Post of the Day
May 25, 1999

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Subject: Some thoughts on NTBK and TBFC
Author: shiloh4378

The correction you are seeing in Netbank is quite normal and quite natural. If you take a look at practically every company that has introduced a better retail model to the public, you will find that every one of these companies went through a substantial correction in their stock price after they became well known. Part of this correction had to do with the fact that the companies were given such tremendous values before they were able to develop a significant economy of scale. Wal-Mart, America Online, Charles Schwab, even new retail focused corporations such as Yahoo, Ebay, and Amazon.com go through a phase where an over-reaction to excessive hype results in a volatile and temporarily devaluing stock.

All of them lost 30-50% of their value once the hype of their competitive advantages and business models began to wane. However, when the first three companies continued to develop and refine their services and consumer relations (every one of them had big problems initially due to the sophisticated nature of their businesses) they became leading forces in their industries. It is my belief that the three later named companies, as well as Telebank and Netbank, will become major forces in the lives of consumers during the next 20-30 years. Let's go through this group and see if there are some distinguishable patterns that are evident.

"Wal-Mart dwarfed K-Mart for decades. While K-Mart was busy chasing the bottom line quarter after quarter, Wal-Mart was focused on continuously improving their purchasing, packaging and delivery of the store's products."

In 1994, America Online was competing against stronger and more established internet service providers (CompuServe and Prodigy). The other two companies, despite their greater presence, practiced and exercised corporate philosophies that were hostile to the needs and desires of consumers. Compuserve had a very strong business base AND had the opportunity to further their consumer inroads by providing a GUI that was friendly to the novice computer user. Unfortunately for them, they decided to stick to their more technical GUI's because they did not want their business customers to feel like "they were using a toy". Similar to Compuserve, Prodigy insisted in having extensive advertising throughout their web pages in order to satisfy their corporate clients despite the fact that their new customers found this behavior highly distractible and irritating.

During this time AOL stayed focus on the consumer end of the business (unlike most banks today). While they also made a lot of stupid mistakes just like any other company during this process, they were also capable of learning from them and using that newfound knowledge to improve and refine their consumer product. A good analogy to this would be the latest consumer package Netbank has been sending to their customers vs. the more technical and bland packages that were given beforehand. Telebank's remarkable improvement in customer service over the last 12 months is also indicative of that company's emphasis on satisfying consumer needs. AOL had to work on the sophisticated nature of satisfying the needs and desires of their customers extensively, yet, they were able to incrementally improve upon their image, their technical expertise, and their retail competitiveness. AOL, as we all know, has become the premiere retail internet service provider and their stock price has reflected this focus on product differentiation and price competitiveness.

Wal-Mart dwarfed K-Mart for decades. While K-Mart was busy chasing the bottom line quarter after quarter, Wal-Mart was focused on continuously improving their purchasing, packaging and delivery of the store's products. Just like Netbank (and Telebank) provides their customers with an exceptionally high rate of return on the product they purchase, (their interest rates are in the top 1% in the country) Wal-Mart was (and has) been focused on their goal of having 80% of the price of their items driven by the actual purchasing cost of that product.

Wal-Mart initially concentrated on a few small areas of the retail business so that they could develop the appropriate economies of scale to reach their 80% goal (just like Netbank and Telebank have been primarily focused on developing the consumer retail end of the banking business.) This was especially critical to Wal-Mart's success, since diversification would have required a higher expenditure of capital and labor that would have worn out their competitive advantage. Netbank and Telebank likewise have also decided to go slowly with product diversification so that they can concentrate on establishing a better quality product at a lower cost vs. their competitors. Today, Wal-Mart is worth more than 80 times as much as it was worth 20 years ago. They went through several 20-50% dips but in the end their busniess model and high level of focus beat their once dominant competitor.

Charles Schwab is probably the best model for these banks in terms of what they may need to become major players in the banking industry. In the first ten years of existence, Charles Schwab was barely a blip on the financial radar. Their advertising was bland, signing up to trade took on average five weeks, and the company greatly overestimated their future growth rate throughout the mid-80's. Still, they never took their eye off the customer. Gradually they began to expand their core retail demographic from financial and managerial professionals to the common family breadwinner. Bland speeches gave way to the introduction of simple slogans and an easily understood philosophy of price advantage. Although these components all contributed to a healthier market perception, it is what was done behind the scenes that catapulted e-trade to the forefront.

A simple product, the telephone, was used as a tool to help investors trade for themselves. Although the automated system hit plenty of snags and system overloads, it soon became the tool that everyone used to trade. However, it wasn't just the telephone that made them successful. It was the integration of computers, intranet e-mail, snail mail, fax machines, wire transfer services, and most importantly, employee empowerment and trust that made Schwab a market leader. An employee at Schwab was given as much training understanding the market as they were given to understand some of the basic needs of the customer. The reason was simple. Customer needs would change, and the only way they would be able to maintain strong relations with their customers is if their employees had the financial background necessary to understand the basic tools that could be used by their customers.

"Like Wal-Mart, [Netbank & Telebank] seek to differentiate themselves through providing products (checking, savings, money market accounts) that represent a much better value for the consumer than their competition is able to provide."

Like Schwab, Netbank and Telebank are not just Internet banks. They use computers, telephones, e-mail, snail mail, and many of the same technologies that are used by Schwab. Like Wal-Mart, both of them seek to differentiate themselves through providing products (checking, savings, money market accounts) that represent a much better value for the consumer than their competition is able to provide. Like AOL, their ability to present this product in a consumer friendly manner will determine their future successes and prosperity. Many of you may believe that a B&M bank will simply copy their model (not without very high losses in profits and shareholder value in the short term, and how many of them are williing to downsize to NT's and TB's levels), or that perhaps the money will dry up (bad publicity and a lack of customer service will certainly slow the growth process down).

However, no one can dispute the fact that Netbank is the fastest growing bank in human history. It's also quite difficult not to be impressed with Telebank's level of customer service, mortgage management, and institutional support (in the high 80's for the last five months). An internet based banking system offers consumers the opportunity to receive a superior interest rate than was previously possible with a non-Internet based bank. Right now these two companies are the leaders in developing this concept of branchless banking. Although, no one knows whether these companies will become the leaders in consumer retail banking, it is quite certain at this point that they will be major players in this market for many years to come. With the two companies now having over 90,000 customers and a combined growth rate that has gone from 6,000 in January to 11,000 in March, it is quite obvious that they will have continued growth and success.

By the way, I'm adding to my positions.

Best Regards