It’s been over a year since we last looked at the Internet banking vendor community. What follows is an unscientific sample of the Internet banking vendors we see and hear about the most in the mid-sized bank market. If I omitted a vendor, I’m sorry – or, you’re welcome – whichever the case may be. Without further BS, loyal followers and dissidents, let’s take a look at how the adolescents of the banking vendor community are faring.
Digital Insight
In 2002 DI announced some larger bank signings that included Hudson City Savings Bank ($11 billion in assets) and Capitol Bancorp ($2 billion). DI has improved its revenue stream, but it is still safely south of Profitable. Revenues grew nearly 50% from $20.4 million during 1Q01 to $30.1 million in 1Q02. During this same time period, net losses from operations improved from $20.9 million in the first quarter of last year to $5.9 million during 1Q02. Then came the dreaded below-the-line consequences that seem so prevalent with the Internet crowd. “Changes in accounting practices” led the way to a 1Q02 loss of nearly $35 million versus $20 million in 1Q01.
Earnings problems aside, among Internet banking vendors DI has done the best job in partnering with core vendors that do not have their own solutions. DI is clearly the most visible vendor on the lower end of the market. It has been especially effective in the credit union industry, where Internet banking usage is particularly high. The heavily penetrated CU market is important for outsourcers such as DI that rely on high customer implementation rates to boost their monthly bills.
Our clients tell us that the very aspect of DI’s strategy that stock analysts love – the recurring revenue stream from outsourcing contracts – is what is causing some of the company’s larger users to begin looking at alternative vendors. Even at only $1.50 per user per month, the bill at a bank or credit union with 35,000 or 40,000 users would give even the most cost-be-damned marketing director a case of the shakes. I hear that DI may liberally negotiate or even fix monthly prices for its largest clients, but it’s certainly not advertising that fact. DI’s ability to address monthly per user costs for its large clients will be a key to its future. And to be sure, DI will eventually have to offer an in-house option if it wants long-term upstream success.
We look at the ViFi acquisition as a potentially positive transaction for DI. Dozens of additional installations never hurt anyone, but we’ll soon see if the purchase price was right. We do feel for the erstwhile ViFi clients. Rest assured that when the dust clears after the mutually beneficial joining-of-two-outstanding-companies song and dance ends, ViFi customers will be running DI.
Corillian
The market continues to see Corillian as one of the premier providers in the high-end Internet banking market, but that perception is not yet showing up in the company’s income statement. Corillian’s first quarter revenues were below that of last year, though the bottom line improved somewhat. Corillian lost $4.0 million on $10.1 million in sales in 1Q02, versus a net loss of $10.1 million on $13.7 million in revenues in 1Q01. Across-the-board operating expense reductions were behind much of the profitability improvement for early 2002.
Our clients who use Corillian report that the company is going through growing pains that have led to some problems with support, revolving project staffing and sales representatives, etc. That’s the bad news. The encouraging news is that Corillian announced deals with some very heavy hitters this year, including $49 billion South Trust Bank, $4.2 billion Boeing Employees’ Credit Union, Huntington Bancshares (via a partnership with e-Bank), and an outsourcing partnership with NCR to deliver Corillian to Chase. While Corillian’s growth-related missteps thus far are normal, its ability to turn things around and successfully support these new, large, demanding clients will be a significant test.
S1
Though S1’s financial position is improving, it continues to struggle to translate rising sales and a reputation as a provider of elegant technology into profits. The firm reported net losses of $6.7 million on revenues of $72.6 million in 1Q02. This compares quite favorably to 1Q01’s net loss of $92.1 million on $63.1 in sales. The biggest reason for the quarter-over-quarter profit variability was 2001’s $50 million loss on the sale of a subsidiary, but the company did reduce operating expenses by roughly $20 million from 1Q01 to 1Q02.
S1 has separate products for large and small institutions. The large bank or enterprise product is well respected as a tool kit with quality technology. S1’s small bank strategy, however, is a true puzzler. The company bought Edify, used that as its small bank solution, and then sunsetted it after the Q-UP acquisition. Now, company reps tell me that the Q-UP product is going by the wayside as S1 productizes, if you will, its enterprise tool kit to be marketable to small banks.
Uh, why? The Q-UP product was a strong community bank product that was generally appreciated by its clients and well supported, especially before the S1 purchase. Sure, it had the problems that all start-ups have, but it competed well in the market before being put through the S1 corporate wringer. Why spend good money to develop a new product and jettison Q-UP? Of course, Q-UP is not the multi-channel, customer facing… … product that the enterprise solution is, but it’s a pretty damn good product that used to compete well with DI. Now, Q-UP is silent. There must a good reason for this move, but it confuses this humble outsider.
The last Q-UP signings listed on S1’s Web site were in April 2001 (INTRUST at $2.5 billion in assets and $5.1 billion MidAmerica Bank). The company lists two new bank/CU Internet banking signings this year: Republic Bank of St. Petersburg ($2.5 billion) and Jax Navy CU ($2.2 billion).
Online Resources Corporation
Though relatively tiny in terms of revenues, ORCC came as close to any of the big players to breaking even in the first quarter. The company posted an improved net loss of $807,000 on $7.8 million in sales for 1Q02, compared to a net loss of $3.4 million on sales of $5.6 million in 1Q01.
ORCC is undoubtedly a visible player in the retail Internet banking market, but I am going to keep its write-up short. We simply have very few clients who use its product. ORCC announced the signing of two new, key clients this year: $10 billion Ohio Savings Bank and $2.1 billion Citizen’s Equity First Credit Union. Here’s hoping that ORCC staffs up gracefully to handle these new clients.
THE CORE PLAYERS
The unsung and emerging force in the retail Internet banking market is the core player. Products developed by the core players or purchased by them and offered as their own are now the biggest competitors Internet providers face.
The core players were deliberately slow to jump in earnest into Internet banking until they could better understand market demands and usage. Well, they figured it out. While many of our clients that utilize their core vendors’ solutions for Internet banking claim that they are giving up some functionality, these banks get sound functionality in the features that their end-users are actually using – reviewing balances, transferring funds and, to a lesser extent, paying bills. Account aggregation, wireless access and email reminders/alerts are shiny features and get the headlines, but end-users are not using them. As a result, most banks simply do not care enough about these features to make them a deciding factor in their selection decisions.
And let’s face it, Bubba – the price is right with the core vendors’ Internet products. The core players are in a unique position to use price as a sledgehammer. Core vendors are for the most part in much better financial condition than the Internet vendors, so they can operate on lower margins. Plus, the core players often deploy their effective (if stomach-turning) technique of making it financially or logistically impossible to use a third-party Internet product. They give real time interfaces to core for their own Internet products but offer only batch access for third-party products. Or they charge exorbitant professional services rates for integration and assess stupefying transaction fees for simply checking balances and transferring funds via third-party Internet products.
And finally, a quick note on the many Internet banking vendors that continue to report “pro forma” or EBITDA earnings in their press releases. By basically reporting net income before deducting expenses, lo and behold they look better than they really are! I gnashed my teeth and spat venom at the Internet players last year, and to my infinite surprise they did not change to appease me. Maybe this year they’ll listen. Not to me, of course, but maybe to Warren Buffet. Check out his quote from the Berkshire Hathaway annual shareholders meeting (as quoted by Adam Egelberg in www.bankstocks.com):
“We’ll never buy a company when the managers talk about EBITDA. There are more frauds talking about EBITDA. That term has never appeared in the annual reports of companies like Wal Mart, General Electric, Microsoft. The fraudsters are trying to con you or they’re trying to con themselves. Interest and taxes are real expenses. Depreciation is the worst kind of expense: You buy an asset first and then pay a deduction, and you don’t get the tax benefit until you start making money. We have found that many of the crooks look like crooks. They are usually people that tell you things that are too good to be true. They have a smell about them.”
Gotta run and open a window, GonzoMongers; there’s a fetid odor in this place. Keep your contract terms at two years or less and dig deep in your due diligence process. And don’t buy the wireless module.
Catch you next time.
-smh