Post of the Day
July 29, 1999
Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.
Subject: Competitors or Complimenters?
NTBK vs. TBFC
Netbank and Telebank have enjoyed a very substantial level of growth and attention over the last six months. This has been quite evident from the seismic fluctuations of their stock prices as well as the almost weekly announcements of banking and credit companies who are promising alternative (and expensive) online banking services. Call it envy. Call it a public relations song and dance. Whatever the reason, these two companies are beginning to have a very profound impact on how their competitors want to be perceived.
This brings us to a very interesting question that goes to the heart of any young industry such as online banking. Are the leaders of an industry competing against each other or are they going for different slices of a bigger pie? This question gives us insight to many of the current realities that we now see in the IT marketplace. For example, in the PC market of the early 80's, Apple Computer was mostly busy trying to suit the needs of individual retail customers while IBM primarily tackled the corporate market. Over the next decade IBM and Apple discovered that they were much better at increasing their market share and profits in their own specific niche than they were at competing in each other's markets. Although both companies made small inroads within their competitors niches (Apple's are popular tools for Desktop Publishing while corporate executives frequently purchase IBM PC's for home use) it is their original market strengths that have guided these early market leaders to their current growth and prosperity.
This trend toward complementary segmentation of a new market has recently taken place within the discount brokerage industry during the last five years. In 1994 Charles Schwab had become the predominant leader through their high level of customer service and an automated phone system which lured techno-savvy and price conscious investors to this emerging sector. However Schwab also had to go about the task of providing dozens, and eventually hundreds, of locations where older investors could be lead through the registration and trading process. This left Schwab vulnerable to low cost competitors who would service customers that didn't need these hand holding services and sought lower trading costs.
E*Trade decided to develop this segment of the market by focusing exclusively on investors who were highly price conscious and technologically inclined. The lower maintenance costs for these customers resulted in even lower commissions (over $100 per trade at one point!) than their facility ridden competitor. E*Trade was soon rewarded with thousands of defectors from Schwab as well as hundreds of thousands of new investors who were comfortable using the telephone and the computer for all their online trading needs.
Schwab eventually did reduce their commission structure and later launched an online site to compete with E*Trade. But instead of abandoning those who were not comfortable with using technology in the place of computers, Schwab continued to use physical branches as a means to continue to lure these customers and expand their overall customer service capabilities. This differentiation lead to justifiably higher commissions, greater overall client growth, and better earnings than their online competitor. Even today Schwab has continued to maintain a stronger presence in the discount brokerage industry by providing better customer service than their more price conscious online competitor through maintaining these physical locations for their ex-full brokerage clients. Why? Because hundreds of thousands of people still demand that service.
Although Netbank and Telebank have barely over 100,000 customers at this point, it is clear that both companies have different interpretations of who their customers are and what their customers will need. Netbank has decided to focus on the financial desires of their target group by providing the highest interest rates possible for their customer's bank accounts. In exchange, the customer will only be linked to Netbank's website for servicing that account and in some cases (such as the checking/money market account) the customer will also have limited checking privileges. So far this strategy has been quite successful. Tens of thousands of people in the last seven months have decided that the excellent rate of return on their banking assets more than offset these online and offline limitations. The company's stock has more than doubled.
Telebank believes that their customers are also technologically inclined but are willing to receive a lower interest rate in exchange for greater check writing privileges (better convenience). Due to Telebank's recent merger with E*Trade and continued alliance with Yahoo, their also appears to be a stronger belief by their management that banking should be combined with other investment vehicles and services so that customers can go to one online location where they can satisfy all their financial needs. This is in strong accordance with Telebank's focus on convenience over cost advantage. As a result tens of thousands of former offline banking customers have invested their assets with Telebank over the last seven months. Again, during this time the stock has more than doubled.
So, do these companies compete despite their different perspectives of online banking? Absolutely. In fact, it can be easily argued that dissatisfied customers of one company would consider the other company as a comparable alternative. More importantly, both companies have taken significant steps to wards encroaching on each others competitive advantages because of their customer's need for value and customer service.
Telebank has offered over the last few months a 6.75% A.P.Y. CD as well as cash rewards for current customers who refer new customers to the company. At the same time Netbank is providing more extensive customer account information than Telebank at their web site. In addition, Netbank has continued to develop close ties with Ameritrade and recently narrowed the gap with Telebank's highly rated customer service by building a brand new customer service center in Raleigh, North Carolina.
It's obvious that both companies are tapping into many of the same sources for growth, but they have also continued to differentiate themselves to a greater degree. While Netbank is an exclusive Internet bank, Telebank continues to provide a telephone alternative to its customers. Netbank emphasizes it's ability to service customers with low monthly balances ($500) while Telebank is seeking a more "upscale" clientele. In the world of Wall Street investing Telebank has aggressively sought the funds and praises of the institutional investing community. Netbank, on the other hand, has relied heavily on public exposure and has sometimes gone against the conventional wisdom of the investment community to seek stability (Netbank prioritized profitability over account growth in the first two years of their existence despite the sentiments and resulting hold recommendations of Wall Street analysts.)
However Netbank and Telebank are not nearly as different to each other as they are to their brick and mortar competitors. In comparison to these millennium old institutions, Netbank and Telebank complement each other exceptionally well because they both have strong competitive advantages in areas where brick and mortar competitors are heavily lacking. In fact, the modern day Goliath's of full service retail banking stand as polar opposites to the philosophies, goals and customer with-it-ness of these two online banking companies.
For example, even the leanest brick and mortar competitors can't come close to Netbank's interest rates. Telebank's customers currently enjoy a level of customer service and interest rate return that put the brick and mortar companies to shame. While the retail banks charge ridiculous fees for their services (and non-services) Netbank and Telebank forgo this "revenue" and instead use their online strategy to minimize their customers banking cost and encourage their account holders to be self-guided and knowledgeable about their banking activities through the bank's web sites. In time this strategy results in even lower customer maintenance costs and better opportunities to provide useful and productive services.
Right now more than 200 million retail banking customers in the United States and billions of potential retail banking customers abroad may become involved with the online banking industry. Netbank and Telebank have not even captured one-tenth of one percent of this market. If these two companies continue to execute their management strategies and improve their overall returns and services there is little doubt that they will not only complement each other, but also that they may legitimize the online banking industry. When this happens only those brick and mortar institutions with incredibly strong leadership will be able to compete in the retail banking industry.