking account," the links to detailed information such as "compare now," "get a recommendation," and "get a business check card" all link directly to content housed on Bank of America's website (see screenshot below).

MasterCard is also a primary sponsor, but its content is less integrated. The third core sponsor is Startup Nation.

Analysis
It makes sense for Bank of America to be involved in Microsoft's Startup Center, a  beautifully designed tool all decked out in "Web 2.0" colors and graphics. The content seems appropriate and useful for a startup. However, it will be a challenge for the area to gain traction with actual startups, who are unlikely to be looking to Microsoft for assistance, unless they are software developers.

But you don't have to be a mega-bank or mega-software company to provide valuable services to startups. Financial institutions can partner with local professional service firms such as accountants, consultants, and attorneys, to create content for startups such as Webinars, and in-person seminars. A well-priced package of banking services, positioned and priced for startups, will help you grab new business in the startup sector.

Examples of startup products and services at financial institutions:

• CIBC startup area
• Lloyds TSB Business Extra package for startups
• Bank of Montreal business startup package
• Simply Startup Business Checking from First Light Federal Credit Union

For more information, see our Online Banking Report on Small and Microbusiness Online Banking (here). Thanks to Payments News for the link.

I first met Chip Mahan in 1995 when he was at the helm of Cardinal Bancshares and about to launch the first Internet-only bank in the world, Security First Network Bank. That effort eventually spawned S1 Corporation, now a leading banking tech company, with a half-billion market cap. 

Unfortunately, the Internet bank was sold off and eventually shuttered by Royal Bank, in a move I've never quite understood. Why would you take the pioneering brand name in one of the hottest sectors of the last 25 years and just close it down? Royal didn't even bother spending the $9/yr to keep the domain name <sfnb.com>, now a generic link site. 

After his stint at the helm of S1 ended in October, Chip is back in the banking business taking the reins of startup Live Oak Banking Company. The Wilmington, NC-based company is still in formation. But it recently passed a regulatory milestone, raising $8 million in capital from fewer than 10 investors (see note 1, 2). David Lucht, who worked with Mahan as a credit officer for Cardinal Bancshares, is the Live Oak's President.

Live Oak was recently profiled in the local business press (here), and will apparently specialize in lending to veterinarian practices and kennels. 

While a number of banks target health care practices including veterinarians, none appear to be aggressive online marketers with the possible exception of Bank of America, which is the only mainstream financial institutions using Google to market vet practice loans (note 3).  Also, BB&T's Vine Street Financial lists vet practices on its menu of commercial health care lending services (see inset).

With Mahan at the helm, its almost certain their will be a web-based component to the bank's strategy. This is the long-tail of lending at work, targeting a highly specific area that needs a national focus in order to create enough volume to survive. Eventually, we expect to see national lenders targeting hundreds, if not thousands, of business niches online.

For more information on small business strategies, refer to Online Banking Report #107/108 (here).

--------

Notes:

1. It looks like the company may have registered the URL <liveoakbanking.com> as their URL, but its not currently live and the registration info is unlisted.

2. Here's what the North Carolina banking commission has listed for the company:

• Required capitalization: $8 million
• Prospective employees: 15
• Address: 2605 Iron Gate Dr., Wilmington
• Principals: James "Chip" Mahan, CEO; David Lucht, president
• Focus: Business lending to vets, kennels and children's day care operations

3. Source: Google search, 14 June 2007, from Seattle IP address, 2 PM PDT

It takes a long time before a new process or technology becomes "conventional wisdom," something that is accepted at face value without questioning its pros and cons. While we are still years away from that happening with remote deposit technology, at least the mainstream press has picked up on its benefits, one of the first steps towards mass adoption.

The latest example was in today's Wall Street Journal special Small Business section. In "Branching Out," a general article on banks' growing interest in small businesses, author David Enrich prefaced an Aite Group "levels the playing field" quote with this (p. R6):  

Remote deposit makes it less important to select a bank based on its location or number of branches--which many big banks tout as a key selling point.

Analysis
The key take-away here is that banks should make sure remote deposit services are prominently featured in checking/cash management offers aimed at attracting new business clients. 

For example, PNC Bank is currently running a remote deposit promotion with a free scanner for customers who sign up before the end of April (see landing page screenshot below). The service is powered by Bankserv (PNC data sheet here;

The promotion is well-placed on Google, with the fourth-highest AdWords placement giving PNC the top-right slot (see inset).

However, neither the promotion or remote deposit are mentioned on the bank's main business checking account marketing page (see second screenshot below). We like the promotion, the first we've seen advertising a free scanner via Google, but the bank seems to be missing the chance to grab new accounts with the freebie.  

PNC Bank landing page from Google search on "remote deposit capture"
(Seattle IP address, 19 March 2007, 9 AM PDT)

PNC Bank main business checking page (19 March 2007)

Intuit's $1.3 billion acquisition of Digital Insight closed yesterday, marking the beginning of a new era of innovation in small business online banking (previous coverage here). It's a market that's been underserved for years (see Online Banking Report's, Small- and Microbusiness Online Banking, #107/108).

Intuit, which has iPod-like domination of small business accounting and bookkeeping via Quicken and QuickBooks, can now leverage the software relationship into the banking relationship.  The bloggers at Intuit's QuickBooks team-blog expanded on that theme here, discussing their goal of integrating electronic invoicing and payments into the bank site:

Why the purchase? One reason is to try to sell functionality of our record-keeping software as a service through banks, letting small businesses create, send, and get paid for invoices, all online at a bank's site. With millions of QuickBooks customers, we think we have some insight into small business' needs.... We learned from our tax return business how quickly packaged software can move to a Web service. Last year, for the first time, more people used the online version of our Turbo Tax Web service than the desktop version.

This is not necessarily bad for financial institutions. In fact, it probably levels the playing field for the smaller banks and credit unions that are the core of the DI client base. Through integration into Intuit's accounting products, smaller banks will be able to offer sophisticated small business solutions that equal or surpass what Bank of America or Wells Fargo offers today.

Remote deposit capture is one of the most significant new technologies to hit online business banking since, well, online banking. According to Celent, 60 of the largest 100 banks, including 20 of the top 25, now offer it. In addition, hundreds of smaller community banks now offer it.

So why can't I find it through Google? (see note 1)

For two years I've been coveting the service and waiting for my bank to offer it to small businesses such as ours. I'm still waiting.

Today, I happened to see it mentioned on the homepage of a local community bank here, First Mutual Bank (see screenshot below).

Not wanting the hassle of moving my account relationship, especially to a bank on the other side of Lake Washington (a major traffic hassle), I tried a little Googling to see what other banks in the area might have it. 

It fails to show up in the organic results, and only two banks, Wells Fargo and Main Street Bank <mstreetbank.com> are advertising on "remote deposit capture" and the shorter "remote deposits." Main Street Bank is located out of state and Wells Fargo, while just up the street from my office, appears to target its remote capture to larger businesses. I'd be willing to pay $20 to $30 a month for it, but I'm guessing that's not even close to the Wells Fargo commercial customer price.   

Action items (see note 2)

1. If you offer remote deposit capture, make sure you have a dedicated page touting the features and benefits.
2. On the dedicated page, make sure you use the term "remote deposit capture" in addition to any cute name you've branded it with. That will help users find it on search results.
3. Market it through Google and other search engines. At this point, it doesn't appear that there's much competition for ads, meaning your cost per click should be low.
4. Create a landing page that captures leads for your business banking officers. Check out Wells Fargo's approach at https://www.wellsfargo.com/com/boc_campaign
   (see screenshot below)

Notes:

1. I am searching from a Seattle IP address. In other markets, there may be financial institutions using Google to market remote deposit services.
2. We will post an additional article on remote deposit marketing later today

Intuit's bold move to purchase online banking pioneer Digital Insight came as a surprise, both to analysts and shareholders. Reactions were mixed, with shares drifting downward after the 8 AM EST announcement Thursday, ending the week off 3% (see chart here; Intuit presentation on the acquisition here).

Although the software developer has made a few forays into selling bank technology, including owning a bill payment processor in the mid-90s, it has generally stayed focused on packaged software for consumers and small businesses.

Just two weeks ago, I met with Intuit execs at the coming out party for its financial institution services unit at the China Grill down the hall from BAI's Retail Delivery Conference in Las Vegas. They were excited about several new services built on the Teknowledge unit purchased last year (see previous post here).

Analysis
Only time will tell whether the acquisition makes sense for Intuit. It's a savvy company that understands the personal finance space as well as anyone, so I tend to believe they know what they are doing.

Regardless of what it does for Intuit's share price, the merger is bound to shake up the online banking product offerings at banks and credit unions, especially for smaller businesses, the Quicken and QuickBooks crowd.

In September, we published a report predicting significant growth in personal finance functionality in online banking services (see Note 1). This merger should further accelerate that growth. As Intuit integrates Quicken, TurboTax, and QuickBooks features into the Digital Insight line, other platform providers will feel pressured to keep up.

This is good news for U.S. consumers who've generally NOT been able to enjoy the benefits of tightly integrated personal finance and online banking.

End Notes:

(1) See Online Banking Report #130/131, Personal Finance Features for Online Banking: Why MySpendingReport Trumps Free Bill Pay

Break out the bubbly. Twenty years after online banking became widely available, and ten years after it migrated to the Internet, more than half of U.S. small businesses (sales between $500,000 and $10 million) bank online. And one-third of the laggards say they'll move online within the next year.

Online banking usage
Here's the breakdown of online banking usage by business size as reported by BAI Research at the company's recent TransPay Conference:

Small business
48% >>>$500k to $1 million
51% >>>$1 mil to $5 million
54% >>>$5 mil to $10 million

Mid-size
61% >>>$10 mil to $50 million
67% >>>$50 mil to $100 million
89% >>>$100 mil to $250 million

Satisfaction with online banking
These companies are relatively satisfied with the service. Only 2%, a remarkably low number, report dissatisfaction. However, there is room to move users into the very satisfied category occupied by 44% of the sample.

Here's the breakdown, again courtesy of BAI Research:

44% >>> Very satisfied
46% >>> Somewhat satisfied
8%   >>> Neither satisfied or nor dissatisfied
2%   >>> Somewhat dissatisfied
0%   >>> Very dissatisfied

Online banking features
And what are they doing online?

91% >>> Deposit tracking
86% >>> Balance reporting
48% >>> Wire transfers
45% >>> Stop payments
38% >>> Tax payments
36% >>> Initiate ACH transfers

Finally, if you need some market sizes for your spreadsheet, click on the link below to see a good breakdown in payments by business size.

You couldn't miss BofA's bright-red, full-page spread in the business section of yesterday's New York Times (national edition, printed in Seattle, code YT, p. C9). In two-inch reverse type the ad screamed:

Payroll Free.

Below the heading:

Introducing Business 24/7, a suite of remarkable new online banking tools for small business owners.

Then in smaller print under the red box:

Business 24/7 is a remarkable new way to manage your small business finances. Online Business Suite only from Bank of America lets you send invoices and receive payments online so you get paid faster. Easy Online Payroll is the first complete online payroll service that's free.* Visit your nearest Bank of America banking center to open a business checking account and take advantage of these services.

To learn more visit bankofamerica.com/business24-7

Fine print:

*Easy Online Payroll is free when all your employees have direct deposit to a Bank of America  account. Otherwise, there is a monthly fee of $5 per employee up to a maximum of $15 per month.

The landing page specified in the print ad, opens to an impressive Flash animation that's a lot like watching an interactive TV ad. You can see what it looks like by clicking on the screenshot right, but you should look at it live to see how voice and animation are used to create an excellent sales pitch.

To leave the commercial, users select the "Get Started" button in the lower right, which leads to another landing page highlighting five key aspects of the service: Business Checking, Easy Online Payroll, Online Business Suite, Small Business Health Insurance, and Business Credit (see screenshot below right).

The core of the account from an online banking perspective, is the Online Business Suite. It is comprised of three modules, as shown below. The payables and receivables modules are optional, but the online banking is required. The total package runs $35/mo as follows:

1. Online banking for $15/mo
2. Online accounts payables (bill pay) for $10/mo
3. Online accounts receivable (invoicing) for $10/mo

Analysis
Like bill payment, BofA is using FREE online banking services to grab attention, a tried-and-true technique. In this case, the free payroll isn't as free as bill payment, since it requires the employee to have direct deposit with the bank. But with the fee capped at $15 per month, most small businesses won't be complaining about payroll fees.

And the entire account is far from free. In addition to the cost of the checking account, the Business Suite runs $35/mo, payroll for three or more is $15/mo additional, bringing the entire online package to $50/mo. This won't appeal to the microbusiness market, the under-$50,000 crowd of part-time entrepreneurs, but for a full-time business with three or more employees, it's a good value (businesses must be under $20 million in revenue to use this service). When BofA adds remote deposit-capture capabilities, it will be even better.

--JB

The first remote deposit solution using a generic document scanner will launch in July, according to its developer Community Bank Systems <bankimage.com>. Without the requirement of buying a $300+ check scanner, remote deposit services will be able to capture a large number of small and micro-businesses.

Analysis
We'll reserve judgment on CBS's ePosit solution until we have more details, but this could be an important way to grab more share of your area's small business customers. And it will make a good copy point for personal checking accounts, though most consumers won't want to learn a new system to deposit a couple checks every month. Conversely, if you lag on adopting this new technology, you may find yourself vulnerable.

As a matter of fact, we could envision a long-term branding campaign around better deposit taking, from reduced hold requirements, deposit-item images available via online banking, and the convenience of 24/7 remote deposit of paper checks. Read some of the rants at HomeStreet Bank's <mybankdoesntgetit.com> site and you can see that deposit INconvenience creates some strong feelings (see this rant and this one).

--JB

In a novel advertising gimmick, Chase Bank affixed two-foot long banners, each pointing to one of 90 electrical outlets in the Indianapolis International Airport. The unique signage, which also includes four months of exposure on in-terminal flight-information monitors, will cost the bank $65,000 for the year, or just under $200 per day.

The signs and slogans are designed to appeal to traveling businesspeople. They include:

This outlet works. Now you can too.

You and your laptop may sigh with relief now.

Congratulations. You found a charge chair.

Analysis
We'll leave the question of cost effectiveness of "outlet advertising" to the outdoor advertising pros. However, similar tactics could be used throughout a community to market online banking and small business services to users of WiFi-equipped cafes and coffee shops. For example, a bank could sponsor a WiFi directory that included names, locations, and hours of WiFi-equipped locations throughout town. For extra credit, include a map of electrical outlets, desired by many laptop owners so they don't have to worry about having to rely on their batteries which are drained relatively quickly when going online.

Most coffee shops aren't going to want a bank slapping advertising stickers on their walls. However, tent cards or brochures carrying the bank's logo could provide WiFi instructions and locations of wall outlets.

With summer just a few months away, this would be a perfect task for a summer intern. Working with existing WiFi directories, the intern could scout out possible locations, map the electrical outlets, document contact information at each location, and post it all to the bank's website. Alternatively, a bank could contract directly with an existing locator service to carry the bank's advertising message.

--JB

There are several ways to make it easier for business banking customers to find the right area of your website:

• Complete unique URL such as Abbey National's <anbusiness.com>
• Business/biz appended to the URL such as Vancity's <vancity.com/MyBusiness>
• Business added within the URL such as Barclay's <www.business.barclays.co.uk> or LaSalle Bank's <vip.lasallebank.com> for its private banking area
• Use cookies to automatically display the business area when users type your normal URL. Wells Fargo uses this technique. When homepage visitors choose the Small Business area, a small text link asks, Make this the first link you see on wellsfargo.com (click on inset for a closeup) which sets a cookie to redirect users to the Small Business area each time they go to the main bank site.

Analysis
All of these techniques are trivial to program and can help differentiate your business offerings from your personal product line. We especially like Abbey National's unique business URL that can be a memorable device in print ads and direct mail. Also, anyone with a separate business offering should consider the optional user-set cookie approach of Wells Fargo.

--JB

On the front page of today's American Banker and on the cover of its Retail Delivery pullout section (see inset), there is an eye-catching EBANK logo presented in eBay's distinctive font. It's an intriguing lead-in to an otherwise predictable story on eBay's PayPal unit and the extent to which it competes with banks. (Note: For American Banker, the cover graphic gave it more "street appeal" so that the paper was more likely to be picked up by the thousands of attendees at BAI's big technology conference in Orlando.)

This is an old story. PayPal has offered a suite of consumer banking services for more than four years (click on table below) including debit cards, bill payment, credit card (issuer), consumer finance loans, credit card processing, ACH processing, money market mutual funds, international payments, interbank transfers, fraud protection, and insurance for funds on deposit. The only new service this year is the credit card payments gateway business it purchased from VeriSign earlier this year; though that is more of a line extension than a new business.

Analysis
Yes, PayPal competes with bank, primarily in merchant processing, an area most banks got out of more than a decade ago. And we'll see more ecommerce players, such as domain registration services company GoDaddy, offering integrated PayPal payment options (see inset). However, none of PayPal's other financial service offerings have a measurable market share, and are unlikely to be causing any lost sleep by execs at Bank of America, Citi, or any other financial institution.

The American Banker article speculated on eBay's interest in moving further into banking by buying a charter and opening a full-service Internet bank. But no evidence was presented for either side of that argument, nor did the author find any industry analysts to comment.

It reminds me of the "controversy" in the mid-90s about Microsoft competing against banks. Although it was mostly fodder for the trade press, we debunked the notion In the very first issue of Online Banking Report (April 1995). There was no way that a successful software company, accustomed to 50%+ margins, would invite the regulatory scrutiny and compliance hassles of the relatively low-margin banking business.

Although eBay has done some strange things, such as jumping into the telecom business via its recent Skype acquisition, we seriously doubt that the auction giant has any plans to open or even lend its name to a full-service Internet bank. It doesn't need those regulatory and compliance headaches.

However, the company will continue to exploit areas of ecommerce, like auction payments and auction purchase financing, that are not well-served by existing players. But if you've put together a franchise that can hold its own against BofA/MBNA, ING Direct, and Schwab, you have little to fear from eBay or Microsoft. In fact, there are opportunities to leverage these trusted brand names to INCREASE your revenues. For example, PayPal provides developer tools that would allow a bank to integrate with the online payments provider to facilitate financing for bank customers.

Previous articles:

• Online Banking Report #113, PayPal Offers Preapproved Credit Lines to Users, Dec. 16, 2004
• Glenbrook Partners, Beware the Doves: Reflections on the PayPal/GE Consumer Finance Alliance, by Scott Loftesness, June 2004

--JB

Did you see Yahoo's full-page ad in today's Wall Street Journal (or was it the New York Times)? Anyway, it was on the back page of one of the interior sections, and it declared:
                -----
A free website for every small business in America.

Now, everyone reading the paper knew it was a come-on; when you go to the Yahoo Local website they try to upsell you on the $9.95/mo premium version (click on the inset for details). Furthermore, the ad probably cost more than the sum total of "free" websites given away. I don't know if it will pay off, but it certainly got my attention.

Financial Institution Opportunities
I got to thinking, what could a bank give away that wouldn't sound too hokey or cost too much? The free website isn't a bad idea, especially if you wrapped some ecommerce services around it, but Yahoo and many others have been doing that for years.

What about bill payment? If you were willing to open up your bill payment system to allow payments to originate from other banks, you could mimic the Yahoo ad in your market with:

A free online bill payment for every business in <yourtown>!
(exclamation point optional)

But a lot of banks already offer free bill payment, so try this on for size:

Free lifetime storage of your checks* for every business in <yourtown> *images of course

The creatives would have a blast with that one.

Finally, since those both have system implications, here's something anyone could offer:

Free local online directory listing for every business in <yourtown>

To pull this off, you'd need to create a database (ideally) or an even an HTML page that lists the web and business addresses for every business in your market. Bank clients could be given premium listings/linkages. And you'd need to give the directory exposure with visible links off your website.

--JB

Link: SBA Self-employed Research Results

A new report released this month by the U.S. Small Business Administration, estimates that U.S workforce is now comprised of 12.2 million self-employed (9.8% of the total) and 112 million employed (90.2%) workers.

What it Means
The self-employed are a significant market segment on their own right. At approximately 10% of your customer base, they warrant attention and possible product offerings specifically geared to their needs. See Online Banking Report 107/108 for more information on creating compelling online services for small and microbusinesses.

Action Items

1. Review your website and other marketing collateral, especially small-business-oriented material, to make sure it includes references to the self-employed.

2. Create a "self-employed" area on your website.

3. Consider creating special product bundles geared to this segment. Since traditional loan underwriting often penalizes self-employment, look closely at what you might do to enhance the credit aspects of the bundle.

4. Include "self-employed" in your search engine advertising buys and in other online promotional efforts.

5. Create a quarterly or monthly email newsletter specifically targeted to the segment.

-- JB

In theory, small and micro businesses represent one of the most lucrative, and relatively untapped, sources of incremental business. The reality is that most small and even mid-size businesses are too busy to spend much time changing banking relationships, unless they are a pre-startup¹ and/or shopping for a credit line or loan. As we outlined in OBR 107/108, a product offering optimized for business will differ somewhat from one built for consumers. The following chart summarizes the product options for small- and microbusinesses. See our prior report for more detail on each feature. The options are divided into nine categories:

1.       Statement data: viewing and organizing balance

2.       Customer service: customer care delivered over the Internet

3.       Accounting services: financial management tools

4.       Payments and billing: e-checks, bill pay, email payments, ACH, wires, invoicing, card processing

5.       Security/privacy: privacy, security, permissions, guarantees

6.       Lending: business tools, news, information

7.       Website content/features: non-financial tools and information

8.       Alerts: email, fax, telephone, and mail activity- and balance-level alerts

Online Services for Microbusinesses
checkmark = must have feature; R = recommended feature; O = optional feature

Source: Online Banking Report, 9/04 checkmark = must have feature; R = recommended feature; O = optional feature

Following are our ten most-promising tactics for generating incremental revenues during calendar year 2005.

In the 2002 study of small business, TNS (formerly NFO Global Financial Services) looked at which banks had the largest share of small businesses relationships and which were ranked highest by small business clients. SunTrust ranked highest in customer loyalty, followed by Wachovia and Washington Mutual.

1. Bank of America

Pros:

·         Three levels of business online banking: online banking with bill pay, Business Connect for multi-users with varied levels of access, and Bank of America Direct to manage all business finances online.

·         Good comparison chart of the three choices

·         Resource center with informative articles on starting a business and other topics

·         Protect against online fraud link

Cons:

·         Must scroll down to see all choices

·         Hard-to-read small blue font for most links

·         No separate URL or bookmark helper

2. Wells Fargo

 

Pros:

·         Small business tab

·         Excellent navigation and design, all viewable on a single screen without needing to scroll.

·         Clients can view personal and business accounts from a single sign-on

·         Single page, informative Small Business Newsletter

·         Customers and non-customers can enter email address to signup for newsletter

·         Relevant and useful tips on product pages

·         Product comparison pages as well as best product for your business quiz

·         Push a button to switch from English to Spanish and back again

·         Link to Make this your first page at WellsFargo.com

Cons:

·         No link to Security on the main page

·         Not using liquid layout, so homepage appears small and off-center at higher resolutions

3. Wachovia

Pros:

·         Small business is one of the four main navigation choices on the top

·         Copy and headlines are solutions-oriented, e.g., Meeting Your Needs, Resource Center

·         Excellent navigation and layout on a single page

·         Separate small business FAQs

·         Relevant products and services packaged into “centers”: Banking Center, Lending Center, Investing Center, Online Services Center, Insurance Center, and HR Solutions Center

Cons:

·         Must scroll to see information on bottom of screen

·         No link to Security

4. U. S. Bank

Pros

·         All major links are contained on a single page without scrolling

·         The no-frills style is easy to read

·         Two solutions-oriented sections: Achieve Your Goals and
Small Business Center

·         Separate Small Business login

·         Link to Newsletter subscription

Cons

·         Layout and design could be improved

·         No link to Security

5. Bank One

Pros

·         Product-oriented layout makes it easy to find specific products

·         Small link to Security on bottom (not visible on screenshot)

Cons

·         There is no small business section, in fact the term is not used in any header, although it is mentioned in the opening paragraph; choices are Business Banking and Commercial, that defies industry conventions and could cause lost business

·         No solutions-oriented areas or resources section

·         Copy is cliché-ridden and not benefits oriented;
for example under Insurance:
     “You’ve invested your heart in your small business.
      We can help you find ways to protect it.”

6. Chase

Pros

·         Small business is one of the four primary navigation choices on the top

·         Excellent design and layout that fits on one page without scrolling

·         Solutions-oriented sections: Plan and Learn, Solutions, and Business Stages

·         Link on left to Have Chase Small Business contact you

·         Privacy & Security link on top

·         Prominent Open an Account and Online Banking: Enroll Now boxes in upper right

·         Liquid layout

Cons

·         No quick navigation or separate URL for the small business page, you have to click on the Small Business section on the home page, then move your cursor down the cascading menu to the Small Business Home, it only takes a few seconds but it’s still unnecessary extra effort

7. Fleet

Pros

·         Separate URL http://www.smallbiz.fleet.com/

·         Tabs across the top help users find important subjects

·         Link to Small Business Value Package (Note: Fleet also offers a Small Business Platinum Program with a dedicated relationship manager, faster funds availability, and priority phone service

·         Solutions-oriented areas: Ideas and Information, Business Tools & Resources

Cons

·         Layout and design is a bit overwhelming

8. Citibank

Pros

·         Using the drop-down menu you can navigate directly to relevant business unit pages; the AAdvantage Business Card main page for example is very well done

Cons

·         Poor navigation off the home page: The only way to navigate to the small business section is to use the drop-down menu on the right; and because it doesn’t have a Go button, it took us 30 seconds before we figured out you have to cursor down to Small Business at-a-glance (screenshot above) in order to move to the small business section

·         Poor navigation within the small business section: The four main choices at the top of the page (Products, Planning, Investing, and Special Offers) are NOT related to small business, they take you back to consumer http://www.citibank.com/  pages, and if you don’t use your back button, you have to go through the full navigation routine to get back to small business

·         Must scroll down to see all the choices

·         Main banking link (Checking, Savings, & Financial Services) as well as the Online banking link cause a pop-up screen to load which is dominated by an outdated self-promotion for online personal banking with 2001 testimonial from Forbes magazine

9. SunTrust

Pros

·         Small Business Resource Center is a good area, although it’s buried under the Online Services tab in the Business Solutions area

·         View only option for online banking, no money movement allowed

·         Ask SunTrust search box in upper right is handy, but it doesn’t distinguish whether user in searching from business or personal pages

Cons

·         The top navigation bar is a mine field of cascading menus that launch when the mouse travels over them, an out-of-date and annoying method for primary navigation

·         No dedicated Small Business homepage, other than the Small Business Resource Center mentioned above and a mid-page link to Your Small Business Solution which leads to a curious page entitled Benefits that talks about Total Business Banking, but it’s not clear if it’s geared to small businesses or not.

·         Unclear and vastly different navigation/organization in the various areas devoted to small business (e.g., Small Business Resource Center)

10. Washington Mutual

Pros

·      Link to content from StartupNation in upper-left corner; the only bank in top 10 with headline targeting startups (see back page for more information)

·      Good online banking demo with audio highlights

·      All the information shows on a single page without scrolling

·      Liquid layout

Cons

·         No link to Security

·         Copy and headlines could be more solutions-oriented

·        Layout is a bit sparse for a bank

Case Study: Financial product usage at one small business

Microbusinesses typically purchase a hodgepodge of services culled from both retail and commercial banking product lines. For example, at our own small business, we purchase 16 financial products evenly split between consumer and business products (see Table 52, below). Nine are sourced from banks, six are from non-banks, and one is a combined effort. Overall, we spend $6,700 annually in fees, interest paid, and interest foregone (for checking). But the internal costs for managing our billings, payments, and banking, are more than three times as much, an estimated $24,000 per year. We would gladly outsource these to a high-quality and VERY trustworthy third party, preferably someone with a regulatory and fiduciary responsibility to safeguard our information and assets, like a bank.

Table 52

Financial Products & Services Used by One Small Business

Source: Online Banking Report, 6/04         ¹Fees and net interest foregone (deposits) or paid (loans) assuming 2% cost of funds
²Purchased through US Bank, but processed by CheckFree and user interface by Microsoft Money

Package accounts targeted to business segments

Most banks offer small business bundles that include checking and other basic transaction services. However, we believe the online platform can be used to assemble more valuable offerings targeted to small businesses with various financial management needs. Table 53 (below) shows ways that the small business market could be segmented. Table 54 (p 53) outlines major feature that could be included in package accounts targeted to the financial management needs of the small business.

Table 53

Potential Business Segments to Target

Virtual financial management packages

Most banks offer small business account bundles that include checking and other basic transaction. We believe that there is a significant opportunity to expand into hosted financial and customer management systems with monthly fees of $100 or more. Following are the pros and cons of moving into the financial management arena:

•          Profitable, incremental fee income
•          Publicity and image enhancement from being the first in your market to integrate banking functionality into an overall Web-based small business management suite
•           Product differentiation and an impressive unique selling proposition
•           Positive word-of-mouth within the local business community
•           Powerful retention tool
•           Potential for licensing to other financial institutions

•           Weak/uncertain demandd: Until recently, small businesses have been slow to adopt new banking technology. It may take several years of marketing, sales, and training before you begin to see a payback.
•           Development costss: Building a robust, highly secure new system will be pricey; you will probably want to partner with an accounting software developer that already has code for the basic functionality.
•           Uncertain ongoing servicing costss: Being on the bleeding edge has its risks; it will be difficult to predict ongoing costs for system maintenance, software development, and customer support.
•           Lack of employee confidence: Financial institution front-line personnel have been known to steer clear of discussing small business and/or online banking subjects due to uncertainty with their operation, cost, and overall value.

Table 54

Features of Virtual Accounting Package Accounts

*Approximate monthly subscription price; additional transaction fees would apply for certain services.

Package Account Descriptions

Virtual Business Manager

Description: A secure place for small businesses to set up an online home base, similar to corporate intranets. Possible names: virtual office, virtual desk, virtual briefcase, or personal intranet. It could also be marketed to the estimated 39 million U.S. households with a home office.

Functionality: For a financial institution, the key to making it work is tight integration with banking and financial matters. A further emphasis on local content/links could keep you ahead of the competition. Banking and financial management feature are listed in Table 54 (previous page), including:

•           Financial calendar/datebook/reminder service integrated with bill payment
•           Virtual safe deposit service that automatically stores financial and other files in secure, encrypted, off-site back-up files not accessible by anyone but the owner (not even bank personnel); can be retrieved on CD for disaster recovery
•           Virtual receptionist that tells visitors how to get in touch with someone at your business
•           Company message boards for internal users
•           Company blogs for external users
•           Ability to post documents to the Web, which can be shared with everyone or just authorized employees and/or customers

Virtual CPAA

Description: As its name implies, the Virtual CPA provides extensive accounts-receivable and accounts-payable services from a Web interface.

Functionality: In addition to the Virtual Business Manager features listed above and the banking/financial management features listed in Table 54, the VirtualCPA could also provide the following features (for more ideas, see the features built into Intuit’s QuickBooks http://www.quickbooks.com/

•           Billing statements and invoicing via email, fax, or snail mail; includes reminders, and confirmations
•           Online, cash-based accounting functions including data entry, categorizing, and basic report generation
•           Bill-payment/accounts-payable monitoring functions, such as email notification when payment transactions are awaiting authorization by business owner; email flags when payment transactions don’t clear in a reasonable time
•           Autopay function that pays certain bills automatically each month when preauthorized by the client
•           Virtual credit card terminal with integrated email and accounting
•           Lock-box service for paper check processing with full integration to client’s accounting system
•           Option to share selected information with outside advisors, such as a CPA

Virtual CFOO

Description: This top-of-the-line service has it all. Just as in the real world, the Virtual CFO takes the raw data and puts it into a broader perspective that allows a business to be more profitable.

Functionality: The following features could be added to those already offered in the Virtual CPA and Virtual Business Manager modules:

•           Online payroll with paper or direct-deposit paychecks and electronic tax payments
•           Online federal and state tax return preparation and filing
•           Full-fledged, double-entry online accounting
•           Complete disaster-recovery services including a redundant data center – an area in which banks’ inherent in-house expertise could be turned into a profit center
•           Complete Web-based customer file management and communications including:
  - invoicing/billing with Web integration, e.g., bill presentmentt
  - payment services/inquiry via the Web
  - email/fax/voice messages automatically confirming payment
•           Access to a CPA-on-calll for accounting and tax questions; advice could be delivered publicly on your Web, privately through confidential conversations, or both.
•           Automatic excess funds allocation to minimize interest expense and/or maximize interest income. For added value, the funds “sweep” could go to investment and loan accounts at any financial institution (not just yours).
•           E-commerce services for hosting secure transactions
•           Accounts-receivable management that automatically notifies the business owner and/or customers when accounts are past due; includes linkages to a virtual payment window
•           Bank-branded virtual payment windoww, which clients can display on their website to increase end-user confidence in paying by credit card or electronic check (ACH); includes integrated messaging confirming orders.
•           Extensive management reporting easily customizable using drop-down menus; for example, revenue reports by customer, accounts receivable aging, quarterly P&L; and so on.
•           Mail-merge capabilities that work across any medium, email, fax, page, voice message, or snail mail; option to outsource snail mail services to a mail house; includes label-printing utility.
•           Retirement plan administration including Web views for participants
•           Project tracking module integrated with reminders and other Virtual Officee services
•           Employee-expense reporting, cash advances and reimbursement services
•            The ability to issue/reload prepaid credit cards for customer rebates, expense account cash advances, and so on..

Small business attitudes are changing as online banking services become easier to navigate and more useful. While it currently seems impossible to eliminate the dependence on the branch for physical deposits, with the widespread adoption of check imaging and electronic payments, most non-cash-oriented businesses will be able to bank remotely. Both PNC Bank and NetBank have announced plans to equip their business customers with paper check scanners that will allow the remote deposit of paper checks.

But even the best website and product offering cannot substitute entirely for the human touch. Every business should have a contact available by phone, email, or instant message. Small business owners should be treated like private banking clients.

Recommended online products and services

In theory, small and micro businesses represent one of the most lucrative, and relatively untapped, sources of incremental business. The reality is that businesses are difficult to reach unless you are competing for their loan business. A product offering optimized for business will differ somewhat from one built for consumers. The following sections detail potential online features for various microbusiness products.

A. Transaction accounts: checking & cards

While the overall banking relationship may revolve around the commercial loan, online banking is all about the transaction account(s), e.g., checking and credit card accounts. Smaller businesses often track their financial progress through their bank accounts, using them as a proxy for sales, cash flow, and profits. Business users are also more likely than consumers to value advanced features such as downloads, reporting, alerts, and multiple authorization levels. Some of the more promising features:

•          Custom data delivery: Periodic summaries of account activity whenever (daily, weekly, monthly) and wherever (text email, HTML email, or fax) the client chooses
•          Long-term archives: If Google can provide 1GB of storage for users of its FREE email service, banks should be able to provide unlimited archives for a fee

Table 27

Checking & Savings Account Deposit Options

Table 28

Online Features for Transaction Accounts: Data Display, Storage, and Value Adds

Table 29

Event Triggered Alerts & Authorization Messages to Support Transaction Accounts

Table 30

Balance, Activity, & Account Management Messages for Transaction Accounts

B. Payment and billing services

Next to statement information, epayment services are the second most important drivers to the adoption of online banking by small businesses. And unlike data access, epayments have the potential to become profit centers and/or a significant source of online differentiation. Most businesses make far more payments than consumers, so the importance of electronic alternatives is magnified. On the other hand, existing businesses already have a system for payment and billing, so it may be difficult to convert them to a new one that requires changes in internal procedures or software.

Your best opportunities may be in less systematic services (i.e. one-offs) such as electronic transfers between a business’s accounts at other financial institution (account-to-account transfers) and the occasional rush payment.

Table 31

Online Features for Billing, Payment Processing, & Funds Transfer Services

Table 32

Online Features for Payment and Accounts Payable Services

Table 33

E-messaging to Support Epayments and Ebilling

C. Credit and loan accounts

Every small business relationship should include a credit component. It’s the lifeblood of business, and a profitable product for financial institutions. However, many banks have been reluctant to make commercial loans to the microbusiness market. Average loan sizes, which are dwarfed by typical commercial loans, make the effort seem fruitless. Yet profit margins on the small business segment can be higher. Microbusinesses often use personal credit, primarily credit cards and home equity secured loans, to finance their businesses.

We believe every creditworthy microbusiness customer should have a package of three or four credit lines with your financial institution: an overdraft line of credit (connected to checking), a home equity line of credit secured by their personal real estate (if applicable), a business line of credit, and a business credit card. Even if the total commitment is no more than $10,000 initially, it will make the business owner feel like a valued customer; and each line can grow larger over time.

Table 34 contains a number of ways to use the online channel to strengthen credit relationships with small businesses. Some of the more important tactics:

•          Loan/line Hybrid: A flexible financing vehicle that includes an integrated line of credit and the ability to take out fixed loans from the overall credit line.
•          Startup Center: Information, tools, and resources geared towards startup businesses.

Table 34

Online Features for Lending and Credit

Table 35

Triggered Alerts for Credit and Loans

Table 36

Account Management Messages for Credit and Loans

Table 37

Example: Potential Annual Credit Product Revenue from a Microbusiness¹

Source: Online Banking Report, 6/04

¹Example for illustration purposes only, not based on actual research results

Table 38

Example: Potential Annual Credit Product Revenue from a Larger Small Business¹

Source: Online Banking Report, 6/04

¹Example for illustration purposes only, not based on actual research result

D. Deposit and investment accounts

The online component of deposit and investment accounts is far less important than for transaction and payment services. However, a robust online offering can boost deposit-gathering initiatives and improve retention. Key online components are listed below: Refer to the Checking/Transaction section for more ideas.

Table 39

Online Features for Investment and Deposit Products

Table 40

E-messaging for Deposits and Investments

E. Financial management & accounting

Although automated accounting and financial management services offer the biggest potential payback to small business owners, they are challenging to deliver. However, working through third parties, financial institutions of all sizes can help cement banking relationships with financial management services such as:

•          Visible and easy-to-use data downloading services
•          Tools to make annual financial updates and tax prep simpler
•          Online wrap accounts that handle all financial and accounting needs for an annual fee, see the section on the Virtual CFO, CPA, and Business Manager

Eventually, it won’t be enough to simply offer robust cash management and online balance reporting to your business clients. Using the Web as a platform to build industry- and customer-specific service offerings, we expect a proliferation of specialized small business services during the next few years. For example, several years ago QuickBooks opened its code to developers http://www.developer.intuit.com/  spawning numerous niche services built on the small business accounting program. Check out the QuickBooks Solutions Marketplace http://www.marketplace.intuit.com/  

As the economy continues to improve, big banks will aggressively court small and mid-size businesses with creative financial management via Web-based services. These innovations will help counteract the perception that community banks provide better service. In turn, community banks will fight back with online offerings that enhance personal service delivered to local businesses. Luckily, vendor offerings will make even the most complicated Web-based service affordable to the smaller financial institution.

Intuit has already built impressive software-to-bank linkages for QuickBooks and Quicken customers. To some extent, the shrink-wrapped software is a Trojan horse, positioning Intuit-controlled links to its partner banks right on the desktops of your best clients. You can fight back by incorporating billing, accounting, and financial management functions on your website using account aggregation, instant messaging, and “push” publishing technologies. Although, it will take time, we think smaller businesses will be very receptive to financial and management services running on encrypted, secure, and trusted servers controlled by the bank..

Table 41

Online Features for Financial Management

F. Service & client relations

Online services and other automation tools can be used to help relationship managers service and cross-sell to small business clients. Used judiciously, these tools can improve the perception of personalized service, even while they improve the productivity of the relationship managers by allowing him or her to handle a larger portfolio. Key components include (see Table 42 below for more):

•          Library of recommended preformatted emails that relationship managers can easily customize and send to clients
•          Private-banking-like service that treats small business owners like VIPs
•          Instant messaging for more private/secure connection between the client and their business banking officer

Table 42

Online Features for Self-Service

Table 43

Online Features for Client Relations

Table 44

General E-messaging to Support Client Relationship Management

G. Security and privacy

Although business users may understand the tradeoff between convenience and risk, the stakes are much higher. A breached small business bank account could cause thousands of dollars of lost productivity and sales, in addition to any funds that disappear. In addition, larger small businesses are always up against the threat of insider theft and fraud. So business owners need, expect, and will pay for more sophisticated security controls. For example:

•          Additional authentication and/or authorization for outbound funds transfers or payments
•          Token- or SMS-based authorization to access the account’s master level where new payees can be added, permissions can be granted, and so on
•          Frequent email messages tracking online account access and alerting the business owner to any suspicious or out-of-character usage, e.g., login from an IP address in Liberia
•          Comprehensive assurances and guarantees that accounts will not be compromised

Table 45

Online Features for Security & Privacy

Table 46

E-messaging to Support Security & Privacy

H. General website content/features

As branches are gradually replaced by websites as the place where most banking business is conducted, your online presence will become a critical part of your overall brand image. Branches will still have a role, but it will be limited to account openings, cash deposits, and the occasional visit to the safe deposit box. Websites catering to small businesses will become far more sophisticated, yet highly customizable and easier to use. Important features include:

•          Resources and discounted banking packages for start-up businesses
•          Separate URL that business clients can enter to skip the consumer section

Table 47

General Website Features to Support Small Business

I. Insurance

Compared to consumers, small businesses buy a lot of insurance compared to consumers. While banks may not be “top of mind” when it comes to supplying insurance, financial institutions can use their online presence to change that perception.

Table 48

Online Features for Insurance

Table 49

E-messaging to Support Insurance

J. Online sales and marketing

Even though microbusinesses are difficult to reach through traditional direct marketing, we believe they will readily seek you out if you provide credit and payment solutions targeted specifically to them, especially when in startup mode.

It’s important to make sure everyone, especially the line staff, understands that microbusinesses are to be actively courted, not avoided. Typically, bankers roll their eyes and trot out horror stories about past “nightmares” with flaky microbusinesses. Staff must be educated to the facts: Microbusinesses can be risky, but with proper pricing and risk management, the segment provides an excellent source of incremental profits.

In sales efforts, leverage the cachet of the branch manager. A single telephone call or visit with the local branch manager could be enough to land an entire microbusiness account. This all-important relationship with a human must be nurtured after the initial sale. Email, instant messaging, and other electronic tools can be effective in keeping the communication channels open.

Some other effective ways to increase your share of the microbusiness market:

•          Uncover microbusinesses within your own retail customer base by looking for random and fluctuating deposit activity.
•          Develop Web content that caters directly to the small business segments you are targeting, such as
  •         - Part-time businesses
  •         - Self-employed (including full-time sales) or 1-person business
  •          - Micro employers with fewer than 5 employees
•          Use professional copywriters familiar with small business terminology to create website copy, including FAQs.
•          Give business bankers “ownership” of the business part of your Web site to make sure it is up-to-date and speaks to the target markets.
•          Enlist business owners to evaluate your website and other marketing material

Table 50

Online Marketing & Sales Tactics for Small Business Acquisition and Retention

Table 51

E-messaging to Support Small Business Sales & Marketing

Online banking usage

Up until a few years ago, small business usage of online banking trailed consumer adoption. In late 2000, 13% of small and microbusinesses used online banking compared to 16% of consumers . Three years later, online banking penetration is similar to that of consumers, an estimated 30% overall. At the largest small businesses, those with sales between $5 and $10 million, usage is now more than 40%, double the rate three years earlier.

It’s likely we’ll see continued rapid growth for a few more years. Almost all (99%) small businesses are computerized, either at the business or at the owner’s home, or both (see Table 18, above) and more than 75% are using their personal computers for financial activity (see Table 21, next page). It’s only a matter of time before the majority of small businesses bank online. Looking at the 7.3 million small and microbusinesses universe, we predict that we’ll pass the 50% penetration point within four years. However, we may reach that point much sooner. One researcher, Synergistics Research, is already saying that online banking usage has passed the 50% mark in the $100,000- to $10-million segment, with the largest small businesses
($5 to $10 million) topping out at 75% penetration.

Table 21

Small business online and PC financial services usage, 2002

Reasons for not banking online are typical, with security and inconvenience (compared to current methods) the most-cited reasons (see Table 22, below). Only 8% mentioned it was too expensive and only 5% said they didn’t have the necessary equipment (presumably convenient online access).

Table 22

Reasons for not conducting either business banking or investing online

Table 23

Online banking, billing, payment and other online activities

Q. Does your company use the Internet …?   

Source: NFO Financial Services Group SOHO/Small Business Owner 2002 Online and Channel Use, April 2003

Table 24

Cash Management Usage

Q. Please indicate if the service is used?

Source: NFO Financial Services Group SOHO/Small Business Owner 2002 Online and Channel Use, April 2003

Advisor usage

While small businesses still turn to their banker for loan advice, only 17% use a banker for cash management advice, and just 4% for retirement planning (see Table 25, below). Because small businesses are skeptical of bankers’ expertise in non-traditional areas, banking organizations must first explain why they are selling the product, and why the bank’s solution is superior to more traditional sources. It may be advantageous to partner with brand names that are more closely associated with the non-traditional product, e.g., Safeco for business insurance.

Regardless of the channel the customer chooses to get information and make transactions, a human is usually needed to close the sale. In a recent Synergistics Research survey of 600 small businesses, only 7% had opened bank accounts remotely (see Table 26, below). The sales process can be assisted by email and phone with a branch manager, business banking officer, or a special small business liaison.

Small business loyalty

One consistent trait across all small businesses: loyalty. Once you land one, it takes significant upheaval, such as a new commercial loan relationship, before they make a move. NFO research indicates that 81% of small businesses use the same bank for personal and business services. And in a survey of Barlow Research clients, about 60% said they kept their personal and business accounts at the same bank. Evidently, it’s just not worth the entrepreneur’s time and energy to shop banks, unless they are in the midst of raising capital. That’s why we believe it is vitally important to establish a credit relationship with every small business customer regardless of size.

However, high loyalty is not necessarily the same as high satisfaction. According to NFO, in 2003 57% of small businesses are very or extremely satisfied with their primary financial institution, up from 50% in 2002. This is a mediocre score overall. And with the advent of the online channel, it is easier than ever to shop around. And since only 22% of small business customers report being actively courted for their deposits and investments, incumbent financial institution may be vulnerable.

Typically it has been the interaction between the business owner and the commercial loan officer that has maintained, or sunk, the relationship. Though personal relationships are still the primary factor, electronic communications and online services are becoming important side benefits. The savvy loan or banking officer can use email, instant messaging, and a Web presence to supplement and extend the face-to-face relationship. Staying in touch, asking for feedback, and identifying new needs can all be done through frequent electronic communications.

Growth potential

While banks and other financial providers have long coveted the small business market, most have found it difficult to provide the high-touch services needed by business owners at prices that a smaller business can afford. However, we believe small business online banking offers a new paradigm. Automated online tools and electronic communications such as instant messaging and webinars, allow banks to deliver customized products at affordable price points, both for the smallest home-office-based sole proprietor as well as companies with hundreds of employees.

Table 18

Small business PC ownership

Looking at the entire universe (including self-employed and contractors), for 2004 we project growth of 2 million new small business online banking users, a slight decline from the 2.5 million who came online in 2003. And the rate of growth, due to the higher base, will slow to 17% from 2003’s 28% (see Table 9, below).

Table 9
Forecast of U.S. Small, Microbusiness, and Self-Employed Online Banking Usage

includes broadest definition of small business users, population estimated at 23 million

Source: Online Banking Report projections based on industry data (+/- 30%), 3/04;
% OLB = percent of total population that is actively banking and/or paying bills online (activity within past 6 months)

Table 10

OBR Forecast: Small Business Use of Online Banking
businesses with annual revenues from $50,000 to $10 million, not including self-employed/contractors

Sources: 1998 to 2002 estimates, TNS Financial Services Small Business Market Track, April ’03; (1) 1995 to 1997 and 2003 to 2013: Online Banking Report estimates plus or minus 33%

The opportunity at your financial institution

For a rough approximation of the small business potential in your market, use the national average business-to-consumer penetration. For example, there are approximately 90 million U.S. households with bank accounts. Therefore about 25% (23/90) are business owners. About 8% (7.3/90) own businesses that are relatively easy to find via identifiable business phone lines, D&B reports, compiled lists and so on. The difference, about 16 million, are harder-to-find self-employed and contractors.

Table 11

Estimating the Number of Microbusinesses in Your Market

Number of banking households in your market                                                     (fill in)

Multiply by the percentage of all households that are microbusinesses                 x 8% or 25%*

Approximate number of microbusinesses in your market                          =                        _____

Source: Online Banking Report, 6/04 *Depends on whether you are looking at all businesses including self-employed/contractors, or just the larger small and microbusiness segment

Total market size of balance-driven banking products

Looking at just the 1.2 million larger small businesses with revenues from $1 million to $10 million (not including self-employed/contractors), TNS Financial estimates total business deposits of $240 billion and the total loans and lines of $160 billion for a total of $400 billion. In addition, we estimated the microbusiness segment ($50k to $1 million) has another $240 billion in deposits and loans. In addition, NFO estimates that small- and microbusiness owners have another $1.6 trillion of deposit and loan balances in their personal accounts, for a total of $2.2 trillion. Assuming a 200 basis point (2%) spread on the balances, the sector is generating about $44 billion in net interest revenues, an average of $6,000 per business/owner.

But, this only accounts the money paid out to financial services companies. It ignores the significant internal and often hidden costs associated with financial management: accounting, bookkeeping, payroll, treasury, and so on. With the Web, banks have an opportunity to compete not just for the traditional financial products, but also for the entire financial operations of the business.

Table 12

Deposit and Loan Balances and Net Interest Margin from Small-and Microbusinesses

Source: Small business ($1 to $10 million) segment and owner balances from TNS Financial Services Group 2003 Small Business Studies, 4/03; Microbusiness balances and average net interest margin are estimates from Online Banking Report, accuracy estimated at plus 100%, minus 50%

¹OBR estimate of $15,000 per microbusiness, n = 6.0 million

²OBR estimate of $25,000 per microbusiness, n = 6.0 million

Table 13

Small Business Assets by Type, Numbers and Balances

Source: Balances from TNS Financial Services Group (formerly NFO World Group) 2003 Small Business Studies, 4/03

Table 14

Small Business Liabilities by Type, Numbers and Balances

Source: Balances from TNS Financial Services Group (formerly NFO World Group) 2003 Small Business Studies, 4/03

Table 15

Misc. Product Usage

Source: Balances from TNS Financial Services Group (formerly NFO World Group) 2003 Small Business Studies, 4/03

Table 16

Financial Products Purchased for Personal Use¹ by Small Business Owners

Warning: Small sample sizes of respondents with large balances may distort the numbers.

Source: Balances from TNS Financial Services (formerly NFO World Group/PSI Global) 2002 SOHO and
Small Business Owner Studies, 4/02; number of small and microbusinesses from NFO’s 2003 Small Business Study, 4/03

Total population (N) = 7.3 million U.S. small and microbusinesses, not including self-employed/contractors, OBR estimate +/- 20%

Does not include the value of the owner’s business, commercial real estate investments, stock options, and other misc. categories

¹Products used personally, not for the business

²Total market = (% using) x (average balance) x (7.3 million micro and small business owners)

³Total balances only, does not include auto leases or insurance

⁴Across all business owners, users and non-users

⁵Net worth = personal assets less personal liabilities, does not include net value of business or non-residential real estate holdings

⁶Total personal assets less value of residential real estate, does not include net value of business or non-residential real estate

Q. When is a business most likely to open a new bank account?
A. When they are first starting out.

Recognizing that the best time to get their foot in the door at a business is before the doors even open, Barclays Bank (UK), addresses the issue front and center on its small business banking home page Barclays Small Business Banking : Small Business.

The company offers a number of startup service including complimentary consultations with business advisors and fee-free checking accounts (18 months if you also bank personally at Barclays, 12 months otherwise).

Types of Small Business

Small business means different things to different people. For the sake of simplicity, in this report we’ll usually use the term “small businesses” to refer to the following segments:

Two major classifications used in this report:

1.    Microbusiness: Basic financial needs, such as Quicken support, simple invoicing,
credit card processing, bill payment, home equity credit lines, and tax reporting; usually sole proprietorships, partnerships, or S-corps (includes self-employed); often with less than 20 employees; total revenue of $50,000 to $1 million annually; total credit lines of less than $250,000.

2.    Small Business: More complex financial needs, such as accounting support, invoicing, payment processing, bill payment, commercial credit lines, tax reporting, and internal security and fraud controls; less than 500 employees; total revenue of $1 to 10 million annually; total credit lines more than $250,000.

Other business types included in above classifications:

·      In-formation Business: Initially, may be more interested in advice and information on credit, payment processing, and other banking services; depending on many factors, may move rapidly towards launch and need to quickly establish accounts and line up financing. Financial needs vary depending on the business plan and funding.

·      SOHO (small office, home office): Smaller, work-from-home sole proprietorships. It can also be used to describe mobile workers such as home-based salespeople in insurance and manufacturing. We classify these companies as microbusinesses.

·      Self-employed: Persons who primarily work for themselves, either as contractors, consultants, or commission-based sales reps. We classify these individuals as microbusinesses.

·      SMB/SME (small and medium business/enterprise): Usually refers to the largest segment of “small” businesses, companies with at least several million in annual revenues. We classify these companies as small businesses.

Primary Data Source

The primary data source for this report is TNS Financial Services Group (formerly NFO WorldGroup-Financial Services, and before that, PSI Global). Our thanks to EVP Maria Erickson and her staff for answering our questions and making data from their Small Business and SOHO studies available. For more information on purchasing financial services research contact Ms. Erickson at (813) 227-8562.

The Small Business and the Affluent Entrepreneur 2003 Study was fielded between April and May 2003; the owners of 3000 U. S.-based small businesses with annual sales between $500,000 and
$10 million were contacted by telephone or mail to provide the most accurate and reliable
information possible.

Using the same methodology, 900 small businesses were contacted for the SOHO and the Entrepreneur Study 2002 between September and October 2002.

The big picture in small business

Small businesses exist in all markets, in every town and at every crossing. Using a broad definition that includes smaller part-time business endeavors, there are more than 20 million businesses in the United States, one of every five households. And that understates the market potential. If you also include the personal product usage of the “business-owning” segment, the total could be as much as 50% of your revenues.

Depending on the definition, as many as 30 million business entities exist in the United States, including self-employed or part-time sideline businesses such as selling collectibles on eBay, or as few as 1.2 million if you only look at companies with at least $1 million in annual revenues
. For the purposes of this report, we are defining the total small business market as 23 million, a figure taken from U.S. Small Business Administration statistics¹.

The total includes

·         16 million self-employed/contractors

·         6.0 million microbusinesses with revenues less than $1 million

·         1.3 million of that is the larger small business with revenues of $1 to $10 million

Small businesses account for:

·         99% of all employers

·         51% of private sector employment

·         67% of net new jobs

·         52% of U.S. gross domestic product

Furthermore:

·         600,000 new businesses are started each year¹

·         13% of U.S. households own privately held businesses²

·         Business-owning households had higher income, more education, significantly higher net worth, and were led by individuals in the prime age group 35-60²

·         Boeing Employees Credit Union’s recent survey showed that 50,000 of its 350,000 (14%) members reported owning businesses or being key decision-makers in one³

·         IDC reports there are now 15 million U.S. home-based businesses, 10 million full-time and
5 million part-time⁴

·         More than 400,000 people make most or all of their living from selling on eBay⁵

(1)     SBA Research Summary #211, “Small Business Share of Economic Growth,” Jan. 2002

(2)     George W. Haynes, Assistant Professor at Montana State, and Charles Ou, SBA Economist, presented an Advocacy Working Paper at the Conference of Entrepreneurial and Financial Research in April 2002

(3)     American Banker, 4/13/04

(4)     2004 estimates from IDC as cited in The Wall Street Journal, 6/17/2004

(5)     Estimate from AuctionDrop, a company that earns commissions selling merchandise on consignment through Ebay, as cited in The Wall Street Journal, 6/17/2004

Who wants to be a microbusiness?

As you plan your business offerings, keep in mind that a majority of Americans aspire to run their own business; fully two-thirds (67%) profess a longing to be in business for themselves. And thanks to computers and the Internet, there are 15 million home-based businesses in the U.S., 400,000 of which make their living from selling on eBay. Surprisingly, though, the number of part-time, home-based businesses has fallen dramatically in the past five years, probably victims of the flat economy
(see Table 3, above).

Since most tax experts recommend separate personal and business transaction accounts for even the smallest business, companion personal/business checking, savings, and card products can be a lucrative niche for financial institutions. Once you’ve convinced retail households running businesses from home to add a business transaction account, you can cross-sell credit and accounting services as the businesses grow.

Channel Preferences

Table 5

Number of U.S. Small Businesses by Annual Revenues

Source: TNS Financial Services Group, Small Business data 4/03, SOHO/Entrepreneur data 10/02, updated to year-end 2003 by Online Banking Report, +/- 20%

Table 6

U.S. Businesses Entities by Annual Revenues
not including self-employed/contractors

Source: TNS Financial Small Business Market Study 2002, 4/03 (commercial banking numbers from 4/00); updated to year-end 2003 by Online Banking Report, =/- 20%

¹The person at the company that handles the majority of banking activities

²Could be serviced by commercial banking department depending on circumstances

Table 7

U.S. Small, Micro, and Self-Employed Businesses Using Online Banking and/or Bill Pay

millions, n = 23 million (2003)

Source: Online Banking Report estimates 6/04; accuracy estimated at plus or minus 30% U.S.
All = All small businesses including self-employed, n = 23 million (2002)
Larger = Small and microbusinesses with annual revenues between $50,000 and $10 million, not including self-employed and contractors, n = 7.3 million (2003)

Table 8

Annual Growth Rate of Small, Micro and Self-Employed Businesses Using Online Banking

millions of net new U.S. small business online banking users and percent change from previous year

&

Source: Online Banking Report estimates, 6/04; accuracy estimated at plus or minus 30%

Introduction

We’ll look at the market through the eyes of a financial institution product manager, the background of both authors. Hundreds of ideas and tactics are presented, some with more emphasis than others. All support five key strategic imperatives for approaching this market (see Table 1 above).

While small businesses have lagged consumers in adopting online banking, recent research by
James Van Dyke’s Javelin Strategy & Research http://www.javelinstrategy.com/  shows that the gap has been eliminated. Javelin’s April 2004 study shows that 56% of all online households used online banking during the past 30 days, compared to 58% of households where the primary financial manager is self-employed (a good proxy of microbusiness ownership). About the only significant difference in behavior was in the usage of Quicken or Money software, where 28% of business owners used it during the past 30 days compared to 17% of non-self-employed (see Table 2 below). Small business owners also tended to visit the branch more often, especially for deposits with 80% having made a branch deposit in the past 30 days compared to 66% of all online households.

Table 2

Online Banking Usage: Self-Employed Online Households vs. All Online Households

Source: Javelin Strategy, May 2004 survey of 2,196 U.S. online households fielded April 2004; screened to be primary household financial manager
SELF = self-employed only (n = 163); NOT = all others (n = 2033); ALL = entire sample (N = 2196)    

Major strategic imperatives

1. Identify small business owners within your consumer base and market

Since it’s time-consuming and expensive to attract small businesses from your competitors, your first priority is to mine your own consumer base for them. Customer surveys, website usage, and deposit activity are good indicators of small business ownership.

2. Facilitate contact with a human at the bank

To maximize your share of wallet, it’s essential that each business owner have a human point of contact at the bank. And it needs to be someone high enough in the organization that they are not turning over every nine months, one of the biggest complaints small businesses have about their banking relationships. To maximize efficiency, this human interaction should be supported with online tools such as email and instant messaging.

3. Begin a credit relationship

More often that not, small businesses use lending relationships to determine who they consider to be their primary financial institution. If you are serious about growing your small business share, you must be aggressive in granting credit to small business owners. And it needn’t be a commercial loan. More often it will be a consumer product, especially tied to home equity. The business owner doesn’t care how you classify the credit internally, they care that you are lending cash to grow their business.

4. Bank the personal business of the business owner

Some small business owners insist on banking their personal business at a different bank,
either because of personal relationships or privacy/security fears of mixing personal and business accounts. 

5. Provide value-added services for a fee

After decades of being beaten up by consumers over every fee on the schedule, financial institutions are wary of charging fees to their retail-like small business customers. But, despite what they may say in a focus group, once they have established an account, small businesses are loathe moving and are relatively insensitive to pricing. If a business owner values their time at $100 per hour and it takes 10 to 15 hours to switch accounts, that’s a $1000 to $1500 soft-dollar cost to moving. However, startup businesses are another matter. When shopping for their initial banking relationship, a new business could be swayed by a couple dollars per month. That’s why Barclays’ strategy of offering new businesses a host of initial free banking and professional consultations is so brilliant.

Unique attributes of the small business segment

·         Small businesses crave stability in their financial relationships; they want to deal with a company they are sure will be there in the future. More importantly, they want a relationship with a real human who knows their business and won’t let anything fall through the cracks during management or business upheaval. What they look for in a provider is expertise, a long track record, fair pricing, and easy-to-use reliable products.

·         Their sourcing of transactional banking services does not provide competitive advantage to businesses large or small. It’s a relatively minor infrastructure expense. However, credit services can make or break a business, so that’s often the key to the relationship.

·         Online banking, while gaining in importance, is a relatively low priority for most business customers who care more about the relationship with their loan/biz banking officer, branch convenience, credit lines, loans, rates/fees, and customer service.

·         It’s vitally important for most microbusinesses to connect with a human during the initial sales process – someone the business owner believes will have a positive impact on credit decisions.
In fact, business owners may value the bond with their banking officer more than the relationship with the bank.

·         Businesses don’t have the time or inclination to adjust their systems and procedures for relatively marginal convenience improvements. That’s why, until recently, they’ve lagged consumers in online banking adoption. But, once started they will often become fiercely loyal online banking customers.

·         Given the combined value of their personal and business financial services expenditures, and the owners’ optimistic perception of future growth in both, small businesses want to be treated like the important customers they are.

Implications

·         Smaller businesses have long been dismissed as lacking sufficient revenue potential to justify the labor required to serve them; however, that assumption is dead wrong. The combined net interest margin from business and personal financial products is $35 billion per year with good prospects for growth

·         The smaller the business, the better the opportunity. Larger small businesses already have established banking relationships and are on the radar screen of every big-bank officer in the area. Each of those wins will be hard-fought and expensive. The better opportunities are in the nearly invisible microbusiness category, especially among self-employed professionals and businesses in formation. However, non-banks such as Intuit, First Data, and PayPal have made in-roads in certain product categories and will attempt to leverage those relationships to up-sell other services.

·         Credit integration, overall financial counseling, and positive representation to the inevitable loan committee are a must. Clients often have good knowledge of the availability and prices of available capital options. Home equity secured lending, with underwriting flexible enough to accommodate the self-employed, is especially important when serving microbusinesses

·         Epayment companies such as PayPal, iPay http://www.ipaymybills.com/ , and Fidesic)  that enable microbusinesses to easily accept credit cards and ACH payments, can be an effective means of finding new customers.

Oft-overlooked segment is lucrative online opportunity

With more than $2 trillion in assets and liabilities up for grabs, the small business market remains attractive to financial institutions of all sizes. Smaller businesses are the lifeblood of many community banks, while the mega-banks look to the segment for growth opportunities. Even credit unions are jumping on the bandwagon, creating services to court small business owners. This report focuses on the online channel and how it can be used to improve profits and market share in the small business market, especially the smallest companies, the 6+ million so-called microbusiness with annual revenues less than $1 million.

But that’s just the tip of the iceberg. If you include all the home-based businesses, self-employed, contractors, independent sales agents, brokers, and those actively looking to launch a business, the number of “business oriented” households approaches 30% of all U.S. households.

Although most banks market aggressively to the 1.2 million larger small businesses with annual revenues of $1 to $10 million, the other 20+ million businesses mostly fly under the radar of most banks, and make do with consumer-oriented financial services.

However, as remote check scanning and other innovations lessen the need for convenient local branches, a new breed of direct banking competitor will be trolling for new accounts nationwide. But, incumbent financial institutions hold strong advantages in trust and convenience and will be difficult to unseat so long as their online services remain at parity with the competition.

Jim Bruene, Editor & Founder
jim@netbanker.com

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.

In theory, small and micro businesses represent one of the most lucrative, and relatively untapped, sources of incremental business. The reality is that businesses are difficult to reach unless you are competing for their loan business. A product offering optimized for business will differ somewhat from one built for consumers. The following excerpt from our Microbusiness 2001 Special Report* is a checklist to assist you in planning your service offering. The features are divided into nine categories:

1.       Statement data: viewing and organizing balance

2.       Customer service: customer care delivered over the Internet

3.       Accounting services: financial management tools

4.       Payments and billing: e-checks, bill pay, email payments, ACH, wires, invoicing, card processing

5.       Security/privacy: privacy, security, permissions, guarantees

6.       Lending: business tools, news, information

7.       Website content/features: non-financial tools and information

8.       Alerts: email, fax, telephone, and mail activity- and balance-level alerts

9.       Marketing: getting the word out to the difficult-to-find segment

Source: Online Banking Report, 8/03       checkmark = must have feature; R = recommended feature; O = optional feature

In theory, small- and micro-businesses represent one of the most lucrative, and relatively untapped, sources of incremental business. The reality is that businesses are difficult to reach unless you are competing for their loan business. As we outlined in previous posts, a product offering optimized for business will differ somewhat from one built for consumers. The following excerpt from our Microbusiness 2001 Special Report (available to subscribers for an additional fee at  www.onlinebankingreport.com/resources/microbiz.html  is a checklist to assist you in planning your service offering. The features are divided into 10 categories:

1.       Statement data: viewing and organizing balance

2.       Reporting: building financial reports from statement data

3.       Customer service: customer care delivered over the Internet

4.       Products: bank and non-bank financial products

5.       Accounting: financial management tools

6.       Payments: billing, e-checks, bill pay, email payments, ACH, wires, invoicing, card processing, credit cards

7.       Security/access: privacy, security, permissions, guarantees

8.       Other Web-based services: business tools, news, information

9.       Alerts: email, fax, telephone, and mail activity- and balance-level alerts

10.    Marketing: getting the word out to the difficult-to-find segment

Online Services for Microbusinesses

check = must have feature; R = recommended feature; O = optional feature

Many of the services outlined in the previous sections can be marketed to small and microbusinesses with cosmetic changes in product names and descriptions. Prices should be adjusted upwards, significantly in some cases, to reflect their greater value to the more complicated financial activities of businesses.

The primary small business functions that should be offered are as follows:

1.      Epayments – Accounts Payable: The area would include advice on how to automate accounts payable through online bill payment and financial messaging, what we have called Virtual Accounting Services.

2.      Ebilling – Accounts Receivable: This is the area where innovative bank programs could save business owners substantial sums, thus allowing banks to charge substantial fees. Small and microbusinesses would be encouraged to establish online billing services using bank programs, such as:

•          online billing statement presentment with integrated payment options
•          credit card payment option with email receipts
•          ACH payment option with email receipts
•          credit extension for the biller’s customers (see #3, below)
•          payment smoothing (averaging) services
•          turnkey paper and electronic billing services

3.      Buyer Credit Programs: As an adjunct to accounts receivable services, banks could offer credit programs for the biller’s customers. Customers needing additional credit to pay their bill could be referred to the bank for an instant credit application. This is a triple win. The customer wins because they can pay their bill, the bank wins because it picks up new customers and/or new loan balances, and the biller wins because they receive the funds with no collection expense. Depending on program pricing, billers could receive a share of the credit revenue stream as well.                                                  

HSBC’s http://us.hsbc.com/business  business product and services menu includes a section on “Making & Receiving Payments,” an excellent way to grab small business user’s attention.

Hibernia’s “Small Business Services” area includes links to “Online Business Assistants” including: finance manager, technology manager, office manager, sales & marketing manager, and human resources manager. It’s a great way to organize and promote a wide-range of banking services and resources.

Eventually, it won’t be enough to simply offer robust cash management and online balance reporting to your business clients. With the Web providing the ideal platform to build industry- and customer-specific service offerings, and with QuickBooks opening its code to developers www.developer.intuit.com , we expect a proliferation of specialized small business banking and financial management sites to hit the market during the next few years.

As the economy continues to improve, the big banks will again aggressively court small and mid-size businesses with creative financial management via Web-based services, often licensed from outside developers. The innovative services will be offered in part to make up for perceived service shortcomings in the small business market.

In turn, community banks will need to fight back with online offerings that enhance their level of personal service delivered to local businesses. Luckily, vendor offerings will make even the most complicated Web-based service affordable to the smaller financial institution.

Whether you are small or large, we think you must pay attention to the accounting and billing needs of your business clients. Intuit has made tremendous strides in serving that need, and as they move into offering more and more financial products to their accounting software customers, banks will feel the pinch. Banks should consider teaming with Web developers to build small business financial and customer-management systems that could be deployed in the next 18 to 24 months. By then, account aggregation will be widely used and should also be incorporated into your Web-based solutions.

Looking at the big picture, we see strong synergies between banking and accounting. Prior to the Web, there was no cost-effective way to bridge the gap between financial data housed in your mainframes with that housed in the PCs of your small business clients. Today, the Web is the ideal medium for tightly integrating your banking services with your clients’ accounting activities.

Intuit has already built impressive software-to-bank linkages for QuickBooks and Quicken customers. To some extent, the shrink-wrapped software is a Trojan Horse, positioning Intuit-controlled links to its partner banks right on the desktops of your best clients. You can fight back by incorporating billing, accounting, and financial management functions on your Web. And there are now off-the-shelf solutions, such as Fidesic that allow banks to provide payment services to Quicken/QuickBooks users.

We think businesses would be very receptive to Web-based financial management services running on encrypted, secure and trusted servers controlled by the bank, so called Virtual Accounting Services¹ (see table below).                                                         

¹Virtual Accountant is a trademarked name from Virtual Growth  www.virtualgrowth.com

Virtual Accounting Services

*Approximate monthly subscription price; additional transaction fees would apply for certain services.

Pros

Each of the virtual products outlined in this section could provide the following benefits to your bank:

•          Profitable, incremental fee income.
•          Publicity and image enhancement from being the first in your market to integrate banking functionality into an overall Web-based small business management site.
•          Differentiation of your banking services.
•          Good word of mouth around your local business community.
•          Virtual accounting products could be licensed to other banks.
•         You can head off further inroads into your revenue base from Intuit partner banks.

•          Weak/uncertain demand: Small and micro businesses have been relatively slow adopters of new banking technology (see OBR 70/71).
•          Development costs: Building a robust, highly secure new system will be pricey; you will probably to partner with an accounting software developer which already has code for the basic functionality.
•          Uncertain ongoing servicing costs: Being on the bleeding edge has its risks; it will be difficult to predict ongoing costs for system maintenance, software development, and customer support.

Virtual Checkbook

Description: An electronic checkbook is the foundation of any small business banking Web offering. It’s fundamental to the stability of your Web services, but there isn’t much you can do to differentiate it from other banks. It’s what’s on top of the foundation that will attract buyers.

Basic Functionality: A good virtual checkbook must include the following functions:

•          Balance inquiry across all business and personal accounts maintained at your bank.
•          Transaction history including basic look-up/search capabilities to find all transactions by date range, by type, by check number range, and by transaction amount.
•          Bill/invoice payment
•          Email to and from the bank

Advanced Functionality:

•          Transaction account aggregation (checking and credit cards)
•          Different authority/access levels for each account
•          Templates for common reports, such as transactions by quarter, transactions by check number, etc.
•          Email integrated with bill pay including:
•           Forms for creating payee communications quickly
•           Filing system that stores all previous communications with the payee
•           Search function for finding text strings in previous messages to payees
•          Fax/email statements
•          Balance notifications
•          Transaction confirmations
•          Wire transfer and ACH initiation
•          Download data directly into personal finance, spreadsheet, or accounting software programs
•          Email reminders (input by user)
•          Email forms for communicating different matters to the bank quickly
•          Permanent searchable archive of all communications with the bank

Virtual Office/Desk

HotOffice, now owned by Thruport Technologies has been providing virtual officer services since 1997.

Description: Create a place within your Web for small businesses to set up a home base for work and collaboration on the Web. These services are commonly called virtual offices or intranets (see HotOffice screenshot above). Other possible names: virtual desk, virtual briefcase, or intranet. It could also be marketed to the estimated 39 million U.S. households with a home office.

Functionality: We think banks could create their own simple and easy-to-use virtual offices integrated with banking and financial matters. A further emphasis on local content/links could keep you ahead of the competition. Here are the features we recommend:

•          Financial calendar/datebook/reminder service integrated with bill payment.
•          Virtual safe deposit service that automatically stores financial and other files in secure, encrypted, off-site back-up files not accessible by anyone but the owner (not even bank personnel); can be retrieved on CD for disaster recovery.
•          Free email with emphasis on secure communications with bank.
•          Email notification services
•          Virtual receptionist that tells visitors how to get in touch with someone at your business.
•          Company message boards
•          Ability to post documents to the Web, which can be shared with everyone or just authorized employees and/or customers.
•           Unified messaging service that provides a single Web page where users can send and retrieve email, faxes, and voice messages. For more information see J2 (formerly Jfax)  www.j2.com  and MessagePoint  www.messagepoint.com )

Side Note: You also might consider setting up virtual offices for your own loan officers and other customer-contact personnel.

Fidesic offers a solution that could be used by small business customers to send electronic invoices and receive electronic payments. Interfaces to major accounting packages make it especially useful.

Virtual Bookkeeperr

Description: As its name implies, the Virtual Bookkeeper provides extensive accounts receivable and accounts payable services from a Web interface.

Functionality: The Virtual Bookkeeper expands on the Virtual Checkbook and Virtual Office with the following additional features (for more ideas, see also,  www.quickbooks.com/products/web )

•          Billing statements and invoicing via email, fax, or snail mail; includes reminders, and confirmations.
•          Online, cash-based accounting functions including data entry, categorizing, and basic report generation.
•          Bill payment/accounts payable monitoring functions, such as email notification when payment transactions are awaiting authorization by business owner; email flags when payment transactions don’t clear in a reasonable time.
•          Autopay function that pays certain bills automatically each month when preauthorized by the client.
•          Full interbank transfer capability to and from any financial institution.
•          Virtual credit card terminal with integrated email and hooks to accounting systems.
•          Lock-box service for paper check processing with full integration to client’s accounting system.
•          Option to share selected information with outside advisors such as a CPA.

Virtual CFO

Description: Just like the real world, the Virtual CFO takes the data entered by the bookkeeper and puts it into a broader perspective that allows a business to be more profitable.

Functionality: The following features could be added to those already offered in the Virtual Bookkeeper, Virtual Office, and Virtual Checkbook modules:

•          Online payroll with paper or direct deposit paychecks, and electronic payroll tax payments.
•          Online federal and state tax return preparation and filing.
•          Full-fledged double-entry online accounting
•          Complete disaster recovery services including a redundant data center. Here’s an area in which banks’ inherent in-house expertise could be turned into a profit center.
•          Complete Web-based customer file management and communications including:

-          invoicing/billing with Web integration
(e.g., bill presentment)

-          payment services/inquiry via the Web

-          email/fax/voice messages automatically confirming payment

•          Access to a CPA-on-call to handle questions. The CPA could deliver advice publicly on your Web, privately through confidential conversations with your business clients, or both.

•          Automatic excess funds allocation to minimize interest expense and/or maximize interest income. For added value, the funds “sweep” could go to investment and loan accounts at any financial institution (not just yours).
•          ECommerce services for hosting secure transactions.
•          Accounts receivable management that automatically notifies the business owner and/or customers when accounts are past due; includes linkages to a virtual payment window (below).
•          Virtual payment window, carrying bank security messages, that clients can display on their Web site to accept credit card or check/ACH payments online; includes integrated messaging confirming orders.
•          Extensive management reporting easily customizable using drop-down menus; for example, revenue reports by customer, accounts receivable aging, quarterly P&L; and so on.
•          Mail merge capabilities that work across any medium, email, fax, page, voice message, or snail mail; option to outsource snail mail services to a mail house; label-printing utility.
•          Retirement plan administration including Web views for participants; includes email statements.
•          Project tracking module integrated with reminders and other Virtual Office services.
•          Employee expense reporting, cash advances, and reimbursement services.
•          Issuing prepaid Visa cards to customer rebates, expense account cash advances, and so on.

Numbers News

2/15/02 Bank of America reported that 4.4 million of its 27 million customers now bank online.

3/5/02   DiscoverCard reported that 8 million of its 50
million cardholders have registered at its Web.

Memorandum

October 2001

To: Your CEO

From: You

Subject: Why Internet Banking Still Matters

With the media focused on the downturn of the economy and the Internet, I know you’ve been questioned about our level of investment in the Internet channel. To help respond, we’ve prepared this brief analysis of the competitive situation and why we need to maintain a superior online presence.

With the closing of more than 600 Internet companies, including well-financed banking ventures  CompuBank and Wingspan Bank, it may seem like the future of online banking is cloudy. However, looking at actual consumer behavior, it’s clear that online banking is becoming as important to the consumer banking experience as previous electronic innovations, such as ATMs and call centers. Already online banking is used by a third of all online households, and industry analysts expect 50% usage within four to five years. With many of our competitors putting projects on hold, we believe this is an ideal time to expand our services, so that when the business cycle turns, we will be well positioned to increase market share.

1.       Our customers expect it: Already, more than 20% of our country’s households are active users of online banking and/or bill payment. In recent months, more than twice as many adults banked online than made online purchases.¹ Five times more people banked online than traded stocks online.² When it comes to ecommerce activities, banking is a clear winner.

2.       The competition has it: Most large banks have offered online banking for a number of years. An OCC study in Sept. 1999 found that online banking was already available from 114 of 160, or 71%, of banks with assets greater than $1 billion. In total, online banking was available from financial institutions that controlled 89% of the country’s asset base and 84% of deposit accounts less than $100,000. And that was projected to grow to 95% and 93% respectively by year-end 2001.

3.       We can use it to humanize the banking experience: Only a small percentage of our customers are recognized in the branch by name. For the majority, branch banking is a semi-automated experience. Online, we greet everyone by name, and in the future will provide highly personalized recommendations and service that could never be duplicated by a teller.

4.       It’s more secure and private: Most articles about online banking security focus on problems, real or imagined. In reality, electronic banking can be far more secure, and private, than the paper-based world it replaces. How much privacy do you have when you write a paper check, exposing your name, address, and bank account numbers to everyone who handles it during its long route through the banking and postal system? Authenticated and encrypted electronic data transmissions are far more secure overall.

5.       It’s the best way to get a loan: Applying for a loan is dreaded by most consumers, that’s one of the reasons why people pay 18% for credit card debt when they could cut their rate in half with a bank loan. Although Web lending is not yet a mainstream activity, consumer trepidation can be alleviated with pre-approvals, excellent email service, guarantees, and fast processing.

6.       It’s the ultimate self-service channel: According to Tower Group, 60% of the country’s 19 million affluent households are already “remote-oriented” in the way they do their banking.³ Once customers are successful in finding answers to their account-related questions online, they will be more inclined to go back and use it for future problems.

7.       It’s more efficient: By automating transactions and customer service responses, both the user and the bank can spend less time on routine matters, leaving more time and money for more interesting endeavors. Even though many of our customers still enjoy face-to-face interactions in-branch, their numbers are falling. When it comes to conducting routine transactions, such as balance monitoring and bill payments, Web banking has the potential of reducing the time spent on these chores to just a few minutes each month.

8.       It’s easier: ATMs took off once people understood that it really was a much easier way to get cash. Likewise, online banking will be equally popular as banks institute services that are clearly better than off-line alternatives (e.g., email statement, interbank funds transfer, balance-level alerts, automated bill payment, and so on).

9.       It reinforces and supplements off-line media: The 60% of households now online have an easy way to act on radio, TV, and print advertisements. We no longer have to rely on consumers remembering to look up our telephone number and call for more information.

10.    It will be profitable: The latest Tower Group research found the following⁴:

Online households have annual incomes almost twice as high as offline households. This simple fact cannot be ignored. Even though our online initiatives have thus far not paid their way in bottom-line results, we are confident that is about to change. Going forward, a high quality Web presence, managed and operated like a branch, with a line manager and good online sales reps, will turn a profit. Look at NetBank, which has turned a profit almost since inception by keeping focused on the bottom line, even during the high-flying-high-spending 1998/1999 period.

Internet banking isn’t for everyone. Most customers still desire a physical presence for reassurance and services such as deposits and safe deposit. But for an increasing number of consumers, many of whom are heavy borrowers for shelter and education, the Internet is fast becoming the preferred channel for most transactions. Complacency now puts us at risk of losing our best customers to more aggressive online competitors.

¹Gartner Group estimate of online banking users, 9/01, see Table 9,; NRF/Forrester estimate of online buyers, 8/01

²Jupiter Media Metrix, 5/01;

³Affluent households have income greater than $100,000 or assets greater than $500,000; remote oriented customers use ATMs, call centers, point-of-sale debit, and the Internet

⁴“Internet Banking in North America: Moving to Where the Action Will Be,” by Frank Caruana, Tower Group, Sept. 2001

Many of the ideas in this issue require executive approval, capital budgeting, I/S negotiations, and so on. If you are looking for ways to boost traffic in 2000, within your existing budgets, here are some low-cost ideas we’ve dubbed “50/50 projects,” ones that can be completed within 50 days for less than $50,000 and usually without any extensive internal systems work.

Small and microbusinesses represent one of the most lucrative, and relatively untapped sources of incremental business. A product offering optimized for business will differ somewhat from a consumer offering. More information can be obtained in OBR’s Microbusiness 2001 Special Report available to subscribers for $995 at  www.onlinebankingreport.com/resources/microbiz.html . The following excerpt from the Special Report is a checklist to assist you in planning your service offering. The features are divided into 10 categories:

1.       Statement data: viewing and organizing balance

2.       Reporting: building financial reports from statement data

3.       Customer service: customer care delivered over the Internet

4.       Products: bank and non-bank financial products

5.       Accounting: financial management tools

6.       Payments: billing, electronic checks, bill payment, email payments, ACH, wires, invoicing, payment processing, credit cards

7.       Security/access: privacy, security, permissions, guarantees

8.       Other Web-based services: business tools, news, information

9.       Alerts: email, fax, telephone, and mail activity- and balance-level alerts

10.    Marketing: getting the word out to the difficult-to-find segment

Online Services for Microbusinesses
Checkmark = must have feature; R = recommended feature; O = optional feature

Source: Online Banking Report, 8/01        ü = must have feature; R = recommended feature; O = optional feature

No two banks will approach the microbusiness market in exactly the same way. Each has its own unique strengths, weaknesses, and business objectives. However, there are several universal tasks that every bank should accomplish in order to address the microbusiness segment:For all banks, regardless of strategy

• Make sure line staffers understand that microbusinesses are a profitable segment to be actively courted, not avoided. Typically, bankers roll their eyes and trot out horror stories about past “nightmares” with flaky microbusinesses. Staff must be educated to the facts: Microbusinesses can be risky, but with proper pricing and risk management, the segment provides an excellent source of incremental profits.
• Leverage the cachet of the “branch manager” in sales efforts to microbusinesses, a telephone call or visit with the local branch manager could be enough to land an entire microbusiness account; after the initial sale, the continued relationship could be fostered via email communications from the branch manager or a designated business banking officer.
• Use email to foster relationships, keep in touch, deliver information, and cross sell.
• Uncover microbusinesses within your own retail customer base by looking for random and fluctuating deposit activity.
• Develop a credit line package consisting of overdraft protection, home equity and business lines of credit (see Table 4).

• Develop a robust payment processing service that allows small businesses to accept email payments from checking accounts or credit cards
• Build transactive services that complement the small business’ current processes, e.g., downloading data in popular formats to import into accounting packages.
• Provide a universal interbank funds transfer mechanism.
• Provide tools to make annual financial updates simpler.
• Develop email and Web-based methods for enhancing the relationships between microbusiness clients and their banking officer contact.
• Develop Web areas that cater directly to the small business segments you are targeting:
  •  part-time businesses;
  •  self-employed (including full-time sales) or 1-person business;
  •  micro employers with fewer than 5 employees.
• Provide flexible financing vehicles that include an integrated line of credit and the ability to take out fixed loans when needed from the overall credit line (e.g., BofA Equity Maximizer).
• Offer flexible pricing. For those willing to keep significant non-interest balances, waive or reduce fees; for those desiring the maximum rate of return on their funds, develop fee-based package accounts.
• Boost email customer service so response times are similar to phone calls.
• Consider OneCore’s turnkey solution as the basis for your offering.

• Look to private banking for inspiration; the bank and its branch managers and/or business officers should treat microbusiness owners as VIPs.
• Develop financial “wrap” accounts that handle all the businesses financial needs for an annual fee, calculated as a percent of revenues under management; the wrap accounts could come in various levels depending on what functions the business wished to outsource. Users could also move up the scale over time.
  •  VirtualCFO: 1% of revenues, $2,500 minimum;
  •  VirtualCPA: 0.5% of revenues, $1,500 minimum;
  •  VirtualBookkeeper: 0.25% of revenues, $500 minimum.
• Provide access to other credit providers via a small business marketplace such as that facilitated by LiveCapital and PrimeStreet, prior to its bankruptcy (for a complete description of the pros and cons of PrimeStreet’s online application process, see the full report for details).

Up until mid-1998, there weren’t many options for banks looking to license a small business banking platform. Today, there are more than a dozen to choose from. Refer to Celent’s mid-2000 rankings below.

Table 1 Functionality of Internet Solution Key:  A= currently available,  P= Planned for 2001, U= Under consideration

Source:  Celent Communications, Ranking the Vendors of Small Business Internet Solutions, June 2000, updated 3/01  www.celent.com

Table 2 Ranking of Small Business Banking Solutions Key:  5= Very strong,  4= Good,  3= Acceptable,  2= Workable but not optimal,  1= Area of Weakness

Source: Celent Communications, Ranking the Vendors of Small Business Internet Solutions, June 2000,  www.celent.com

Microbusinesses typically purchase a hodge-podge of services culled from both retail and commercial banking product lines. For example, at our company, on the higher end of the microbusiness segment, we purchase 16 financial products to operate and finance our business; eight are consumer products, and eight are business products (see Table 1, below). Of the 16, nine are sourced from banks or thrifts, six come from non-banks, and one, bill payment, is the combined effort of a bank (U.S. Bancorp), a non-bank service provider (Checkfree), and a software company (Microsoft). Overall, these products cost us about $8,000 annually in fees and interest paid (for loans) and interest foregone (for checking).

But the internal costs for managing our billings, payments, and banking, are nearly three times as much, an estimated $23,000 per year. These are things we would gladly outsource to a high quality and VERY trustworthy third party, preferably someone with a regulatory and fiduciary responsibility to safeguard our information and assets, such as a bank. For more information on our “dream” financial management program).

Table 1

Financial Products & Services Used by OBR

Source: Online Banking Report, 4/01     ¹Fees and net interest foregone (deposits) or paid (loans) assuming 5% cost of funds

The 16 products listed on the previous page (Table 2) are the most common banking products used by microbusinesses; the core of your online offering. But to differentiate yourself from the competition, you need to add spice to product line with other business products and services. Table 3 below provides an online services feature checklist to assist you in planning your microbusiness service offering. The features are divided into 10 categories:

1.      Statement data: viewing and organizing balance

2.      Reporting: building financial reports from statement data

3.      Customer service: customer care delivered over the Internet

4.      Products: bank and non-bank financial products

5.      Accounting: financial management tools

6.      Payments: billing, electronic checks, bill payment, email payments, ACH, wires, invoicing, payment processing, credit cards

7.      Security/access: privacy, security, permissions, guarantees

8.      Other Web-based services: business tools, news, information

9.      Alerts: email, fax, telephone, and mail activity- and balance-level alerts

10.  Marketing: getting the word out to the difficult-to-find segment

Table 2

Online Services for Microbusinesses

checkmark = must have feature; R = recommended feature; O = optional feature
Source: Online Banking Report, 4/01

Credit Products

Every microbusiness account should include a credit component. It’s the lifeblood of business, and a large revenue driver for most financial institutions. Past history has shown considerable reluctance to make loans to the microbusiness market. Average loan sizes, which are dwarfed by typical commercial loans, make the effort seem fruitless. But if you look at the potential profit margin of the loans, the microbusiness segment looks better (see Tables 8 & 9, below):

Table 3

Example: Potential Annual Credit Product Revenue from a Microbusiness¹

Source: Online Banking Report, 4/01

¹Example for illustration purposes only, not based on actual research results

Table 4

Example: Potential Annual Credit Product Revenue from a Larger Small Business¹

Source: Online Banking Report, 4/01

¹Example for illustration purposes only, not based on actual research results

The Big Picture

Depending on how you define small business, there are as many as 30 million business entities in the United States, including self-employed or part-time sideline businesses such as selling collectibles on eBay,¹ or as few as 2.4 million if you only look at companies with at least $500,000 in annual revenues, but no more than $10 million.²

For the purposes of this report, we are defining the total small business market as 9.4 million; 2.4 million of that is the larger small business with revenues of $500,000 to $10 million (see Table 1, below) and 7.0 million microbusinesses with annual revenues of $50,000 to $500,000. While microbusinesses are the primary focus in this report, much of what we discuss would also be effective with larger small businesses, as well as self-employed or part-time businesses that fall under the $50,000 threshold.

In your business planning, it’s important to look more at the financial needs and attitudes of the end user and less on annual revenues. George in New Haven may only bring in $25,000 annually from his office equipment resale business; but combined with the $175,000 his wife brings in from her law practice, that’s a household you should be banking. A robust microbusiness offering could be the bait that lands all the business from George’s household.

¹Celent Communications, 7/00

²PSI Global, 4/00

Table 1

Description of Small Business Types

Source: PSI-Global 4/01; Online Banking Report, 4/01

The Real Opportunity for You

Unless you run a national franchise, the 7.0 million universe of microbusinesses is meaningless. You need to know what the opportunity is in your market. One way to look at it is through percentages. Assuming there are a total of 85 million U.S. households with bank accounts, then as many as 35% (30/85) identify themselves as business owners. More than 11% (9.4/85) own businesses that are relatively easy to find, they have identifiable business phone lines and at least $50,000 in annual revenues. Looking at just the $50k to $500k microbusiness segment, more than 8% (7.0/85) of all banking households also run microbusinesses.

Assuming 25% of microbusiness owners are current candidates for online services, and 50% will be users within 5 years, there are 1.75 million (25% x 7.0) prospects today, and 4 million by 2006 (50% x 8). For more details. To get a rough idea of the microbusiness opportunity in your market, multiply the total number of banking households by 8%.

Worksheet 1

Estimating the Number of Microbusinesses in Your Market

Number of banking households in your market                                               _____

Multiply by the percentage of all households that are microbusinesses      x      8 %

Approximate number of microbusinesses in your market                             = _____

Multiply by the percentage using the Internet (pxxx)                                   x     70%

Approximate number of Internet-using microbusinesses in your market      =            

The market may be large, but how much of it is truly up for grabs? Business banking relationships have traditionally revolved around the credit relationship. In cases of larger small businesses, a trustworthy bank officer is perceived as both an ally to the “loan committee” and someone who helps find solutions for business credit needs.

Unless you make the commercial loan, is there any hope of gaining a meaningful transaction or deposit business? OneCore, the premier Internet-only small business banking provider on the, has only attracted “a few thousand accounts” in more than 2 years. In fact, late last year, the company recrafted itself as a turnkey solutions provider for large bank business banking programs. Though the mid-six-figure price tag is high, it’s far less than it would take to build a similar platform from scratch. We think OneCore has a good chance of succeeding, if they can attract a marquee reference account before their investors back out. The company says it has adequate capital through 2002, so it appears they have a good shot at making it.

It’s possible to attract microbusinesses without providing credit, but why would you want to? The credit account is what drives profits to the bottom line for you and your customer. Every creditworthy microbusiness customer should have an overdraft line of credit, a home equity line of credit (assuming the business owner has home equity), and a business line of credit. These three credit facilities, even if they total no more than $10,000 initially, will make the business owner feel like a valued customer; and each line can grow larger over time as you grow more comfortable with the business owner’s financial track record. 

Table 2

U.S. Businesses by Annual Revenues

Source:  PSI-Global, Small Business Market Study 2001, 4/01 (commercial banking numbers from 4/00)

¹The person at the company that handles the majority of banking activities

²Could be serviced by commercial banking department depending on circumstances

³Also known as SOHO, small-office-home-office, a term used less frequently today

The small business sector spends a considerable amount of time and money on financial matters. In 1997 the McKinsey/BAI study found that the average annual financial services purchases from banks and non-banks combined, across 5.6 million U.S. small businesses, was $14,000; removing insurance, the average fell $7,700.

More recently, PSI found the total market size of balance-driven products (assets and liabilities) was $2 trillion; $870 billion (43%) was from microbusinesses, and $1.15 trillion was from small businesses (57%), Assuming a 200 basis point (2.0%) spread on the balances, the sector is generating $40 billion in net interest revenues, an average of $4,300 per business. In addition, PSI estimates that business owners have another $2.4 trillion of deposit and loan balances in their personal accounts. At a 200 basis point spread, the owners are generating another $48 billion in net interest income on the consumer side (see Table 4).

But, this only counts the money paid to financial services companies. It ignores the significant internal costs associated with financial management: accounting, bookkeeping, payroll, treasury, and so on. With the Web, banks have an opportunity to compete not just for the traditional financial products, but also for the entire financial operations of the business.

Table 3

Financial Products Purchased by Small and Microbusinesses—Business Usage Only¹

Source: Balances from PSI Global’s 2000 Small Business and SOHO Studies, 4/00; number of small and microbusinesses from PSI’s 2001 Study, 4/01

Total population (N) = 7.0 million U.S. microbusinesses plus 2.4 million U.S. small businesses = 9.4 million

¹¹Includes only products used exclusively in running and operating the business

²Includes short-term investments

³Average balance of businesses using the particular product

⁴Average balance across the entire population (N)

Table 4

Financial Products Purchased for Personal Use by Owners
of U.S. Small and Microbusinesses¹

Source: Balances from PSI Global’s 2000 Small Business and SOHO Studies, 4/00; number of small and microbusinesses from PSI’s 2001 Study, 4/01

Total population (N) = 9.4 million U.S. small and microbusinesses

¹Products used personally, not for the business

²Total market = (% using) x (average balance) x (9.4 million micro and small business owners)

³Total balances only, does not include auto leases or insurance

Online Banking Usage

Until last year, small business usage of online banking had been disappointing. Just a year ago (April, 2000), less than 7% of small and microbusinesses said they used online banking. But during the past 12 months, usage has spiked, climbing 56% to 10% overall. Growth in the larger end of the small business segment was even higher, with the $500,000 to $4.9 million segment with online penetration of 16%, 68% year-over-year gain. In the largest segment, businesses between $5 and $10 million, usage climbed to 29%, a 71% gain.

Table 5

Small and Micro Business Use of Online Banking

Sources:  (1) 1998 to Q2 2001 estimates, PSI Global 2000 Small Business Market Track with update in April ‘01; (2) 2001 YE to 2010 YE forecast, Online Banking Report, plus or minus 33%; assumes 3% annual growth in the number of businesses in each category

Large banks and other financial providers have long coveted the small business market, but have found it difficult to provide the high-touch services demanded by business owners at a price smaller businesses can afford. We believe online delivery is the answer to this dilemma as it allows banks to customize powerful financial management products for sole proprietors, partnerships, and S-corporations.

The Opportunity

• Banks are missing an enormous opportunity to serve the lucrative microbusiness (see definition, right) portion of the small business market.
• Although this group has long been dismissed as not having enough revenue potential to justify the labor required to serve it, we believe the combined value of business and personal financial product usage, and the potential for growth in both, makes them a highly desirable segment.
• The best opportunities are among self-employed professionals and business service providers who do not require constant depositing of cash and paper checks.
• There is less competition for this segment because it is difficult to reach and undervalued by mainstream financial services providers; however, non-banks such as Intuit, GE, and American Express have made in-roads in certain product categories, and will attempt to leverage those strong relationships to upsell additional services.
• Credit services are still a likely determinate of which bank is deemed the “primary” financial provider; home equity secured lending, with underwriting flexible enough to accommodate the self-employed, is especially important when serving microbusinesses.
• New payment processing services, such as CheckSpace  that allow microbusinesses to easily accept credit card and ACH payment, are a great lure for finding new customers.

Microbusiness Attitude and Behavior

• Online banking is a low priority among business customers who care more about the relationship with their loan/biz banking officer, branch convenience, credit lines (especially home equity), loans, rates/fees, and customer service.
• Small businesses want stability in their financial relationships; they want to deal with a company that will be there in the future; and, most important, they want a relationshipp with a real human who knows the business and won’t let anything fall through the cracks during management or business upheaval.
• Therefore, it’s vitally important for most microbusinesses to connect with a human during the initial sales process; someone the business owner believes will have a positive impact on credit decisions.
• This all-important relationship with a human must be nurtured after the initial sale; email and other electronic tools can be effective in fostering the relationship.
• Business owners may value the bond with their bankingg officer more than the relationship with the bank.
• Businesses don’t have the time or inclination to adjust their systems and procedures to use things that  “sound good on paper.” But, if you can get them started, small businesses will often become loyal online banking customers, more likely to stay with their bank.
• Given the combined value of their personal and business usage, and the owner’s optimistic perception of future growth in both, small businesses want to be treated with respect.
• The importance of each customer service interaction grows in importance as business owners move to self-service options, relying less on interactions with branch staff.
• Over time this segment is likely to move to self-service over the Internet (primarily email) and relatively brief telephone conversations.                                                                                             

Primary Data Sourcee

Many of our conclusions are based on data provided by NFO WorldGroup-Financial Services (formerly PSI Global). We owe a debt of gratitude to Maria Erickson, EVP, for her patience in answering our questions and for making data from their Small Business and SOHO studies available for this report. Contact Maria at (813) 371-3800 x 294, for more information on purchasing financial services research from NFO.

Special Report: The Hidden Segment

A blueprint for profitable online services for sole proprietors, partnerships, and S-corps

Bank of America recently told analysts that its online businesses were in the black.¹ No one outside BofA knows exactly what accounting gyrations were used to come up with those results, but apparently the revenues were boosted substantially by gains in technology investments the bank made in ecommerce partners such as Checkfree.

If you weren’t playing VC in 1999, you may have found it a bit more difficult to show a profit from your online efforts. If you are looking for a new strategy to improve your online P&L, we think you should consider a segment that is large, profitable, underserved, and practically invisible - microbusinesses. Microbusinesses include part-time entrepreneurs, startups in formation, self-employed, and very small corporate entities.

While there is no universal definition of a microbusiness compared to a small business; for the sake of this report we’ll use 5 employees as the cut-off. Typically, once a company has more than a handful of employees, it uses specialized accounting systems that make its banking needs different from microbusinesses running Quicken or QuickBooks.

In this month's entries we’ll help you analyze, justify, design, and launch an online service geared towards microbusinesses. This month contains the executive summary of the special report, along with an analysis of two promising microbusiness solution providers, OneCore and CheckSpace. The full 100+ page report is available in PDF or hardcover format for an additional fee.  email us at ebizreport@netbanker.com .

The below companies launched in second-half 1999 or first half-2000 in alphabetic order.

1stWebBankDirect

www.1stwebbankdirect.com

1stwebbankdirect is soliciting affinity partners
directly from its Web site.

Type: Division of Sovereign Bank ($24.6 billion)

HQ: Wyomissing, PA

President: Cliff Lavin

Status: In formation; the most talked about unlaunched startup, garnering press attention since announcing Internet initiatives in March 1999; no announced launch date, parent may be occupied with acquisition of 268 branches and 532 ATMs from Fleet.

Strategy: To offer co-branded Net banking through affinity groups such as universities, community groups, employers, and retailers.

Service Providers/Software Platforms: Net banking platform from S1; bill payment from Checkfree; account approval algorithms from Equifax; core processing from Fiserv; call center and account servicing platforms from Unisys.

Mini-Analysis: We trust the bank has more up its sleeve than just affinity marketing, which has some serious weaknesses:

•  most affinity groups already have credit card partners, one of the major retail banking profit drivers; for example, MBNA alone has more than 4,000 affinity partnerships
•  for banking services, many affinity groups are well-served by credit unions delivering a compelling package of local convenience, personal service, low prices, and online banking
•  major e-tailers will demand an equity kicker as part of any deal; for example, Amazon.com received warrants for 4.4 million NextCard shares as part of its co-branded credit card deal

A final observation: The name is too hard to remember and type. It strings together four generic concepts: 1st, Web, Bank, and Direct; that’s at least two too many.

Contact:

201 Penn Street

Reading, PA 19601-4038

(610) 520-7000

AccessNationalBank

www.accessnationalbank.com

AccessNational touts 24-hour commercial real estate loan approval on its home page.

Type: Start-up clicks and mortar

HQ: Vienna, VA

Founder: Michael Clarke, CEO, ex-Patriot Bank associate of Millennium Bank’s Carroll Markley.

Status: Application for a national bank charter filed with the OCC Feb. 16, 1999; preliminary approval received June 8, 1999; doors opened in early 2000.

Target Market: Small business with revenues of $15 million or less in the greater Washington Metropolitan market with a special emphasis on the high technology community of Northern Virginia.

Strategy: Blend of Internet delivery with a minimal brick-and-mortar presence; a single full-service branch will operate in Chantilly, VA. Access National will merge with residential lender Mortgage Investment Corporation, headquartered in Vienna, VA, concurrent with the opening.

Funding: An IPO is planned

Contact:

14006 Lee Jackson Memorial Hwy.

Chantilly, VA 20151

(703) 871-2100

AeroBank

www.aerobank.com

Type: Division of non-bank financial services company, Aerofund Financial, a San Jose, CA factoring company

HQ: San Jose, CA

CEO: Scott Racusin, previously with Security Pacific Bank (13 years) and Union Bank (12 years)

Status: Launch planned for Q2 2000; AeroBank is just the fourth national bank to be approved by the OCC for national electronic delivery; the first was CompuBank in Oct. 98, the others are NextBank, a limited purpose bank accepting jumbo (<$100,000) deposits only, and CIBC National Bank of Maitland, FL, a division of CIBC (Toronto, Canada)

Target Market: Small business

Strategy: Integrating Net delivery with human loan officers

Funding: In the process of raising $18 million

Goals: 10,000 accounts by 12/31/2000; profitable within 3 years

Mini-Analysis: With the experience and client base of Aerofund Financial, this bank has a real chance to reach a critical mass of customers.

Contact:

2787 Moorpark Avenue

San Jose, California 95128

(408) 241-2462

BankDirect

www.bankdirect.com

BankDirect’s excellent home page includes links to both ABAecom and VeriSign’s site certification programs.

Type: Wholly owned subsidiary of Texas Capital Bank ($297 million) which launched its brick and mortar bank concurrently with BankDirect

HQ: Dallas, TX

Size: 7,000 total accounts 2/15/00, more than double the 3,000 accounts as of 10/27/99

Top Execs: Rose Hultgren is President,
Joseph Grant is CEO

Status: Launched in March, 1999, but have not committed major marketing dollars; planning an IPO spinoff in 2000.

Strategy: Affinity-based co-branded marketing programs such as the one with Excel Communications <excel.bankdirect.com>.

Mini-Analysis: First impressions are good: catchy name/logo; excellent graphical layout; good, concise copy; and so on. But they need to work on navigation. The biggest deficiencies: no links to the online demo except on the login page; Learn is a confusing name for company information; it’s unclear what the difference is between “manage” and “access,” which are both password protected but apparently not integrated.

The bank also needs to work on the loan side, currently delivered on a co-branded basis via Lending Tree. While that is a good approach for low-margin installment loans (mortgages, auto loans), the company needs revolving credit products, especially an overdraft line of credit. Overdraft credit lines are a must-have feature for serious transaction accounts and they can be big moneymakers for the bank.

Some other interesting features:

•  rate comparisons
•  email signup on home page
•  customer service contact forms
•  small animations on Apply and Login draw users attention to these important functions
•  Coming Soon says they are working with PalmCentral.com to develop Palm banking
  and WarrantySuperstore.com
•  InsWeb for insurance

· pop-up customer service forms in five categories:
- Have a CSR call me
- Ask a question
- Make a comment
- Report a problem
- Refer a Friend

Contact:

4230 LBJ Freeway

Dallas , TX 75240

(214) 890-5835

BankZip

www.bankzip.com

BankZip, “The World’s First Internet Banking Alliance” is worth a look.

Type: Spinoff from Patriot Bank ($1.1 billion); alliance of community banks; see funding right.

HQ: Pottstown, PA

Top Exec: Richard A. Elko, President

Status: In formation with early 2000 launch planned; beside founder Patriot, three other banks have signed on, Madison Bank (Blue Bell, PA; $158 million), First Penn Bank (Philadelphia, PA; $81 million), and IGA Federal Savings Bank Feasterville, PA; $190 million) all based in eastern Pennsylvania.

Target Market: Through community bank franchisees and equity owners, the banking consortium hopes to reach a nationwide audience.

How it Works: BankZip’s unique business calls for creating a co-branded “portal” licensed to community banks throughout the nation. Users attracted to BankZip.com through national advertising enter their zip code (hence the name) and are directed to the participating community bank licensing that zip code. If no bank has locked up a particular zip code, revenue from the user is shared by all affiliates.

One drawback: New users, even those coming into the system from a participating community bank, must transfer their accounts into the BankZip system. Affiliates handle customer service only.

Funding: BankZip was a wholly owned division of Patriot Bank, which invested $5 million in the venture. On Dec. 14, 1999, BankZip completed a private placement of $5.44 million of common stock and convertible debentures bringing total capitalization to $10.44 million. Through Dec. 14, BankZip has incurred $4.85 million in pre-tax cash and noncash charges that were expensed in Patriot’s fourth quarter results.

Patriot’s ongoing relationship with BankZip is limited to ownership of convertible debentures to acquire 5 million shares of BankZip.com at no further cost. An initial public offering is expected in the year 2000.

Marketing: Last fall, the company talked about raising enough capital in an IPO to fund a $70 million marketing campaign to build the brand and attract users. The strategy has been scaled back a bit, but the bank still plans an aggressive marketing campaign.

Other Domain Names Owned

insurezip.com investzip.com

zipthis.com loanzip.com

cashzip.com moneyzip.com

atmzip.com marketzip.com

americase-bank.com (America’s E-bank)

Source: Network Solutions, 11/99

Mini-Analysis: Talk about thinking outside the box —and with $5 million on the table! This concept is so unique and unprecedented, we don’t quite know how to react. It could be a huge winner. Or not. Originally, we were skeptical, but after a long discussion with Elko and Joe Major, CEO of Patriot, at BAI’s Retail Delivery we came away impressed with their knowledge, drive, and enthusiasm. They might just be able to pull it off. But they definitely need to spruce up the Web site, it’s outdated and doesn’t inspire confidence in the venture’s ability to create a compelling Web bank.

Contact:

High and Hanover Street

Pottstown, PA 19464

(610) 970-4650

Clarity Bank

www.claritybank.com

Clarity’s Web site placeholder has a modern look.

Type: Start-up, acquiring existing bank

HQ: Purchase, NY (home of MasterCard)

CEO: David Arzi

Status: Formed in June 1999; launching in March 2000, following the completion of its acquisition of First National Bank (Uvalde, TX; $28 million).

Target Market: Small business initially, then consumer

Business Model: More focused on loans than transaction fees

Strategy: Will offer a full line-up of business and consumer services with bilingual (English and Spanish) delivery; an ecommerce mall will feature offerings from its small business clients and other Web sites that refer users to Clarity Bank; mall usage will be boosted with a cash-back credit card good at mall merchants.

Marketing Plan: A $1 million launch effort is planned, including a 750,000-piece direct mail, on- and off-line media; also soliciting associates who will earn $20 per customer sign-up.

Funding: $14 million in venture funding raised to date; planning an IPO this year.

Goals: 50,000 accounts “in the near future”

Mini-Analysis: Sounds great on paper; but will have to be careful not to overextend trying to be all things to all people all at once.

Contact:

2975 Westchester Avenue

Purchase, NY10577

(914) 701-2000

info@claritybank.com

Clarity Bank Management Team

Source: company, 12/99

*formerly President of Bank CEO of Hartford-based Advest Bank and Trust Co., a subsidiary of the Advest Group Inc. which in May 1999, sold its retail and commercial banking businesses

Direct Banking

www.directbanking.com

Type: Wholly owned subsidiary of Salem Five Cent Savings ($1.1 billion), one of the first banks with a Web site in 1995

HQ: Salem, MA

Top Exec: William H. Mitchelson is CEO of Salem Five; former directbanking.com head Mike Fitzgerald was hired in January to be President of Net.B@nk

Status: Launched in Nov. 1999

Funding: Wholly-owned subsidiary of Salem Five

Mini-Analysis: Salem Five has been an innovative pioneer, winning our First Best of the Web in 1997; if they can harness this innovation in a Net-only subsidiary, it could be very successful; a wild card is the loss of its top exec to Net.B@nk

Contact:

210 Essex Street
Salem, Ma 01970

(978) 720-5325

eBank

www.ebank.com

Ebank has the best domain name in the business, now they need to build a company that can leverage it.

Type: Public (EBDC), clicks and mortar

HQ: Atlanta, GA

Size: $55 million in assets, $43 million in deposits, 1,078 deposit accounts (9/30/99)

CEO: Richard A. Parlontieri

Status: Southeast Commerce Holding Company was organized Aug. 1997 to serve a holding company for Commerce Bank; completed IPO July 1998; began operations Aug. 1998; in May 1999 acquired domain name ebank.com, changed its name to ebank.com, and announced Internet strategy; shortly thereafter the OTS found that the bank violated its charter by materially altering its business plan without prior approval of the OTS; the bank paid a $100,000 fine in Sept. 1999 and subsequently had its Internet business plan approved.

Target Market: Small business

Strategy: Originally the company planned to open a nationwide network of ebank.com centers in high-potential markets. Those plans have been scaled back to just three ebank centers in 2000, Atlanta, Charlotte and Tampa. To achieve the personal service the company believes is essential to successful commercial lending, the bank plans to partner with community banks around the country. The bank recently announced (1/31/00) an alliance with Talisman Technologies to deploy a network of Internet-enabled ATMs that would connect to the bank. Pending OTS approval, the network would be initially available in fourth quarter 2000.

Mini-Analysis: Now we understand why eBank execs kept avoiding our questions about last summer. They were in the midst of receiving a major slap on the wrist from the OTS, to the tune of $100,000, for announcing their Internet strategy prior to OTS approval. But that appears to be all behind them now, and the bank has reeled off an impressive list of strategic alliances.

They certainly have the right name, although investors have been skittish given the bank’s troubles with regulators. The stock trades about 15% under its $10 IPO price (7/98) and the company’s $12.5 million market cap (2/10/00) isn’t all that much higher than what the domain name alone might bring, based on Bank of America’s purchase of loans.com for $3 million in January.

Contact:

2410 Paces Ferry Road, Suite 190

Atlanta, GA 30339

(770) 801-0355

info@ebank.com

Millennium Bank

www.thenetbanker.com

Millennium Bank offers a full range of services including a brokerage.

Type: Start-up, privately held

HQ: Reston, VA

CEO: Carroll Markley, previously with Patriot Bank, parent of BankZip.com

Status: Announced Dec. 1998, raised $8.3 million and opened April 1, 1999, under a national charter

Mini-Analysis: Millennium Bank www.thenetbanker.com put a “the” in front of the URL we’ve been using since Nov. 1995, www.netbanker.com In general, “the” domain names are second-tier, it kind of makes you wonder why they couldn’t afford a real domain name. It’s also confusing to customers and vendors who tend to forget “the” and type netbanker.com instead. We know, we get interesting email destined for “thenetbanker.com,” resumes, gossip, and so on.

Also, we question how Web-savvy the company is. They have never approached us about forwarding misdirected email. We weren’t even aware there was a “thenetbanker.com” until researching this report.

Contact:

1601 Washington Plaza

Reston, VA 20190

(703) 464-0100

National Interbank

www.nationalinterbank.com

National Interbank, a division of First National Bank of Mitchell, Indiana, launched at year-end.

Type: wholly-owned subsidiary of First National Bank of Mitchell (IN), a $48 million bank owned by Waterfield Bank Corp.

HQ: Mitchell, IN

CEO: Randy Waterfield

Status: Launched Dec. 1999; the bank was founded by the Waterfield brothers, Randy and Richard, formerly of Goldman, Sachs. Banking has been in the family since their grandfather founded Waterfield Mortgage Company in 1928. Later their father ran the mortgage company and acquired Union Federal Savings Bank of Indianapolis.

Target Market: Consumers

Strategy: Use best-of-class technology to provide superior services; E-Loan provides mortgage and home equity lending services

Mini-Analysis: The bank has done a good job of getting their name around the Web and on various rate comparison sites. But so far, its service offering is sparse and undifferentiated. They have their work cut out for them, as do all new Net-only banks.

Contact:

P. O. Box 1245

Indianapolis, IN 46206-1245

(877) 468-7265

j_randall_waterfield@nationalinterbank.com

NextBank

www.nextbank.com

Type: Affiliate of NextCard, the first Net-only credit card company launched in Dec. 1997; parent is public (NXCD) with market cap = $1.1 billion (2/29/00); IPO May 1999; Amazon holds a warrant to purchase 4.4 million shares for $39

HQ: San Francisco, CA

CEO: Jeremy Lent

Size: NextCard has more than $500 million in assets from 275,000 credit card accounts (2/28/00); NextBank has $314 million in deposits (9/30/99).

Target Market: Consumers using credit cards and the Internet.

Status: NextCard purchased Textron National Bank in 1999; it is expected to eventually provide the base for a full line of retail banking products; but currently NextBank’s Web offering is limited to jumbo CDs (<$100,000) and a link to NextCard credit cards.

Strategy: Credit card product and infrastructure optimized for the Internet; consistently one of ten largest Net advertisers; adding value around Internet transactions which is expected to lead them into debit transactions/checking; statement aggregation and so on; co-branding with Amazon.com and others

Mini-Analysis: We have been impressed with NextCard ever since we first talked to them in early 1996; lately, they have been downplaying their interest in “traditional” Net banking, claiming to be more interested in Internet transactions than retail deposits; time will tell if that’s merely a head-fake. The relationship with Amazon.com could be used to develop interesting statement aggregation and person-to-person payment schemes leveraging Amazon.com’s 16 million customers and patented one-click payment mechanism.

Contact:

595 Market St, Suite 950

San Francisco, CA, 94105

(415) 284-9217

Pennsylvania Business Bank

www.pabizbank.com

The three circular graphics on the home page reveal product menus when a mouse travels over them.

Type: Start-up, private

HQ: Philadelphia, PA

Top Exec: Alan Fellheimer

Status: Bank founded, Mar. 1999; Net banking launched Oct. 1999; commercial loans added, Dec. 1999; operates under Pennsylvania Bank Charter with FDIC insurance

Target Market: Business

Strategy: Offers a full line of commercial, small business, and personal products, but clearly is targeting the business customer; Web site from Digital Insight; also uses www.bizbank.org

Contact:

7 Penn Center, 1635 Market Street

Philadelphia, PA 19103-2217

(215) 587-2200

info@bizbank.org

TB.com Bank

domain name not registered

Type: Start-up, private

HQ: Wilmington, DE

Top Exec: Frank Mastrangelo, President/COO, formerly Jefferson Bank CTO

Status: In formation

Strategy: TB.com Bank is expected to be an all-Internet operation with a private-label banking relationship targeted to affinity groups such as universities and trade associations.

Funding: The Cohen family is creating a new Internet bank to add to its financial dynasty which included JeffBanks Inc., sold Dec. 1, 1999 to Hudson United, and Resource America. Bancorp.com is the holding company for TB.com Bank, which is being organized in Delaware, with Edward E. Cohen as Chairman and his son, Daniel G. Cohen as CEO; applied for a state charter Sept. 13. Edward Cohen is CEO and Daniel Cohen is COO of Resource America, a Philadelphia-based specialty finance company.

TheBizBank

www.thebizbank.com

Type: Wholly-owned subsidiary of Cole Taylor Bank ($2.0 billion)

HQ: Chicago, IL

Top Execs: Craig S. Dean, CEO; Dan Bleil, EVP, Relationship Management

Target Market: Small business

Status: Building a state-of-the-art product line

Contact:

1333 Butterfield Rd., Suite 555

Downers Grove, IL 60515

(630) 493-1531

info@thebizbank.com

Ubiquity Financial

www.ubiquityfinancial.com

Type: Division of Fraser Valley Credit Union ($500 million; 47,000 members)

HQ: Abbotsford, British Columbia, Canada

Top Management: Larry Davey, President

Status: Launched in Jan. 4, 2000; has attracted 400 accounts in its first month; uses Prologic platform

Target Market: The CU expects 10 to 15% of the parent’s members to join, representing 5,000 to 7,000 members; also eyeing the 150,000 Canadian customers of ING Direct.

Strategy: Paying higher rates than its brick-and-mortar parent; plans to advertise on iMoney.com, a Canadian financial portal.

Comments: The name is a bit cumbersome.

Contact:

32071 South Fraser Way

Abbotsford, B.C., V2T 1W3

(604) 850-0999

Virtual Bank

www.virtualbank.com

Virtual Bank is adding statement aggregation
from VerticalOne.

Type: Click-and-mortar start-up, VC funded

HQ: Palm Beach Gardens, FL

Founders: Rory Brown, CEO; Bill Decker, President

Status: Launching April 3, 2000; looks to be a major player after landing a first round investment in Feb. of $37.5 million from venture capital firms J.H. Whitney, Palisade Capital Management, and Wyndcrest Partners; General Electric, DaimlerChrysler, DLJ, MCI Worldcom CEO Bernie Ebbers, Starwood Hotels CEO Barry Sternlicht, and Miami Dolphins quarterback Dan Marino; uses Prologic platform.

Strategy: Targeting employees in the high-tech industry; plans to open offices in 12 high-tech areas in the next 18 months, including Silicon Valley, Austin, New York, and Boston; could very well be the first retail bank with statement aggregation (VerticalOne).

Contact:

2000 PGA Blvd., Suite 3110

Palm Beach Gardens, FL 33408

Virtual Bank Domain Name Holdings

virtualbank.com myvirtualbank.com

1vcharge.com 1vauto.com

1vmortgage.com 1vloan.com

Source: Network Solutions, 11/99

X.com

www.x.com

X.com’s Web site is typical Silicon Valley, full of selling messages and devoid of pictures.

Type: Start-up; VC funded; banking services provided through partnership with First Western National Bank (La Jara, CO, $48 million), a subsidiary of Community Bankshares, Inc. (Colorado)

HQ: Palo Alto, CA

Top Execs: Bill Harris, CEO (formerly Intuit CEO); Elon Musk, Founder

Status: Soft-launch Nov. 30, 1999; P2P payments launched Dec. 15; during Feb. became largest Net-only bank as measured by number of accounts, 50,000+ on Mar. 1; announced merger with PayPal on Mar. 2; became most-visited bank in the USA in Feb. with 1.8 million unique visitors; first public bank victim of cyberthieves

Target market: Consumers

Goal: 500,000 accounts by mid-year

Strategy: viral marketing with $20 sign-up bonus (promotion ended Feb. 18); Internet person-to-person payments including co-branded auction payment product with AuctionWatch.com no minimum S&P index fund with no management fees and a 1 basis point contribution by the company

Funding: Sequoia Capital led the first round of
$25 million; a second round is expected in March; followed by an IPO in 2000, which Elon Musk said will be the biggest Internet IPO this year (see The Industry Standard, March 6, 2000, 86-87, www.thestandard.com/article/display/0,1151,12192,00.html

Mini-Analysis : Although, it’s very early in the game, X.com appears to be the first company, other than Palo Alto neighbor and merger partner PayPal, following the strategy we’ve been expecting for some time, that of a truly virtual bank working in tandem with the customer’s local bank and checking account (for more on this strategy, see Building the Amazon.com of Financial Services, and Virtual Checking.

They are also the first retail banking entrant to go after eyeballs rather than selling single products such as high-rate deposit accounts (Net.B@nk, Telebank); credit cards (NextCard, Wingspan, Providian); or mortgage loans (E-Loan, Mortgage.com). Cranking up the registered user base and Web traffic has been the formula for dot com success on Wall Street, so it will be interesting to see how it plays out in the banking sector.

It’s human nature to seek out activities with a payback less than the two to three years typical for the bill pay systems of today. So we’ve come up with a list of “instant gratification” features to offer online banking users to get them hooked on your service. The ideas can be used in the following three-step process of effective account activation:

Getting to the First Use

1. Create a good first impression

2. Provide immediate gratification

3. Make it simple and trust inspiring

Turning One-Time Users
into Regulars

1. Provide Web and email feedback after each use, especially the first (see example upper right).

2. Provide ongoing excitement and a reason to email your customer, such as a sweepstakes with an automatic entry each time someone pays a bill is paid
(see chart right).

3. Migrate users into automated payment routines. For example, encourage recurring payments with TWO sweepstakes entries for each autopay. Each merchant set up on autopay increases customer lock-in making it that much more difficult to switch to banks.

Bonus strategy for extra credit:

• Provide incentives at various usage milestones, for example, a mousepad for everyone that paid more than $5,000 worth of bills from your Web.

Example: Email after first bill payment
increases confidence and encourages use

Pat Jones,

Thank you for using YourBank.com eBillPay.
You have joined nearly 12,000 other forward-
looking YourBank.com customers using
electronic bill payment.

Your payment to xyz Corp. was mailed today
and should be credited to your xyz Corp. account within five days.

Your questions on eBillPay or any of our
other services are welcome from 6 a.m. to midnight
at 1-800-YourBank. Or visit our 24-hour self-service center on the Web <click here>.

Sincerely,

Alex Reynolds, Online Service Manager

Alex@yourbank.com

P.S. With each bill payment you make, your name is automatically entered into a drawing for a new Sony VAIO laptop.

Activation Tactics in Use Today

Source: Online Banking Report, 3/99; Financial Services Online, 2/99

Creating a Good First Impression

Your goal is to engage newcomers within the first 30 to 60 seconds, some techniques:

•  Make the top layer of copy concise and easy to understand; but with detailed explanations a click away; hire professional writers/editors; and TEST it all with real users.
•  Divide applications and forms into bite-sized chunks; let users come back later to finish if needed.

Provide something useful and worth remembering on the first visit. Preferably, something that allows you to at least capture the email address of good prospects. For example:

•  Allow new Web banking registrants to pay their first bill, or a trial payment to themselves or a friend, during the initial session (see Net Banking Playground).
•  Provide a free email-based “New Biller Notification Service” (OBR 1/99).
•  Let users easily sign up for balance alerts, transaction confirmations, and other emails triggered by activity in transaction accounts.
•  Pay cash bonuses for opening a new account (see TeleBank, OBR 2/99) or for conducting desired transactions, for example: first bill payment; 100th bill payment; first recurring payment; first time paying 10 or more bills in one month; first mortgage payment, first online funds transfer to savings; first in-bound ACH; first email to customer service; any tip posted to an online FAQ; or referring a customer, etc.
•  Provide rate comparison forms with email updates.
•  Post a refi analysis with email updates.
•  Provide a “Certified Merchants Program” where users can inquire about the track record of various online merchants; you could even guarantee fraud-free transactions at any merchant in your database; provide email updates of new merchants.
•  Allow small businesses and merchants to apply for a “Certified by Yourbank” logo to post on order-entry screens.

Make sure new users have no lingering doubts about the quality and integrity of your services. Some requirements:

•  Responsive help options via phone, email, Web chat, and even in person.
•  Service guarantees perhaps backed with monetary rewards. For example, an email-based voucher for $5 at Amazon.com if your email goes unanswered within 60 minutes, or 30, or 15, or 5 (how low can you go?)
•  Post third-party endorsements prominently, especially VeriSign (see feature in next OBR, 4/99), TRUSTe, FDIC-insured, and Online Better Business Bureau (see OBR 1/99)
•  Incorporate a simple, high-quality look and feel such, for example, www.nextcard.com .

Provide “creeping personalization” that gradually personalizes the Net banking experience without delving too far too fast into private details (see sidebar below)

Building Anonymous Personalization

Start the customization process the first time someone visits your Web. Update buttons strategically located around your Web can be used to make it less threatening than requiring users to fill out yet another form. For banks operating in multiple geographic markets, the first data point to capture is zip code. Users enter their zip code in a small box and press enter. The info is captured in a cookie, and from then on, as long as the user comes in through the same computer (without altering their cookie file), you will know where they live/work and can deliver personalized info, such as local time/temp/traffic, etc.

On each subsequent visit, ask a new update question. Over time, a powerful user profile will be built enabling you to pinpoint more closely what an individual user wants to see, even if the user chooses to remain anonymous. One company specializing in this concept is GuestTrack, www.guesttrack.com run by Cliff Allen cliff@GuestTrack.com, co-author of Internet World’s Guide to One-to-One Marketing.
(Source: ClickZ http://www.searchz.com/Articles/0325991.shtml3/25/99.)

Home banking vendors are beginning to release business modules for their Net banking platforms. Four are currently available or about to ship. Many more are in the wings.

Digital Insight

www.diginsite.com

26025 Mureau Road
Calabasas, CA 91302
Phone: (818) 871-0000
Fax: (818) 878-7555

Key Execs:
Paul Fiore, EVP & Co-Founder
John Dorman, President & CEO

The Company: The privately held company was founded in July 1995 by Paul Fiore and Daniel Jacoby. The company employs 76 and had 1997 revenues of $5 million. Historic strength in building turnkey Web sites for credit unions. Launched Web banking services in March, 1996. Of 243 live clients, 235 (97%) use Digital Insight to host their Web sites, 187 (77%) used the company to build their Webs, and 125 offer transactional Web banking through the company. Total Web banking enrollment is 236,000 for an average of 1,900 members per financial institution.

Business Banking Program: Prizm Internet Cash Management was launched in April, 1998, with Community Credit Union (Plano, TX; $500 million; 125,000 members) as its first client.

Edify

www.edify.com

2840 San Tomas Expressway
Santa Clara, CA 95051
phone: (408) 982-2000
Fax: (408) 982-0777

Key Execs:
Jeffrey Crowe is President and Co-founder
Bill Soward is VP Product Marketing

The Company: Edify is a public company (EDFY) founded in 1990. For the 12 months ended Sept. 30, sales were $67 million, profits were $655,000, and total employment stood at 349. The company has 1,100 clients worldwide, 150 in financial services. It’s Electronic Banking System is a full-featured online banking platform priced at $150,000+ and used by pioneers Net.B@nk, CompuBank, Harris Bank and others.

Business Banking Program: Edify announced the Business Banking Suite on Sept. 23. It runs on top of the company’s Electronic Banking System and is scheduled to ship in Q4 1998.

Home Financial Network

www.homeatm.com

55 Green Farms Road
Westport, CT 06880
Phone: (203) 341-7000
Fax: (203) 341-7442

Key Execs:
Daniel Schley, CEO; Eric Jacobsen, President & COO
Tom Dittrich, VP Marketing

The Company: The privately held 52-person company was founded in Sept. 1995 by two MECA Software executives, Daniel Schley and Eric Jacobson. According to the company, its clients have achieved 9% penetration (percentage of customers using online banking) with 87% activation rates, and support costs under $0.30 per customer per month. The company’s first product, HomeATM, a direct-dial program, was launched in March, 1997. Six months later the product was ported to the Web and dubbed HomeATM-Internet Version. The company offers flexible pricing options including a pay-as-you-go model and has seven clients live, six in beta, and others in various stages of development.

Business Banking Program: The company is in the launching a business version of its software called, what else, BusinessATM. It is expected to ship in fourth quarter.

Q-UP Systems

www.qup.com

8303 N. Mopac, Suite B450
Austin, TX 78759
Phone: (512) 342-9910
Fax: (512) 342-9921

Key Execs:
Dan Martin is President
Wade Sanders is Director of Sales

The Company: The privately held company was founded in 1995 and employs just 30. Its total client base stands at 97, with 78 licensing its Internet Banking System launched in Nov. 1996. See the demo at www.secure-banking.com Besides the usual online banking functions, Q-UP includes a number of value-adds such as stock quotes, weather forecast, radar and time of day.

Business Banking Program: Q-UP was an early entrant in business banking, launching the Cash Management module in Sept. 1997. It features wire transfers, ACH origination, direct deposit, tax payments, and more. So far, 52 banks have licensed Cash Management, making it the leading seller in the category.

As more community banks head online, some may be wondering why. Isn’t the advantage of a small bank the personal service it can offer customers? For example, our president knows just about every business customer personally; sees them at Rotary Club; has kids in the same soccer league. Conventional wisdom says you can’t make money on the Web, so why would a community bank spend its valuable resources on that sort of endeavor?

Cascade Bank (Everett, WA; $444 million) had been a traditional thrift institution with expertise in originating home loans and gathering high-cost deposits. Then the bank decided to change its orientation, along with many similar instit