Editor’s note: Charles Davidson covers the Atlanta tech scene for Local Tech Wire. His column appears on Mondays. NetBank’s latest earnings conference call was boring. The talk was all about banking, not the Internet. There wasn’t a single Internet-centric question from an analyst.
This is good. Unlike a lot of Internet banks, Atlanta-based NetBank has pushed beyond questions of survival and appears to be on solid ground. Ergo, it has become the standard bearer for the city’s once ballyhooed crop of online banks and financial software startups.
In the oh-so-innocent days of 1999, everybody in Atlanta’s tech community, and even analysts in places like Boston, were proclaiming Atlanta THE center for financial technology. The world’s first Internet-only bank, Security First Network Bank, was here. Others followed, along with a spate of software houses and Web sites aiming to peddle safe deposit boxes, bonds and various other financial tools and services online: Magnet Communications, Netzee Inc., CheckFree Holdings Corp., Derivion Corp., nFront Inc., Maxrate.com and Safedepositbox.com.
A few have expired. Online bill handler Derivion and loan marketplace Maxrate.com to name a couple. Netzee, a financial software firm, is flirting with delisting from Nasdaq. The Intercept Group, a banking technology company that owns stakes in Netzee and other firms, squeezed out a small profit in the 2001 fourth quarter but lost $1.9 million for the year and $16.9 million 2000.
NFront, another software maker, has been acquired. The pioneer, SFNB, was bought last year by RBC Centura, the Royal Bank of Canada. By most accounts RBC Centura has royally botched it. Lee Kallman, a charter SFNB customer who lives in the Atlanta suburb of Smyrna, says that during the transition from SFNB, RBC shut down his and his wife’s account for two days without warning.
Still, considering the online slaughter of 2000-2001, Atlanta’s online financial community has held up reasonably well. NFront and SFNB fetched profits for their investors. NetBank’s shares hit a 52-week high of $15.22 on Feb. 15, and as of Feb. 25 were up 65 percent over the past three months. The stock (Nasdaq: NTBK) closed at $14.84 on March 4. It has strung together 15 straight profitable quarters, and is doing as well as probably any online bank. (A number across the nation have closed.)
Magnet Communications, a purveyor of online services and software for banks, raised $13 million in October. Two highly regarded offline banks, SunTrust Banks and Silicon Valley Bank, contributed equity to the round, and SVB added a $5 million line of credit.
Still the center
That’s enough for D.R. Grimes. As far as he’s concerned, Atlanta remains the center of the online financial universe.
The CEO of NetBank and an Atlanta banker and financial software exec for 30-plus years, Grimes says the metro area’s prominence in money-handling technology dates to the 1970s. Companies like Stockholder Systems Inc. (SSI), Management Sciences America and Peachtree Software were early players in the business. Georgia was the second state to have an automated clearinghouse for checks, he says.
Among Atlanta’s various online financial-related concerns, Checkfree is much larger than NetBank. But Checkfree was started in Ohio, and it’s not an online bank. So we’ll examine NetBank here.
The reason NetBank’s recent confab with analysts was more bank than Internet is because NetBank has reached a degree of maturity, Grimes reasons. It’s gotten there by balancing growth and profitability, an exotic notion among Internet companies.
But after breakneck growth – accounts, loans, total assets and deposits soared 150 percent last year and 250 percent in 2000 — NetBank is shifting the balance in favor of profits.
Grimes says the bank wants to evolve into a “high-growth, highly profitable financial institution” from a “hyper-growth, profitable” one. That means squeezing more profit out of each customer. It also means raising fees, doing more “cross selling” of additional products like brokerage accounts and insurance, and figuring out which customers are most profitable, focusing on them and nudging money-losing ones out the virtual door.
Above all, it means hanging on to long-term customers and convincing them to move more of their business to NetBank. Grimes says a longtime customer is 15 times as profitable for NetBank as a new one. The bank gives away stuff to new customers and has to spend time and resources answering lots of questions. NetBank’s newbies are often testing both NetBank and Internet banking generally. They aren’t likely to move many accounts over right away.
“It’s a lot more important to keep customers long term than to get new ones,” Grimes says.
So he’s putting the brakes on growth — slowing it to a still brisk 55 percent this year. The risk, of course, is that higher fees and such will scare customers away. But in 2001, NetBank held onto 93 percent of its customers, the company says, and Grimes expects that figure to climb. That’s in part because Internet bank customers need not switch banks when they move to a new state. Of course, as offline banks grow increasingly gargantuan, that’s less an issue.
Online advantage waning?
At the same time, the customer’s advantages in banking online — higher rates and lots of easy ways to manage your accounts online — are becoming less compelling to some customers, like Kallman. No Luddite, he’s been banking online for six years and is now with NetBank. But for several reasons, his days as a Net banking customer are numbered.
Kallman figures offline banks have started to catch up in terms of online services like bill payment and account management. And they have branches everywhere so you can make deposits without mailing them, as he often does with NetBank. Finally, as fees charged by Internet banks add up, it cancels out the better interest rates on deposit accounts, Kallman says. Therefore, Kallman and his wife plan to switch to a traditional bank soon.
“The fundamental value proposition for online banks has gone away,” declares Kallman, who heads up marketing for Atlanta’s professional women’s soccer team.
Of course, not all customers agree. Ken Womack of Atlanta is happy as punch with NetBank and has no plans to move any accounts. “I’m not someone who really needs a physical bank very often – I have direct deposit, I don’t often have other checks to deposit, and I rarely have cash I need to deposit. So it’s a great deal for me,” he says.
Womack, a manager with Cox Interactive Media, ticks off the plusses: free checking and unlimited online bill payment, checking and savings accounts earn interest that beats regular banks, and NetBank tracks external accounts like credit cards and brokerage accounts.
Grimes loves people like Womack. He just hopes they outnumber people like Kallman.