Online Finance Hits its Stride

A funny thing happened while everyone was laughing at the implosion:
e-finance grew up and got real. Since the Nasdaq bust began two years ago, Net
finance businesses have exchanged glitz for substance.

Instead of trying to persuade people to chuck their day jobs and become stock
traders, E*Trade and its rivals are focusing on the mundane transactions
Americans do every day. The new growth sectors of online finance involve paying
bills, managing bank accounts, figuring taxes, and taking out mortgages.

And it’s working. Tens of millions of people now use the Net for financial
transactions, and their ranks are swelling. Last year, 15 million Americans paid
bills online–up 60% from the year before.

What’s more, this generation of e-finance outfits is making money. For the
first time, more than half of the 21 public e-finance companies turned a profit
in the first quarter under generally accepted accounting principles, if Wall
Street estimates hold up. That’s up from nine in the fourth quarter of 2001
and is expected to rise to 14 companies by yearend. Those now profitable include
lender E-Loan, mortgage provider IndyMac Bancorp, financial software developer
Intuit, and online bank Netbank.

How e-Finance Got Real
With the exception of Internet brokerages, e-finance is back and stronger than ever. Savvy companies gave up on making us PDA-toting day traders and pushed mundane transactions and simpler technology
Mortages About $160 billion in mortgages was processed online last year. Getting a Net mortgage is becoming cheaper. Web leader IndyMac charges rates as much as 0.375% below market averages because its processing cost
are so low.
Billing Fifteen million people paid bills on the Net last year, up 60% from the level in 2000. Growth took off when the credit-card companies began promoting electronic payment on monthly paper bills.
Online Tax
Of about 60 million people who will prepare their own returns this year, the IRS expects 8.5 million to file on the Net, a 27% increase from last year. Electronic filing cuts refund-delivery time by 65% or more.
Banking About 16 million US households used online access to checking or savings accounts last year, up from 12 million in 2000. Customers like having no lines and 24-hour access. Several banks make a profit online.
Trading By early 2000, Net players had grabbed 45% of the trades on Nasdaq and the Big Board. That share has dropped to 22% with the stock market crash, and few Wall Street analysts expect it to regain its peak any time soon.

To be sure, certain sectors of e-finance are still struggling. The brokerage
business adapted to the Internet faster than any other arm of finance, with Net
brokers grabbing 45% of the New York Stock Exchange and Nasdaq trades by early
2000. But with the stock market crash and with day traders counting their
losses, that share is down to 22%.

Even those sectors of e-finance that are growing face challenges ahead. Net
mortgages will see slower demand as interest rates stabilize or even rise. The
Mortgage Bankers Association predicts the volume of mortgages will drop 29% in
2002 from the record $2 trillion last year. And online bill payments and Net
banking will need continued backing from the large corporations promoting them
to keep growing. The downturn for Net brokers underscores how cyclical some
finance sectors can be.

Why are so many e-finance services taking off now? For starters, finance is
better suited to the capabilities of the Internet than, say, retail. It deals in
information, not goods. Companies don’t have the cost of shipping books, dog
food, or sofas around the country. And buyers don’t have to test to see
whether a bank account is comfortable–unlike with a mattress or a pair of

More important, e-finance companies have used smarter tactics during the past
year and have been blessed by favorable markets. Consider online mortgages. A
flowering of innovation and a refinancing boom prompted by tumbling interest
rates helped boost online loan volume to more than $160 billion in 2001–up to
10 times as much as the year before. About $25 billion of that came from dot-com
lenders, but far more came from big boys such as Countrywide Credit Industries

The dot-com leader is LendingTree Inc. in Charlotte, NC. Users of its online
marketplace effectively apply to as many as four of the 150 lenders in
LendingTree’s network, which compete with one another for the business.
LendingTree gets referral fees for each lead and commissions averaging $450 on
loans that close. Last year, LendingTree helped lenders land $8
billion in mortgages and $4 billion in
other loans.

Numbers like LendingTree’s pale beside the market power of huge banks.
Bigger lenders have managed to tailor Net mortgages even to customers who don’t
like the Net. Instead of applying online, most IndyMac customers go to a broker–who
applies online for them. Then Web software tracks documents, pulls credit
reports, and figures out the interest rate needed to match a borrower’s credit
record, spitting out price decisions in minutes. Technology also lets IndyMac
beat average mortgage rates by 0.25% or 0.375%–up to $50 a month on a $200,000
mortgage. By automating many things that had been done manually in the past, it
has pushed its processing costs to 55% to 60% below the industry average.

While innovation helped boost Net mortgages, it may have saved online bill
payment from extinction. In the past, startup bill-consolidation firms, banks,
and portals tried to persuade consumers to pay $5 to $13 a month to pay their
bills online–and got few takers. But credit-card companies and other billers
wanted online billing to grow because it saves them processing costs. So billers
started offering it to customers free of charge. From 15 million last year, the
number of Americans who pay bills online is expected to hit 26 million this year
and 46 million by 2005, according to researcher Gartner Group.

Paying taxes online is getting a similar push from the IRS. The agency saves
about $1 for each return filed online, and it’s under congressional mandate to
see that 80% of returns are filed electronically by 2007. The agency has
proposed giving e-filers two extra weeks to get their returns in. Consumers don’t
fare too badly, either: The $33 tab for most online tax returns from Intuit’s
TurboTax for the Web is a third of the average bill from pros who use similar
software. The result: The IRS thinks 8.5 million people will e-file this year,
up from 6.7 million last year.

Online banking is more of a middling success. While the number of people
looking at their checking or savings account information rose 33% last year, to
16 million, according to the newsletter Online Banking Report, it’s just
beginning to make money for banks. The payoff for customers is more convenience
than cash–since they usually don’t get any discounts on service charges.

The big impact on the industry: The Web makes customers much more loyal to
their banks. A study by Boston Consulting Group (BCG) says online patrons switch
banks 40% less often than other customers–because they invest time in
understanding the service and configure their accounts to do things like
automatically send out monthly car loan payments.

E-finance has turned the corner. It has tens of millions of customers now,
not three years from now–which was the sort of vague promise Web companies
once used. Certain sectors, such as mortgages, will suffer cyclical declines as
the volume of business slides. But taxes and bills know no bear markets.

By Timothy J Mullaney in New York, with Darnell Little in Chicago in BusinessWeek. Copyright 2002 by The McGraw-Hill Companies, Inc

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