Courting traditional banking consumers with a promise of convenience and higher
rates on accounts, Atlanta-based Net.B@nk becomes the first online bank to
achieve profitability.
From the day they first sat
down to discuss setting up an all-Internet-based bank, the management team at
Atlanta-based Net.B@nk relied on strong partnerships and a network of
industry contacts to aid in the venture into a new realm of banking. The
strategy worked. In March 1998, the company became the first Internet bank in
the country to become profitable -- no small feat for a 2-year-old Internet
startup that battled the cynicism of its brick-and-mortar counterparts to set
up shop on a new, untested medium.
But the impressive
financial milestone reached by Net.B@nk is not only significant for the banking
industry -- it’s also a big forward step for e-commerce in general. “When we
began in 1996, there were no proven business models for Internet companies,”
says D.R. Grimes, Net.B@nk’s CEO. “Our success has come through the devoted
efforts of the bank’s employees, the loyalty from the bank’s growing customer
base and the strength of the bank’s strategic partnerships.”
A native of Tulsa, Okla.,
and a 30-year resident of Atlanta, Grimes entered the Internet banking business
with T. Stephen Johnson, president of consulting firm T. Stephen Johnson &
Associates. Johnson and Grimes, a pair that worked together at Trust Company in
the 1970s, put their heads together and came up with the idea of an
all-Internet bank. Grimes, who currently oversees the daily operations of
Net.B@nk, brought more than 30 years of banking and technology experience to
the table. Johnson, Net.B@nk's chairman, was an experienced consultant who
helped banks through startups, mergers and other transitions, and brought the
financial connections to the company.
“Because of Steve’s banking
connections, he was able to get together with a few other individuals to raise
seed money for the company through private investors,” says Grimes. “Because of
his efforts, the bank currently has a 15 to 20 percent European ownership.”
Net.B@nk was incorporated
in 1996 and opened in 1997 under the charter of one of its owners, Carolina
First Bank. Originally founded as Atlanta Internet Bank, the institution
changed its name to Net.B@nk in August 1998 to better reflect its national and
international scope. “We thought it was appropriate to give the bank a name
that reflected its expansive reach through the Internet,” says Grimes, whose
initial assignment was to help take the company public.
Formed in 1996, Net.B@nk,
Inc. (the bank’s holding company), raised $35 million in an initial public
offering (IPO) in July 1997. Like many Internet stocks, it has benefited from
investor euphoria over the sector, rising from under $15 from its debut last
year, to a close of $24 on November 23. According to analysts, the company
expects 25 cents per share earnings for 1998.
When Net.B@nk was initially
launched, it served about 20 customers — most of whom consisted of employees
and their friends. Less than two years later, the bank boasted a hefty $162
million in customer deposits — a 176 percent growth over January 1998. Two
months later, the bank announced total assets of $243 million.
According to Grimes, the
fact that an increasing number of consumers are turning to online banking has
meant a steady growth of accounts and deposits for Net.B@nk from a varied, worldwide
customer base. “As we continue to grow, we also look to remain profitable --
something most Internet companies have yet to be able to do,” Grimes adds
In this era of technology
and information-sharing, many companies are realizing that forming
relationships with other firms, business partners and even competitors are
often the best route to business success. From startup to present, this
networking theory has paid off big time for Net.B@nk. Through its strong
contacts, experienced management team and strategic business partnerships, the
company has grown tremendously in a short period of time, and currently employs
a staff of 27 and serves customers in all 50 states plus many more worldwide.
Overall, there are
increasing signs that virtual banks are becoming much more than just “virtual
reality,” Grimes explains: “For me, the
opportunity to run a bank that allows us to have customers directly connect to
us, without even having to go through a branch network, is just incredible.
From a technology point of view, the Internet is great in its ability to enable
all of our customers to be totally connected to us and to each other.”
The concept of online
banking is attractive to consumers for many reasons, in addition to sheer
convenience. Because of low overhead expenses -- since there are no branches to
maintain and fewer staff -- cyber-banks can parlay their reduced costs into
better interest rates on traditional banking services like money market
accounts, interest-bearing checking accounts and CDs. Additionally, Net.B@nk
offers its customers perks like automatic, online bill-paying, 24-hour account
access and online brokerage services.
According to Grimes, the
average Net.B@nk customer is 40 years old and a homeowner who earns more than
$60,000 in a management, professional or technical position. When taking on new
clients, the company conducts credit checks and employment verifications prior
to opening new accounts, and requires new customers to deposit a minimum of
$100 to open an account.
While the bank’s offerings
and market demographics may sound impressive now, the road from concept to
completion wasn’t all easy for Net.B@nk. Pressure from regulatory agencies, for
example, came into play during the initial start-up period. The problem?
Atlanta-based Security First Network Bank, a technology company that was also
operating a bank, was losing large sums of money, making regulators reluctant
to approve another Internet bank. “They held up our application for months
while we convinced them that we had a solid business plan and a good,
successful model,” says Grimes. And convince them they did. Unlike the first
Internet bank, which was what Grimes calls a “test bed” to technology to sell
to other banks, Net.B@ank is “the real thing. Since inception, we’ve proven
beyond doubt that the Internet is a successful medium to deliver banking,” he
adds.
Today, all of Net.B@nk’s
transactions are conducted over the Internet and customers have access to their
accounts from any computer that has a modem and Internet access. Unlike the
handfuls of large banks that have taken the plunge into cyberspace and
established a presence on the Web, Net.B@nk is of a different breed. Instead of
providing Web access as an added convenience, this institution offers all of
its services exclusively over the Internet. Customers simply mail in their
checks or have them direct-deposited from their employers.
In joining with a multitude
of financial institutions that have diversified their product and service
offerings, Net.B@nk recently announced the launch of an online brokerage
services division, which allows customers to access all of their assets from
their keyboards, and automatically transfer cash from their brokerage accounts
to their FDIC-insured, Net.B@nk accounts. “We’re creating an environment where
our customers can easily access their brokerage and bank accounts anytime and
anywhere to place trades, pay bills, write checks, use the ATM and make
purchases using a debit card,” explains Grimes.
On average, Net.B@nk opens
200 new online accounts and fields about 1,200 e-mail messages per week. Not
surprisingly, dealing exclusively
over the Internet has brought some customer service challenges with it. To
provide a personal touch for customers, the company offers a toll-free 24-hour
telephone number that is attended by a 10-person staff.
Building a small business
is hard enough, but building one based on an intangible concept like the
Internet was harder than imaginable for Net.B@nk. In fact, in 1997, Grimes says
it was common for people ask him if the Internet was just a fad, or if it was
it here to stay. Today, no one would even ask that question, he says, but at
the time, consumer sites like Amazon.com and online investment sites like
E*Trade were unheard of. And while it’s true that the growing medium boasts its
share of success stories, in 1996 those companies were way off on the horizon
in the eyes of Wall Street investors.
“No one had ever done this
before,” says Grimes. “We couldn’t just go out and talk to anyone who knew how
to do it; no one had any experience.” To combat the problem, Grimes says
Net.B@nk used the names of business partners like AT&T to its advantage,
since those partners were already established and well-known.
“We had no name
recognition,” he says. “But we were using AT&T for our Web hosting, so we
made a deal with them: As we signed up customers, we would try to get those
customers to sign up for AT&T’s WorldNet [Internet] service.” In true
entrepreneurial style, Grimes and his team created AT&T/Net.B@nk diskettes
and set up tables at computer stores in an effort to get customers to sign up
for both services simultaneously. The company also placed newspaper
advertisements, primarily in the Atlanta area.
Then, in Fall 1997, the
bank made a major change in its marketing strategy by funneling all of its
advertising efforts into the very medium that had provided a cornerstone for
its business: the Internet. “We decided it would be much easier for us to
convince people who were already on the Internet to bank with us,” Grimes
explains. “Since then, we’ve dedicated our entire $30,000-$40,000 monthly
advertising budget to about 25 different Internet sites.”
Net.B@nk’s new, effective
marketing strategy includes placing well-targeted banner ads on investment and
bank research Web sites, as well as sponsoring new financial pages and joining
such pages as charter members.
Working with a design
agency and reputable public relations firm, Net.B@nk has been advertising
extensively since November 1997. Its banner ads have appeared on about 40 Web
sites, including those of Microsoft Investor, Money Magazine, Motley Fool and
the Weather Channel.
According to Grimes, the
biggest drawbacks of doing business on the Internet, besides the amount of
effort it took to convince people that Net.B@nk could evolve into a viable
entity, were the lack of a traditional application form and the need for an
original signature from new customers. He explains: “I would still like to see
us streamline account set-up. It’s not like buying a book, a two-minute thing.
We’re asking people to entrust us with their money.”
Another challenge, says
Grimes, lies in competing in an industry that moves and changes so quickly and
so often. “We view the Internet year as about 60 days,” he explains. “It’s a
huge challenge to keep up. We outsource a lot [of the work], which makes it
easier for us to keep up with technology.”
At present, Grimes sees his
company’s staunchest competitors as online brokerage firms, though other
Internet banks are expected to open in upcoming months. Since its inception,
Net.B@nk has broken through the traditional brick-and-mortar barriers of its
counterparts and proven that a bank can be profitable online. Its customer base
has soared to well over 12,000 accounts, and current deposits exceed $200
million from domestic and international customers. As a result, the company
stands a good chance of becoming the dominant brand in Internet banking, but
Grimes says the opportunity to stake that claim may not last.
“To become the dominant
brand, we’ll have to take this profitable business and grow it very rapidly,”
he says, adding that the real challenge will lie in balancing growth with
profitability. “We grew by about 500 percent in 1998; I’d like to see that
continue. For that to happen, we have to continue to build our technology
and customer service so that we can support those additional customers. It’s
one thing to say you doubled in size, but it’s another to have the operational
infrastructure necessary to support it.”
Company: Net.B@nk
URL: www.netbank.com
Founders: D.R. Grimes and T. Stephen Johnson
Industry: Online banking
Location: Atlanta
Founded: 1996
Employees: 27
Revenues: $162 million in customer deposits (1998)
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Advisor,
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