Tired of paying the post office $0.37 for the privilege of paying your monthly electric bill? Fed up with waiting in line to deposit a check at your bank? With the revolution in online banking and online bill pay, these chores are fast becoming a 20th-century anomaly. Today, Fool contributor Rich Smith lets you listen in on a recent conversation he had with Jeff Stiefler, CEO of Digital Insight (NASDAQ:DGIN), one of a handful of companies helping to digitize all your money-moving needs.
Rich Smith : Jeff, for the benefit of those who don't know Digital Insight, how about a thumbnail sketch of the company?
Jeff Stiefler: Sure. Digital Insight is the market-leading provider of online banking technologies to middle-market financial institutions -- primarily regional banks and credit unions. We empower middle market institutions to serve the online banking needs of their consumer and business customers, delivering advanced technology that is fully comparable to that offered by the very largest banks.
Rich: What's the most common way that consumers encounter your product in their day-to-day lives?
Jeff: Let's presume that you bank at a regional bank or credit union. [When you] check your account balances online, transfer funds online between your checking and savings account, or pay a bill at your bank's website, it's very likely that you are experiencing our technology without knowing it. Incidentally, although Digital Insight provides online banking transactions for more than 1,700 financial institutions, our products are configured to reinforce branding for each of our clients. So consumers won't necessarily see our brand on our clients' websites, but rest assured, we are doing the heavy lifting behind the scenes.
Rich: You've been CEO of Digital Insight since August 2003 -- what were you up to before taking the helm at DI?
Jeff: I spent the largest part of my career in financial services, at Citibank (NYSE:C) and American Express (NYSE:AXP). At Amex, I headed sales and marketing for IDS, the company's financial services subsidiary (now American Express Financial Advisors), then became IDS's president and CEO, then president and a board member of American Express. I decided to retire from Amex in 1995 to spend more time with my four young children. Eight years later, the children had grown up a lot, and I realized I wasn't getting the level of professional satisfaction I wanted. I decided to find a company to run and was fortunate enough to find Digital Insight.
Rich: On several occasions, you've compared the consumer adoption rate in online banking/bill pay to the historical growth curve of consumers using ATM machines. Can you lay out that thesis for us briefly?
Jeff: Several industry executives and market research firms have drawn parallels to consumer adoption of online banking and ATMs. For example, in a recent report, market researcher Celent demonstrated graphically the very similar adoption curves for the new technologies. People often forget that it took 25 years for ATMs to become as ubiquitous as they are today. Considering that we're just 10 years into online banking, we have a great deal of growth ahead of us -- especially in our market, serving smaller institutions where adoption has historically been slower.
Rich: It's hard to find a bank that doesn't offer some flavor of online banking these days. How can DI continue to grow once all the potential customer banks have been claimed?
Jeff: Because DI was first to market, we were able to build the industry's largest installed base of financial institutions and their customers. We believe we can achieve significant top- and bottom-line growth over a multi-year period simply by driving higher levels of adoption within our installed base. As well as we have done, we still have nearly 30 million consumer account holders within our installed base who are not yet Internet banking users, and approximately 34 million who are not yet using bill pay. And we continue to add new clients by winning business from our competitors. For example, we announced in June that VyStar, one of the country's largest credit unions, had decided to migrate its 300,000 customers to our platform
Rich: There are a lot of other companies targeting your market, some directly, some less directly. How serious is the threat posed to DI by the following competitors: banks' own in-house tech departments; Online Resources (NASDAQ:ORCC); S1 (NASDAQ:SONE); and Sybase (NYSE:SY)?
Jeff: Frankly, we don't worry about these firms much. When we compete head-to-head against direct online banking competitors, we generally win. And within our market segment, developing a solution internally isn't viable because smaller institutions don't have the IT resources to do so.
Our toughest competition comes from core data processors, particularly when the financial institution is a price-sensitive buyer. Interestingly, our primary strategy for competing with core processors is to collaborate with them -- something we have done very effectively through revenue-sharing arrangements. More than half of our client wins are derived from core processor partnerships today. ... We recently announced that Kirchman, a Metavante subsidiary [Metavante is itself a subsidiary of bank-holding company Marshall & Ilsley (NYSE:MI)], named DI as its exclusive provider of online banking and cash management services to its 400 banks. After only three months, we've signed six new joint clients and have a few dozen additional sales opportunities in the Kirchman pipeline.
Rich: Your company lists a lot of numbers on its quarterly earnings report. Highlight for us the two or three numbers that you think an individual investor should pay most attention to, to better gauge the health of your business.
Jeff: Here are the most important metrics: growth in the number of Internet banking and bill pay end users, because that's what drives our revenue model; operating margins, because that's what validates our ability to scale the business in a disciplined and effective fashion; and average monthly service revenue per Internet banking end user, because that measures the degree to which we're able to maintain stable pricing.
Rich: If there's one constant in the banking industry, it seems to be that big banks are constantly eating smaller banks. DI focuses on serving the needs of smaller banks. How do you respond to critics who say that your most lucrative clients are the ones most at risk of being acquired by a larger bank?
Jeff: First, it is important to recognize that no customer accounts for more than 3% of revenue, so acquisition risk is relatively minimal. Second, we have termination fees built into virtually all of our contracts to ensure that if a client is acquired before the end of their contract term, we are protected. Third, some of our largest sales wins have come from acquiring banks that have decided to standardize their combined organization on our online banking platform. Mercantile Bank, a $16 billion holding company based in Baltimore, is a great example of such an outcome following its acquisition of a Digital Insight client last year. As a result of these factors, M&A activity has been net neutral to Digital Insight over the years.
Rich: At The Motley Fool, we almost always encourage investors to focus on a company's success as a business rather than the success or failure of its stock. Give us the "bull case" for why a stock's price matters.
Jeff: I believe the importance of stock price is most apparent within the company as an employee retention tool. Like many technology companies, stock options and employee stock-purchase plans play an important role in our compensation packages. Aside from the financial benefits, when the market rewards a company's performance, employees also gain a sense of pride, accomplishment, and confidence. Finally, a fairly valued stock price provides additional flexibility for financing potential acquisitions, although acquisitions aren't a primary focus right now.
Rich: The Motley Fool is investors writing for investors, so we're always looking for potential investment ideas. What companies are on your radar?
Jeff: CashEdge is a privately held company that has impressed us. We recently entered into an exclusive partnership to resell its new account opening and funding technology to middle-market financial institutions. CashEdge has developed market-leading technology that allows banks to open and fund deposit accounts online in real-time. We are firmly convinced that acquiring customers online is where the market is headed, and CashEdge has the best technology available.
Fool contributor Rich Smith has no financial position in any of the companies mentioned in this interview. You can take The Motley Fool's disclosure policy to the bank -- online or off.
