I've been waiting for something like Chase Bank's Jot (see note 1). It's part of the "second wave" of mobile apps that demonstrate why mobile banking will soon be better than online banking.
_________________________________________________________________________________

Mobile banking phase 1: 2008 through 2011
________________________________________________________________________________

Mobile's first wave was all about porting the most-used online functions, balance inquiry and statement viewing, to a smaller screen. That was convenient for smartphone owners on the go, but it didn't add much to the overall user experience. 

The test of whether you've nailed the mobile UX is if that even if you are within arm's reach of your laptop, you still pick up the mobile to perform a function. Most mobile banking systems fail that test, i.e. you only use mobile banking when online access is inconvenient or insecure.
________________________________________________________________________________

Mobile banking phase 2: 2011+
________________________________________________________________________________

The second wave is much more interesting. Your mobile phone can do financial chores that simply cannot be accomplished online, for example:

• Deposit a paper check via mobile camera (USAA, Chase, PayPal and many more)
• Transfer money to your friend by "bumping" phones (PayPal, ING Direct)
• Alert you to special merchant offers in your exact location that are redeemable simply by using your bankcard (BankOns)
• Pay your bill automatically by scanning the billing statement (Mitek)
• Upload paper receipts and append them to expense reports (Expensify)

And the latest addition to that list:

• Receive feed of transactions and tag them with categories for future reference and reporting (Chase Jot)

________________________________________________________________________________

How Jot works
________________________________________________________________________________

Chase's new app (announced 1 June 2011) may not be as cool as remotely depositing a check, but it's much more useful for most cardholders. The iPhone and Android app, which is currently available only for the bank's Ink business credit card, sends push notifications of each transaction (see inset) and enables users to (relatively) quickly append transactions with category information, i.e. "tag" transactions. 

One key Jot feature, missing in most mobile banking services, is a running list of the transactions waiting to be tagged (see right).

That way, when the business owner has a few spare moments, they can quickly get caught up with their categorizing work. This ongoing attention will reduce the quarterly game of "what's that transaction" played when finalizing the company books.

So not only does Jot save time, it potentially improves the quality of the accounting data, always a good thing for business management. 

The app also includes other business credit card management functions such as basic reports by tag, the ability to change employee credit limits, and info on outstanding balances and payment due dates.

While the functionality is still pretty basic (e.g., there is no way to add more than one tag to a transaction), there are only 60 days of transactions available, and login needs to be simplified, overall Jot is a winner. We are tagging it with an A-.

----------------------------------------------------

Notes:
1. The Jot landing page is well done and includes a series of four short demo videos.
2. For OBR subscribers, see our previous Online Banking Reports on mobile banking and payments.

On the one hand, it's easy for a bank to get the attention of business clients and prospects. Just announce a streamlined commercial loan-app process. But since that's unlikely to happen in the wake of the Financial Meltdown, a Webinar with Google is a pretty solid Plan B.

Chase has a winning effort here. The topic, 7 ways to sell online, is so compelling that Google is tossing in a $100 AdWords credit for attendees (see note). And it never hurts to associate with a powerful and well-regarded Internet brand.  

The email design is good with an interesting subject line, an email to ask questions, and a big green button for the call-to- action. The copy is a bit predictable, but it's short and to-the-point and doesn't distract. There are small quibbles regarding design-layout; perhaps, a Gmail issue; and they forgot to capitalize the W in AdWords, but those are minor glitches.    

Grade: A-

Chase email to existing business clients (6 May, 10:33 AM, Pacific)

Landing page hosted by Google and co-branded with Chase (link)

-------------------------------

Notes:
1. Google usually offers the $100 only to new clients, but I don't seen any fine print limiting the bonus. I hope they don't add a restriction after the fact, which could negate the positive energy Chase generates from the Webinar offer.
2. For more info on the space, see Online Banking Report: Micro- and Small Business Online Banking (published Oct. 2009)

Chase Bank is aggressively pushing its latest small biz initiative, Instant Storefront, billed as a way for old-school "9 to 5" businesses to sell online 24/7. Here's where I ran across it last week: 

• A radio ad a few days ago (in Seattle)
• Full-page ad in the San Francisco Business Times (p. 24 of March 25-31 issue)
• On the main account management page within online banking
• Small ad on Chase's business banking public page today (see last screenshot, note 1)
• Email yesterday offering a $100 bonus to give it a try (see first screenshot, note 2). 

The email is short and sweet with a good subject line and appealing design. The green button leads to a landing page with more info (second screenshot). The page includes an old-school, and very effective lead-gen technique, offering to email the $100 coupon to interested visitors (third screenshot).

The cost is $30 per month, and the bank throws in a $350 POS terminal and waives $150 in startup fees for new Chase Paymentech merchant customers.

To redeem the offer, customers must visit with a business banking specialist in a Chase Branch. Ecommerce website development seems like a bit of a stretch for a business banker to be conversant with, but hopefully it's very turn-key. And I like how the service positions Chase as an online partner to small biz, so it may be a brilliant branding tool.

Using a browser with cookies removed (note 1), I don't see any mention of the new service on Chase's website and searching for "storefront" in its site search returns nothing (note 3). So Instant Storefront may be a western market test.

----------------------------------

Chase Bank email to business customers about Instant Storefront (30 March 2011)

Landing page for Instant Storefront (link)

Lead-gen page where users enter their email address to get the $100 coupon

Chase public business banking site (with Washington state customer cookie)

-----
Notes:
1. The ad appears only on the browser I use to access my Chase account. On browser with cookies disabled, I do not see the Instant Storefront ad.
2. The print and radio ads also offer the $100 bonus.
3. The bank uses the URL: chase.com/storefront in its radio ad.
4. For more info, see Online Banking Report: Micro- and Small Business Online Banking (published Oct. 2009)

Internet-enabling every service and device on the planet creates fascinating new business opportunities. And we are seeing our share of them in the fintech space (note 1). Knowing how to deliver the proper blend of personal service and automation is an area of extreme importance to financial institutions: The optimal solution varies by customer, by product, and even by time of day.

One relatively neglected area involves premium services that offer state-of-the-art tech married to specialized human service, for a fee. Large banks have private banking departments that handle the bills and day-to-day finances of households with millions in assets. But those that fall outside the private banking threshold are generally offered free, self-service tools available to everyone.

Back when only 10% to 20% of households were online, that distinction was necessary. But now that 60% to 70% or even more of a bank's households use the Internet, there are enough customers to slice and dice financial management services into a variety of offerings and price points. There's a lot of revenue available for service offerings in the wide range between free and private banking.

Enter the newest player in high-end bill payment: Balance Financial, an angel-funded company based in Seattle that launched its new service this week. CEO Devin Miller was also involved in the launch of one of our favorites new services of 2010, Finsphere's PinPoint mobile location-aware fraud-alert service (previous post).

___________________________________________________________________

How it works
_______________________________________________________________

Balance is a unique mixture of automatic bill pay and human bookkeeper, with an online PFM thrown in to help keep track of it all. The company has built a rich PFM, added billpay powered by Online Resources, and given each customer their very own actual person who oversees the account.

Unlike previous generations of billpay and the scan-and-pay offerings from PayTrust and others, Balance Financial does everything for you. It receives the printed or electronic billing statement, it uploads the docs to its website, and then the most important piece, it pays the bills automatically based on your prior instructions, just like the private banking officer. The end user is only contacted if the bill falls outside the preexisting parameters.

Sound too good to be true? Maybe, if it were free, but it's far from it. The company tested a variety of pricing options and settled on a price that's borderline ridiculous for the retail banking mindset: $75 per month.

___________________________________________________________________

Analysis
______________________________________________________________

Are they crazy? Maybe, but probably not. The company has been delivering personal bookkeeping services for seven years, and has paid more than 100,000 bills for its clients (note 3). It knows from experience there are affluent households and small businesses that are happy to offload this task for much more than $75 per month. When paying larger bills, the late fees alone can easily be in this range (note 2).

Balance admits the audience for $75/mo is tiny. But as its technology gets better, and its bookkeepers can take on bigger client loads, it believes it can push this price down, maybe even way down. So if you are interested in finding a new way to serve your mass affluents with something they can't get anywhere else, take a look at Balance.

Balance Financial integrates the human side throughout the Web-based app (3 March 2011)

--------------------------------

Notes:

1. From the look of the applications for the upcoming FinovateSpring, the number of startups is growing at an even faster pace.
2. Our record penalty for paying a bill late at our business is $1,100. We'd just made a huge charge and by being that one day late, our APR was bounced to 25%, and we went into revolving mode over two cycles. Even though we paid the balance off within 7 days of making the charge, it still cost $700 one month and $400 the next. Anyway, that one incident alone would pay for Balance for 1.25 years, not to mention avoiding the huge frustration of making a thousand-dollar blunder.
3. The original bookkeeping service was founded in 2004, by Devin's wife, Rebecca Miller.
4. For more on online personal financial management (OFM/PFM), see our Online Banking Report.

Two thousand is the largest banking premium I've ever seen, although Chase's out-of-pocket costs are probably less than $500. The offer was made last week via email (see first screenshot) to existing business-banking customers not already enrolled in Chase Quick Deposit, a scanner-based remote check-deposit service.

The details:

------------------------------------------------------------------------------------------------------------

From: Chase Bank 
To: Business Banking clients
Date: 10 June 2010 (1 PM)

Offer: Two years of free remote deposit services (Chase Quick Deposit), normally $50/mo, plus the $855 Panini 50-50 business-class scanner to power it. Total retail value = $2,055 

Fine print:
-- Users must deposit at least 10 checks per month to maintain fee-free service
-- New Quick Deposit users only; not valid for current or previous users
-- $500 cancellation fee if discontinued within 12 months
-- Offer good through July 31, 2010

Notes: This offer does not appear to be available to the general public. On the bank's website, the current offer is a free scanner with a 2-year contract at $50/mo.

-------------------------------------------------------------------------------------------------------------

Analysis: It's definitely attention-getting and will drive new remote-deposit business. But I'm a bit surprised Chase is giving away both the razor and the blades (see note 1). Perhaps the bank is testing different offers. But it will be two years before Chase finds out what percentage of its users convert to paying customers. Of course, they are also banking on an account-retention lift to repay the significant cost of the offer.   

Email from Chase offering free remote deposit services (10 June 2010, 1 PM)

 

Landing page

Users accepting the offer must first log in to their account to enroll

Notes:
1. Offer made to a single-service (DDA) small business checking client converted from WaMu.
2. For more info, see Online Banking Report: Micro- and Small Business Online Banking (published Oct. 2009)

We just launched a new blog focused on important developments at nearly 100 of the most innovative financial companies on the planet: those chosen to demo at our Finovate conference series. We'll have capsule summaries each week on Netbanker, but for the full post we encourage you to subscribe to the Finovate email list or RSS feed here.

We'll also be keeping you posted on even more Finovate alumni news via our Twitter feed here.

Outright.com Launches New 1099 Tax Filing Service

Free online bookkeeping site Outright.com has added its first fee-based service, shedding light on its business model for the first time. The company's new service helps small business owners manage 1099 tax forms for contractors, charging $5 per. Outright intends to introduce more fee-based services in the future while keeping the core service free.

Along with the launch of its 1099 service, Outright also launched a new tax information website, Right Taxes Now. The new site provides tax advice and offers opportunities to sign petitions regarding small-business tax relief legislation.

Read more about Outright.com and its new offerings here.

BillShrink Expands into Small Business Market with Launch of Credit Card Advisor

BillShrink, which provides money-savings advice on a variety of consumer products, has expanded its offerings to include help for business owners.

The company's new BillShrink for Business service helps businesses find better credit card deals. The company also has online tools in the works for comparing business wireless phone services and savings accounts.

Read more about BillShrink's new business services here.

BrightScope Launches 401(k) Data Tool

On January 19, BrightScope launched a new online tool, the Personal 401(k) Fee Report. The new tool expands on BrightScope's previous 401(k) data offerings by comparing the costs and retirement results of selected plans against alternatives such as IRAs, making the data more useful to financial advisors.

The report also provides detailed information on each 401(k) plan, such as a breakdown of the fees and a list of the associated funds. Read more about BrightScope's new 401(k) product here.

I received an email this morning (see below) from Chase Bank inviting me to participate in a new Business Advisory Board, powered by Lightspeed Research. My colleague also received the same invite for his separate account, so it doesn't appear to have been a particularly selective emailing. Both accounts were acquired by Chase in the 2008 WaMu debacle.

To sign up, users simply complete a 10-question one-page online form (first part shown below in screenshot 2) which took just under six minutes (note 1).

After completing the registration, I expected to be ushered into some type of special club, but all I received was a 15-word paragraph telling me to confirm my email address (screenshot #3). That's a bit of a letdown after giving the bank nearly 10 minutes of my day. I surmised the big payoff would come after confirming and logging back in. 

I was wrong. After logging in, I was greeted with a short thank-you statement and an invitation to take the "welcome survey," which turned out to be three questions about the 2010 economic outlook (screenshot #4). And that was it. Nothing more to see or do. No blog. No "online community" (promised in email). No special offers (note 2). They didn't even have the courtesy to share the results from the survey I just took (note 3). I began to wonder if I'd been scammed.

Analysis: On the surface I love this idea: inviting customers to participate in an online advisory board. Customers like to be noticed and heard, and a chance to win $100 is icing on the cake. But if you intend to ask business customers to take 15 minutes out of their day, it better be for something real. So far, I just feel stupid for signing up and thinking that I was actually going to make a difference at the bank.

Hopefully, they'll make up for the bad start with interesting opportunities down the road. But the bank will have to work doubly hard to get my attention after this wasted effort. 

Email from Chase Business Banking (received 19 Jan. 2010, 1:55 PM Pacific)
Note: Highlighting mine

1. Landing page from email (link, 19 Jan. 2010)

2. Registration page (click to enlarge; link)
Note: Registrants are entered into a sweepstakes to win one of ten $100 prizes.

3. Registration thank-you screen

4. Three-question welcome survey is available after confirming your email address

Notes:
1. Although the site says it's for business-banking customers of Chase and WaMu, it appears that anyone that finds the website can join.
2. Under the "Rewards" tab, information tantalizes regarding earning "cash, prizes, sweepstakes entries" for survey-respondents. But there are no examples or surveys available, so it's one more small letdown.
3. Business owners that read through the online FAQs will find out that they may be contacted one or two times per month with "research opportunities," but Chase shouldn't bury this key info in the FAQs where only a small percentage of users will find it.
4. See our recent Online Banking Report for more ideas on how to serve small- and micro-businesses through the online and mobile channels.

Another bank is about to join USAA (post), WV United FCU  (post), and Randolph-Brooks FCU (post) in the smartphone-enabled deposit sphere. Royal Bank America, a $1.3 billion (asset) Philadelphia-area institution, is in final testing of its new deposit-taking iPhone app called RoyalRDC (iTunes link).

The new app appeared in Apple's iTunes store on Monday, but currently the bank is accepting only beta testers (see screenshot below). The app, said to be coming "within weeks," allows a check to be deposited within 30 seconds using any model iPhone.

The bank is currently promoting the benefits of remote deposit on its home page (see screenshot below). Not only can RDC users skip the trip to the branch, they have 2 additional hours to make a deposit for same-day credit (6 PM instead of 4 PM). That's an enticing additional benefit nicely highlighted through the shaded-clock image below. 

Royal Bank America homepage (7 Jan. 2010)
Note: This is the homepage view after refreshing the page once; yellow highlight is mine.

Royal Bank call for beta testers (link)

Note: For more info on mobile banking on the iPhone, see our March Online Banking Report.

Perusing the newsstand at the Minneapolis airport last night, I picked up the latest Harvard Business Review issue entitled Reinvent. One article in particular prompted me to shell out the $16.95 for the double issue: Wanted: A First National Bank of Innovation by Edmund Phelps, a 2006 Nobel winner in economics, and Leo Tilman, a Columbia prof and author of Financial Darwinism.

Their case was laid out at the beginning of the article:

Ever since Alexander Hamilton, the U.S. economy has been about ideas, experimentation, and exploration: businesspeople imagining new concepts and launching new ventures; entrepreneurs engineering new products or methods based on new ideas; marketers conceiving of niches for new products or new niches for old ones; managers and consumers assessing novel products; and financiers with strategic vision judging which innovations to back.

The authors argue that it's the funding of new ideas, not arbitrary pet stimulus projects, that really drives our economy in the long-term. And with credit and venture funding difficult to obtain, the government should step in with a new GSE (government-sponsored entity), their so-called First National Bank of Innovation, to help fill the funding gap.

My take: After the recent debacles with the major GSEs, Fannie and Freddie, I'm not so sure that we need more taxpayer guarantees on our nation's books. But the economy would probably be better off long-term if some of the money flowing to housing and roads was invested in entrepreneurial-driven activity.

But, I'm not about to get involved (again) in telling the government what to do. Instead, I'd rather see the private sector step up and implement the ideas presented by Phelps and Tilman. Why not create your own in-house Bank of Innovation, where local startups could go for support, banking services, and help in finding financing. Umpqua Bank has been trying some interesting things in this area (see Umpqua Lab screenshot below).

Pulling ourselves back up from The Great Recession is no easy task. And banks, rightly or wrongly, are currently seen as part of the problem. Wouldn't it be great if people started seeing the financial industry as part of the solution? That's a New Year's resolution I think we can all get behind.

Umpqua Bank labs microsite <umpqualab.com> (6 Jan. 2010)

Note: See our recent Online Banking Report for more ideas on how to serve small- and micro-businesses through the online and mobile channels.

I recently opted in to the Umpqua Bank email list. And even though I'm not a customer, I received an upbeat message this morning from bank president Ray Davis (screenshot below).

This email appears to be geared towards businesses (see the closing line below). And that makes sense because I'd recently been looking into its business social network (note 1). But the message is on-target for consumers as well.

The well-written 185-word letter covers three main topics:

• A cautiously optimistic message about the overall economy
• Some tangible evidence (new banking division, new lending teams, new capital, and 20,000 hours of community service) that the bank is a forward-moving survivor
• Reassurances to customers that they were well-capitalized and moving closer to repaying TARP money

The tone was completely soft sell. There is a link to its online switch kit at the bottom and links to its LocalSpace business social network and Twitter feed (note 2) on the right. It's more "we're in this together" than sales pitch and closes with this wonderful line:

As we wrap up 2009 and look ahead, I encourage you to commit to the spirit of recovery and take action that positions you for the future.

We recommend that every other well-capitalized bank and credit union send a similar message before the holidays. We are about to move into the annual "year in review" exercise in the media, and this year's 100+ U.S. bank failures will be high on the list. Remind your customers, members, employees that you are still a vital member of the community. And that for every financial institution that went under, there were a 100 like yourself that did not. 

Notes:
1. For more info on the small-business market, see our latest Online Banking Report: Small Business Online & Mobile Banking.
2. Umpqua dreamed up one of the most compelling reasons we've seen to follow a bank, or any company for that matter, on Twitter (with the possible exception of the tweeting bakery): updates on its truck handing out free ice cream (Umpqua Twitter page).

Since we began publishing Online Banking Report in 1995, we've taken a deep dive into the small- and micro-business online banking market five times. The latest was published yesterday (here). Online Banking Report subscribers can access it now as part of your subscription  (note 1). Others may purchase it for US$495 (abstract here).

Small business banking is one of my favorite subjects. It's near-and-dear to our hearts because we've experienced first-hand the frustration of trying to manage our business with neither the resources, nor frankly the interest, to tap sophisticated business-management tools.

So, we've hobbled along over the years using Word, ACT, Excel, Microsoft Money, a hand-written ledger, and a moderately customized ecommerce back-end on our website. But we've clearly paid a price (note 2) for our lackadaisical approach to business finance.  

The reason I share our foibles is to point out the need for banks (note 3) and others to look at the opportunity more broadly. You can do so much more than simply help small businesses manage their checking accounts and credit lines. It's the day-to-day business drudgery, billing, account receivables, record-keeping, tax prep, payroll, compliance, and so on, where small and micro businesses really need help.

As I've said many times over the past decade, I'd gladly pay $500 per MONTH for an online, small-business financial management service that handled ALL our needs. Ultimately, it would save us thousands per year, while delivering much more timely info about the health of our business.

Our latest report is a true product-manager's guide to small-business product/service development with 76 pages of ideas plus examples from leading banks worldwide. We tie it all together with detailed descriptions of four levels of small-business package accounts (starting on p. 45 in the OBR Small Business Report; note 4):

• Virtual Checking Account: A transaction-oriented service priced at $25 or so per month
• Virtual Business Manager: Organizes most financial management duties for $50 to $100 per month
• Virtual CPA: Handles most business-management functions including customer relationship management and billings for a monthly fee of $100 to $250
• Virtual CFO: The works for $500+ per month

The report also includes data on the size of the U.S. market and a forecast for online banking usage for the next 10 years.

Notes:
1. Printed copies will be mailed late next week.
2. According to our accountant, we've spent well into five-figures more than necessary, mostly in extra taxes. Then again, we've avoided paying bookkeeping and software expenses that could have been just as high. 
3. Why do I think this is an opportunity for banks and credit unions, when it is outside of their core deposit and credit offerings? Very small businesses have neither the time nor resources to search for solutions, and then perform the due diligence necessary to determine whether the solution provider or professional services firm is trustworthy. On the other hand, while business owners may not always hold their bank in the highest regard, they at least trust them to safeguard their info. An army of regulators and class-action lawyers makes sure that the bank does not take its fiduciary responsibilities lightly. 

But few financial institutions will look to build sophisticated financial management features in house. Most will look to outsiders, both startups such Outright.com and established bank-tech firms such as Intuit, to build and maintain the business-management features.
4. See also, our recent post on small-business dashboards. 

I finally finished our latest report on small business online banking last night. Just as I was about to upload it, I realized there was something missing in the "dream online banking solution" for small businesses.

So I stopped the "presses" and added it to the report. What was the missing piece? A financial and business management dashboard integrated with online banking.

I poked around the web today and found a few interesting products (see update below), none of which were quite what I was looking for, and had no direct connection to financial institutions:

• MyBizHomepage has a dashboard that integrates with QuickBooks and sounds pretty slick. But there website hasn't been updated for more than a year, so not sure if this is a viable business or just a hobby site. I have an inquiry in to the owner.
• DreamFactory Software also offers QuickBooks-integrated dashboards. I found it in the new Intuit App Center for QuickBooks add-ins (here). It's a powerful program, but not the kind of plug-and-play dashboard I'm looking for.
• iDashboards: Has impressive sample dashboards to view. None integrate directly with online banking, but many include financial data (see screenshot below).

So I'm still looking for financial institution examples. Know any? Comment below or email me. It's too late to make our report, but we'll report it here.

iDashboards mockup of a healthcare "billing scorecard" (link, 28 Oct 2009)

Update (29 Oct 2009):

Here's another QuickBooks dashboard from QuickGauge.com:

Isn't business banking supposed to be all about the people? Then why don't financial institutions use their websites to publicize their business banking talent? None of the several dozen business banking sites I recently reviewed allows prospective business clients to connect with an actual human being in advance of calling or emailing a general number for more info.

The only bank I'm aware of that actually puts its business bankers on its website is Cascade Bank headquartered in Everett, WA, a few miles north of Seattle. The bank has posted the following info for years (see screenshot below):

• Headshot
• Name, title, location
• Short mission statement/bio (note 1)
• Phone number and email address

That's a respectable start. But with today's virtually free Web-based tools such as Twitter, blogs, and Linked:In (note 2), every business banker should have their own online presence. Sure, the bank or credit union will need to provide guidance and oversight, but it's not like these sales folks don't know how to put their best foot forward.

Cascade Bank Commercial Banker Directory (link, 20 Oct 2009)

Notes:
1. Unfortunately, the bio area is blank for 3 of the 12 business bankers listed. That looks pretty bad, especially with 2 of the first 3 blank. Come on Lar, Cynthia and Patrick, get those bios over to marketing ASAP.
2. Those Cascade listings would look much more impressive with Linked:in links by each name.

If you are like me, you put off filing the dreaded 1040 as long as possible, and may often have no clue that the final due date (for extended returns) has snuck up on you once again. Then there are those quarterly filing dates that aren't spaced three months apart (see screenshot; note 1). 

That's why every financial institution that serves small businesses and the self-employed should do three things:

• Post the IRS due dates on its website (see screenshot)
• Provide email/text reminders (opt-in naturally)
• Blog/Twitter them

Small biz accounting startup Outright.com (a Finovate 2009 presenter) is ahead of the curve with its handy Self-Employment Tax Calendar:

Note:
1. I've been paying quarterly estimated taxes for 15 years, and thanks to the Outright.com calendar, this is the first time I realized they were spaced 3-2-3-4 months apart. No wonder, I can't remember. 

I was poking around the various small business online accounting sites today researching our next Online Banking Report and thinking about which service would suit our business, given that Microsoft is pulling the plug on Money.

I was already familiar with Outright.com (a Finovate 2009 presenter; demo video coming soon), FreshBooks, and LessAccounting. But I was completely surprised by one contender in the free category: Intuit QuickBooks Online.

The software giant offers three flavors of online-only accounting (see screenshot below; full comparison here):

• QuickBooks Online Free: Create and send invoices, print checks, track money flow for up to 20 customers and run basic reports; even includes email support
• QuickBooks Online Basic: In addition to the above, for $9.95/mo, users can manage an unlimited number of customers, set permissions for others to access data, and choose from a library of 40 standard reports
• QuickBooks Online Plus: Full-fledged QuickBooks for $34.95/mo, mimics most features of QuickBooks Pro (see comparison here)

Financial institution opportunities:
All four online accounting companies offer free versions and premium fee-based options (note 1). Consider linking to them from your small business resource center. For extra credit, develop a co-branded version you can offer your customers or negotiate discounts for the fee-based versions.

Intuit's QuickBooks Online product line (14 Oct 2009)

Notes:
1. Outright.com is currently free for all users, but says it is working on value-added, fee-based options.
2. For more info on the small biz space, see our Online Banking Report: Small & Microbusiness Banking (June 2004). Note: Anyone who purchases the 2004 version now, will automatically receive the newer version when it's published later this month.

Logging out from my Bank of America credit card account (both personal and business accounts), I was greeted with this pitch for the bank's small business community (see first screenshot). The pitch is straightforward and emphasizes three benefits:

• Get answers to your business questions
• Exchange ideas with other entrepreneurs
• Free

Clicking the red Join Today button drops users onto the Forums page at the small business site (see second screenshot).

Bottom line: The logout effort is a good brand-building exercise for Bank of America, and it should drive much-needed traffic to the site. According to Compete (see chart below), in August the small business community site had an estimated 70,000 unique visitors, two-thirds more than the 40,000 a year ago. But traffic was down almost a third from the springtime peak.

Bank of America logout screen (23 Sep 2009, 4 PM Pacific)

Landing page (link)

Compete traffic estimates, Aug 2008 through Aug 2009 (link)

Too often we don't give online business banking the coverage it deserves, both here and in Online Banking Report (note 1). Online services can be far more valuable for a business customer than for the average consumer. But consumer services, with bigger advertising budgets and much more press coverage, tend to be more visible when we search for examples of financial innovations.  

That's why I was especially intrigued with the PNC Bank ad in the Aug/Sep issue of BusinessWeek SmallBiz magazine. Not only had PNC Bank shelled out for a full-page ad (p. 20, see inset; note 2), the creative was interesting and included a tease for the CFO product combined with easy-to-recall URL <pnc.com/cfo>.  

The new account, cleverly dubbed PNC|CFO, an acronym for Cash Flow Options, covers all the major headaches of business owners:

• Accelerate accounts receivable
• Improve your outgoing payments
• Invest your cash wisely
• Access information online
• Ensure access to cash (note 3)

Analysis
Naturally, I was most interested in the second-to-last bullet, online information. The audio-visual online banking demo is thorough, but surprisingly neglects mobile banking services. The only mention of mobile banking is at the end of the last paragraph on the online banking landing page. With business owners increasingly tethered to their businesses via Blackberry or iPhone, mobile capabilities should be front-and-center. 

The other thing missing from the web-based marketing: a human connection. The main call-to-action is the big orange Contact Request button (see screenshot below). Presumably a biz banker will quickly get on the horn and make that connection. However, the bank should make it clear that they have a bevy of qualified bankers available to usher new clients into the CFO account.

Simply changing the button to Contact a Business Banker would be an improvement. But I'd also like to see a bullet point that talks about customer  service. The only thing I saw was a few generic screenshots in the online demo which talked about responding to most questions "within 24 hours." That doesn't make the reader feel particularly special.

Finally, a small rant about the bank's contact form. I received error messages the first three times I attempted to submit it. Evidently, commas are not allowed in the company name or address fields. That not good programming and creates a needless poor first impression. There's is also no space in the form for comments from prospective customers. PNC Bank has been on the web for 14 years, it should have flawless forms (note 4).

Grade: Overall, I really like what PNC is doing so I'll give the marketing site an A for design and B- for execution.

Landing page for PNC's Cash Flow Options service (link, 19 Aug 2009)

PNC new account "contact me" form with error message

Notes:
1. Our last report on Online Small Business Banking is available here (June 2004).
2. Key Bank (p. 9) and Bank of America (p. 29) also bought full pagers.
3. The bank is referring to credit lines and loans; I'm not sure why they didn't state that more clearly. Access to cash sounds more like a checking account feature.
4. While I'm at it, here are a few more minor flaws: (a) Even though I made two errors in the form, the error message only identified the first one; (b) When an error is made, the form automatically clears the checks in the bottom column of boxes; (c) The bank has neglected to turn off auto-fill (at least in Firefox 3.0) in the "confirm your email" field. 

Pitney Bowes (PB) hit me with a cross-sale message this morning, and surprisingly it was for a banking service, remote deposit capture (see email below). Because we already do ACH transactions through PB to load our postage meter, it's something I would consider buying from them, especially since our business bank does not offer RDC.  

The service called Click Deposit (note 1) works with any bank or credit union checking account and is powered by Jack Henry ProfitStars. The cost runs $39.95 to $149.95 per month, depending on volume. You get up to 150 monthly scans at the lower level and 1,000 at the high end. Buyers must sign a nine-page contract (PitneyBowes_RDC_app.pdf), committing to the service, and leased scanner, for 36 months.

Because I don't want to lock us in at $500/yr for three years, I think we'll pass on this deal. Hopefully, we'll be able to tap a lower-cost iPhone-based service in the near future, such as that offered by WV United FCU (see previous post).  

Email from Pitney Bowes (22 July 2009, 9:36 AM Pacific)

Landing page (link)

Note:
1. Although, Jack Henry announced the relationship in May (press release), I found no mention at the main Pitney Bowes site (pb.com) or the services site (pitneyworks.com), so this may be a marketing test.  

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