August 8, 2003 (2 a.m.) /Scottsdale, AZ/ – We’re way past due for the semi-annual Internet banking market update. And, GonzoBankers, the times they are a changin’. Internet banking vendors, you can exhale. I will mention no vendors by name in this article. No need, because we’re going to go from a 10,000 foot view this week. Why suffer another bashing of unprofitable vendors in this fledgling software market? Just read about the vendors in the last column and assume they’re all still struggling. Let me share with you a simple 30-second radio spot I heard multiple times during the Jim Rome show this week:
“Sunday! Sunday! Sunday!! Crazy Ben’s Appliances, Furniture and Home Banking MegaStore is going positively crazy… this Sunday only! Amana ranges starting at a low, low $699.99!! We need a therapist! Unfinished bookcases for a foolishly frugal $49.99!! Internet banking for just $.75 per user… and we’ll throw in a firewall because we’re OUT OF OUR MINDS!! You might think we’re nuts, but at Crazy Ben’s we’re passing the insane savings on to you! Sunday! Sunday! Sunday!!”
As I’ve insinuated by quoting this radio ad, the theme of the year at our clients when it comes to retail Internet banking is Price Reduction. With no revenue upside, banks and credit unions alike are working to deliver the online functionality their clients demand without popping budgets like girdles at a smorgasbord.
Truth is, many banks and credit unions are paying dearly for their own success, particularly those that have online banking delivered via ASP. The more end-users they enroll, the more they pay every month. Consider, say, a credit union with 35,000 online banking users at the end of a three-year contract paying $1.75 or even $2.25 per user per month. I don’t have to whip out my abacus to know that they are paying more for Internet banking than they are for core processing – easily.
But prices are on the way down due to pressure at contract renewal time from banks that are getting fired up. It’s no secret anymore that the Internet banking players are ready to deal, and deal with deep discounts. It’s good for our bank and credit union clients, and it’s worrying the analyst community. I have spent many hours with stock analysts who cover Internet banking vendors talking about what’s going on with Internet pricing. They are all acutely aware that renewing contracts equates, in most cases, to reduced revenue.
A sizeable portion of the downward price pressure for Internet banking stems from our amigos, the core players. They have mastered marketing home banking products that solidly deliver the functionality that end users actually use for a relatively cheap price. The core players have meatier margins to work with, and they are using price to threaten the Internet banking specialists in a marked, real way. Add to that the fact that the core vendors are delivering much tighter core-Internet integration than most of the niche players can, and the equation gets scarier.
The core vendors are actually threatening to do to the Internet niche players what Wal-Mart routinely does to a small town’s specialty retail stores when it moves into town. It shut them down. Do you have to take a half step or even a full step down in quality when you shop Wal-Mart? Damn straight. But the prices make that pill easier to swallow, especially when you still can get what you really need at Wal-Mart anyway. So what if the shirt doesn’t have a tiny polo player on the pocket? You’re still warm, and the chicks still dig you, right?
So the core players have eschewed the mostly unused bells and whistles of account aggregation, wireless, etc., and they are making a killing by reliably delivering the necessary basics.
If a bank is experiencing any kind of respectable end user growth rate at all, the numbers can decidedly tip to the side of in-house delivery. Staggering monthly bills are forcing banks to more seriously consider in-house home banking software to the historically more popular ASP-delivered products. The technology is much more proven now, and banks and credit unions have far less angst over the technology’s reliability. They understand the security features and fret less about their ability to protect customer privacy in-house as opposed to the experts driving the ASPs. I’m not saying that we’re seeing a landslide in the in-house direction, but we are detecting, at the very least, the beginning of a trend.
We have reported before that some larger mid-size banks (above $5 billion) are considering or actually in the process of developing their own home banking products. The technology and talent are both readily available, and an Internet-based product that can check balances, transfer funds and integrate with a bill pay provider ain’t exactly rocket science. Faced with snowballing Internet banking bills, a good number of our larger clients and associates are seriously considering taking a dive into the development pool.
So what’s the net result of all of this? While we used to routinely see Internet banking contracts written for $1.75 to even $2.50 per end user per month, we frequently see them down to $.75 or $1.00 per user now. If you have enough end users or represent a big enough portion of a vendor’s revenue stream, you can get an ASP vendor to cap or fix monthly prices at even lower than that.
Online bill payment is another story. Banks can offset bill pay costs directly with monthly fees to their customers who use the service. So, the price pressure in the bill pay arena has been substantially less. But some of the big boys out there are starting to offer bill pay to their customers for free. They’re just giving it away! Time will tell if free bill pay is successful and will have a trickle-down effect on mid-size and community banks. My guess is that it will, but it will take a good 18-24 months to gather enough momentum to have a substantial effect on vendor pricing.
Sunday! Sunday! Sunday!
Next time, GonzoFreaks.