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Banks Face Threat from Financial Portals


by Hal Plotkin
Silicon Valley Correspondent

Leading online-banking industry analysts say the business model of financial services content aggregators such as LendingTree Inc. {TREE}, which went public this week, pose a daunting new set of competitive challenges to banks and other mainstream financial institutions going forward.


Lending Tree post-IPO stock performance

Earlier this week, Goldman Sachs famed market mover Abby Joseph Cohen pointed investors toward banking and financial-sector stocks, saying their valuations, which have lagged behind the rest of the market, make them attractive bets at the moment.

But several analysts who specialize in the online-banking industry warn that the future looks very murky for banks and other financial institutions which now must very quickly figure out how to deal with a major new challenge: one-stop online services, sometimes called financial portals, where consumers can consolidate all their financial information in a single place as well as do comparative shopping for financial products and services, such as loans and certificates of deposit.

“Banks like Wells Fargo {WFC}, Banc of America {BAC}, and Citibank {C} have got to make some hard decisions right now,” says George Barto, senior analyst at the Gartner Group, based in New York. “We’re at the beginning of a major transformation in the way banking is done.”

Analysts such as Barto say that Charlotte, N.C.-based LendingTree, along with similar financial services aggregation firms such as E-Loan Inc. {EELN}, based in Dublin, Calif., and Mortgage.com Inc. {MDCM} based in Plantation, Fla., represent the tip of an iceberg that threatens to come between banks and their customers.

If that happens, the best-known banks could eventually be eclipsed by a new breed of online companies that capture the loyalty of consumers by giving them more choices, lower prices and greater convenience.

LendingTree went public on Wednesday, with shares priced at $16, $4 above its original target price range. The stock moved mostly sideways on Thursday, echoing the sagging post-IPO performances of competitors E-Loan and Mortgage.com.


E-Loan post-IPO stock performance

Mortgage.com post-IPO stock performance

Despite those shaky starts, however, analysts say the future looks quite bright for financial services aggregators. At the moment, it is unclear which of the financial services aggregators stands the best chance of success over the long run, which has led to anemic performances in the stocks of those firms.

One thing is, however, crystal clear: Any success those or similar firms eventually enjoy will almost certainly come at the expense of the major banks.

“Giving consumers the ability to do apples-to-apples comparisons on financial services is tremendously destructive to existing financial institutions,” says Rob Sterling, an analyst at Jupiter Communications, based in New York. “The online book sellers have already taught traditional booksellers a few lessons about that.”

Analysts say the biggest threat to the banks moving forward won’t come from online aggregators alone, such as LendingTree, which connects borrowers with the lenders offering the most attractive terms. While such firms are already spurring more margin-decreasing competition for the banks, the real threat down the line comes from a combination of comparative shopping services such as LendingTree with the capacities created by so-called “portable identity players,” such as Sunnyvale, Calif.-based Yodlee Inc.

Portable identity companies allow consumers to store all their passwords, say for their bank, insurance and brokerage accounts, in one single online location. Users can then visit that one site and conduct business on any of their linked accounts without having to visit each site individually.

“Consumers are going to want to go to one place to handle all their financial accounts,” says George Barto, of the Gartner Group. “Why would I sign up for one bank’s Web site when I can get all my personal account information, plus competitive offers, from a more-comprehensive online service?”

The only way banks can get around that dilemma, Barto says, is to become full-service financial portals themselves, which would mean offering consumers access to some of their competitors’ products, as well.

Barto credits Chicago-based First USA Bank for recognizing this emerging new trend sooner than most. First USA recently established WingspanBank.com as a fully owned subsidiary. Styled as a next-generation financial portal, Wingspan resells First USA financial service products but also offers access to competing products from other banks and financial institutions.

“First USA is one of the suppliers for Wingspan,” Barto says. “But it’s just one of the suppliers. I think, over time, it’s quite possible you’re going to see First USA fade away. Fifty years from now, Wingspan could be the bank customers do business with, and First USA, if anything, will just be one part, maybe a preferred part, of their invisible network of suppliers.”

Barto says First USA deserves a lot of credit for getting ahead of the game by setting up a separate business entity to take advantage of the power of the Internet to transform the banking industry.

“There’s no way they could have done it with the First USA brand,” Barto says. “Consumers on the Internet want to know they’re not going to be tied to just what one bank has to offer.”

“It’s a real dilemma for the banks,” agrees Jack Staff, senior analyst at Zona Research, based in Redwood City, Calif. “The trend is toward consolidating all financial information in one place. That really complicates things for the banks.”

Hoping to stave off that threat, First Union Corp. {FTU}, based in Charlotte, N.C., recently issued a new set of requirements aimed at preventing third-party financial services content aggregators from displaying account information on their sites without the permission of the bank, even if those sites have been given permission to do so by the individual account holders.

“Protecting First Union’s customer information and accounts is vital to our customers,” says David Carroll, First Union’s executive vice president, when he announced the bank’s new rules in December. First Union officials say third-party aggregators might not sufficiently protect the confidentiality of accounts and could leave those accounts vulnerable to fraudulent transactions.

If First Union prevails, it could pull the rug out from under financial services aggregators, forcing them to cut the banks in on a piece of their action in exchange for access to the customer-account data they need. On the other hand, it is possible that the courts may eventually determine that the account data belong to the account holders, and not to the banks.

The U.S. Justice Department, for example, is investigating a similar dispute now raging between online auction market leader eBay Inc. {EBAY} and content aggregator competitors who claim their right to access information on eBay’s site is being unfairly restricted.

Regardless of the legalities, it is also possible customers may vote with their feet, taking their business away from banks that don’t give them access to information about their own accounts whenever and wherever they want.

The growing use of wireless mobile-banking services, for example, is also expected to accelerate the pressure on banks to participate in solutions that give consumers more convenient online access to all their financial information.

There will be an estimated 102 million Internet-compatible wireless devices in circulation by 2003, according to a recent estimate by Jupiter Communications. The small screens of those devices and the need for simple user interfaces are expected to work in favor of companies that offer consumers all their financial account data at a single easy-to-use site.

“The question now is whether that will happen on the terms of the financial institutions or the start-up Internet companies,” Sterling says. “The financial institutions have much deeper pockets, so I’d say the smart money is on them.”

But what if the start-up Internet companies win the right, either legally or by customer preference, to capture and redisplay account data without the permission of the banks?

“The danger then is that the banks could wind up being just back-office operations, the plumbing, for the online companies,” Sterling says. “If that happens, we don’t need 8,000 regional banks. We probably don’t even need five.”

“Either way, I think it’s going to be similar to what online brokers have done to the old brokers,” Staff says. “Prices are headed south, and competition is going to get tougher.”

And that means bank stocks, despite their currently low relative valuations, might not be such a good bargain after all.

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