``If you've gone to the trouble to process the loan, any type of profit is better than none,'' Gellman says. ``An eighth of a point isn't going to kill the deal one way or another.'' The Digital Financier Update (DFIN.COM Update) provides a weekly commentary on important stories with significant financial, and or Internet implications. The purpose is to provide finance professionals and there staff with a timely brief synopses of recent and historic news events that best illustrates the changing digital economy. The stories will eventually impact all of us. Many of our stories may have received very little popular press coverage. The weekly summary is e-mailed at no cost to participating subscribers for distribution to staff and co-workers.
This publication is designed to be a quick read and the archive is a good resource for financial history.
The most common sources for the DFIN.COM Update include UP, AP, Fast Company, Business Week,The Economist, Forbes, Wired, Federal Reserve Bank Publications. The Wall Street Journal Interactive, MSNBC, L.A. Times, San Jose Mercury News.
Week of June 27, 1999
Online mortgages grow by leaps and bounds, June 28, 1999, BY MONUA JANAH ,
``If you've gone to the trouble to process the loan, any type of profit is better than none,'' Gellman says. ``An eighth of a point isn't going to kill the deal one way or another.''
Gellman's experience shows how the Internet is transforming an American ritual -- getting a home loan -- pushing down the cost for borrowers while squeezing mortgage brokers' profits.
But in a twist that observers say is typical of the emerging Internet economy, the pioneering companies offering online mortgages may end up victims of their own success -- intensifying competition and driving fees down so low that they threaten their own survival.
Web-based services range from simple advice and referral, offered by sites such as Microsoft Corp.'s HomeAdvisor, to mortgage brokerages such as E-Loan Inc. of Dublin, Mountain View-based Intuit Inc.'s QuickenMortgage.com and iOwn Inc. of San Francisco.
E-Loan, which completed an initial public offering Monday, is the largest online mortgage broker and has also begun acting as a lender, writing its own loans. It faces competition there from mortgage.com, of Plantation, Fla. -- which plans to go public soon -- as well as traditional banks and lenders such as Countrywide Credit Industries Inc., who are also chasing Web-based business.
Last year, about $4 billion in mortgages were handled online, according to a report by Deutsche Bank, up from almost nothing just three years ago. Forrester Research Inc. in Cambridge, Mass., predicts the share of mortgages handled online will grow from 1.5 percent this year to 9.6 percent in 2003.
The surge in the last two years was fueled by a strong economy, high employment levels and cheap credit. Mortgage originations overall climbed to $1.5 trillion last year from $833.6 billion in 1997, according to the Mortgage Bankers Association of America.
Refinancings accounted for half the total, up from 31 percent in 1997, and online sites siphoned away a chunk of that business, since refinancings are easier to automate than a mortgage written at the time a home is purchased.
But Web technology, which provides an easy, interactive way to navigate a wide array of financing options, has made it simpler even to get the loan a home buyer needs at purchase.
Robin Powton, a computer consultant, went to the Web for a loan when he was ready to buy a four-bedroom house in suburban Philadelphia. He found his loan on QuickenMortgage.com, prepaying three points and getting a 6.3 percent rate on a 30-year, $350,000 loan.
``I could see all the numbers online. I could try changing the terms and see what would happen if I did,'' he says.
Powton says he got as good a rate as anything a broker could have found for him, plus he saved up to $3,000 in broker's fees. ``I didn't really see what value they added.''
As important as the wider array of choices online, customers say, is the demystification of the process.
Ewa Kubalska, a hardware engineer, used E-Loan for two refinancings of her house in San Jose. ``Throughout the process, I felt as if I was in the driver's seat. With a broker, I only knew what they were willing to tell me.''
David Veach, who also used E-Loan for two refinancings on his San Jose house, says he ``probably saved in the neighborhood of $2,000 to $5,000'' on those transactions.
``For refinancings, I wouldn't use a traditional mortgage broker again,'' Veach says. ``Even if I was buying a new house, I might approach one to verify that what I was doing online was reasonable. But I would still go online to get the loan.''
It's that kind of thinking that analysts cite when they predict that online mortgage companies will force prices down industrywide.
``The mortgage process is the most backward pig of a process that exists,'' says James Punishill, an analyst at Forrester Research Inc., Cambridge, Mass. ``But what the Net is doing is putting the consumer in charge. When that happens, there's pressure on prices and on fees. The differential in prices will narrow.''
Small- to mid-size brokerages are feeling the pinch the most.
``The Internet has done a number on the business,'' says Elaine Mello, a loan agent at Los Gatos Lending Connection, which has launched its own Web site. ``E-Loan has really hurt us. People have become smarter shoppers. It's made a huge dent in the business.''
Gellman's company has a Web site -- northstarmtg.com -- and offers a ``$250 bonus'' to customers who close a loan after filling out an online application.
But though Web-based companies may avoid much of the expense of maintaining a brick-and-mortar operation -- buildings and salespeople, for example -- their other costs are as high as any offline company. Until all the back-office systems are automated, the cost of processing a loan is as high for E-Loan and for QuickenMortgage.com, say, as it is for a traditional broker. And online companies have to worry about high expenses for technology and Web site design and upkeep.
The result is what E-Loan faces. The company, which handled $1 billion in loans in 1998 and $490 million in the first quarter of this year, posted losses of $11.2 million last year and $11.4 million in the first quarter.
Worse, mortgage rates have risen in the past six weeks on fears of inflation. That threatens the large refinance businesses of E-Loan and other Web mortgage brokers.
The company's stock offering of 3.5 million shares was repriced down once -- a sign of lack of demand from investors -- before being priced back up Monday at $14 a share. The stock begins trading on Nasdaq today.
Despite the growth of online mortgages, traditional brokers say there is still a way to retain customers -- providing personal service, much as some stores have done when a Wal-Mart came to town.
Take Elliot Ames Inc. The Los Altos-based, privately held company was the fastest-growing mortgage broker in Silicon Valley last year, handling $1.7 billion in loans, up from $1 billion in 1997. It does no advertising. Chief executive Tammy White prefers to rely on word of mouth.
Karen Toms and Henry Brown are a husband-and-wife team of brokers in Elliot Ames' Menlo Park office. They says their business has grown 400 percent in the past four years because they offer long-term help and expertise that extends well beyond getting the loan.
``We don't consider our business transactional,'' Brown says. ``We consider it relational. We want to be there for our clients and become a trusted adviser over the years.''
Paul Saffo, a director of the Institute for the Future, a think tank in Menlo Park, agrees. He's been a client of Toms for the last eight years and has no plans to change.
``It's interesting, I have moved so much of my transactional life online -- banking, buying Christmas gifts, bidding for things on eBay,'' says Saffo. ``But the difference in mortgages is the personal relationship. Online mortgages are great if you're just looking for a standard product and are willing to put in your own time. But in California, with our real-estate market the way it is, it's not so simple. Can you codify all the expertise of a human broker online? Maybe some day, but not yet.''
Net is blurring the line between products, services, June 27, 1999, Mercury News -
Widely known as a ``Father of the Internet,'' Vinton G. Cerf is the co-designer of the TCP/IP protocol, the computer language that gave birth to the Internet and is commonly used today. Cerf, now senior vice president of Internet architecture and technology for MCI WorldCom Inc., met with Mercury News Staff Writers Jon Healey and Deborah Kong during a recent visit to San Jose to discuss how the Internet will affect daily life. An edited transcript follows:
Q: What do you envision when you think about hooking devices other than personal computers to the Internet?
A: I guess I'm seeing several things going on at once. I'm seeing the potential for turning products into services in many cases. Devices that are online may be capable of using the Net to deliver a service as opposed to simply using a product.
Let's suppose I have an Internet-enabled car. That phrase could mean a number of things. One possibility is that the engine itself has been constructed with an Internet chip, not only to help manage the engine's parameters, but also to report in and report back to the engine maker what's been happening to that engine. You get information on how that engine's been holding up.
The other thing that I'm quite intrigued by is the possibility of knowing where you are, using global positioning system or other location (technology) and then having the device use that fact in order to perform some useful service. This means relating the knowledge of where you are to geographically indexed databases on the Net.
There's this notion that Eric (Benhamou, chairman and chief executive of 3Com Corp.) talks about where the connectivity is pervasive. It means that we can start to get local information -- like, ``What room am I in?'' -- because you walked into the room, your personal digital assistant queried and the room answered.
One example was when you go into the grocery store, you can import a list of everything you've bought in the last little while, or if it's a store you shop at often, maybe it knows what you bought over the last three months, so you can download that into your PalmPilot and then click off the things that you want. Maybe we'll send that in an e-mail to the store, somebody packages that part up, and then you just look for the vegetables and squeeze the melons and so on, until you're happy with what you've got.
Q: How do we get all these items that can't communicate onto the Internet?
A: One example of how to get there is to imagine putting these technologies into chips.
Some people have pointed out that the real story here is software, and it's true. If you don't have any applications, there's nothing to do; the network is not very useful.
So if I were running for president, I'd probably have a slogan, ``It's the software, stupid.''
Q: Would you also say that you were the founder of the Internet?
A: I don't know. After watching the vice president get in so much trouble, I think maybe I'll just sit still for a bit.
Q: Universities have access to extremely high-capacity Internet connections. How does that bandwidth migrate to the mass market?
A: There's a homely example of what happens when you get enough bandwidth that kids who are playing Internet games are starting to experience in some parts of the country, Arizona in particular: the fun of playing multiparty games remotely. They have both sound and microphones, so the kids can actually hear each other while playing.
They have a choice of either talking to each other while they're playing the game, or if they don't have microphones, then they have to type, like a chat room. When it comes to strategy and tactics, the kids who can talk are doing much better than the kids who have to type, because typing slows you down. So it was very clear: If you can speak to each other, you can make a more effective collaboration.
Q: Talk about the untapped capacity of the existing networks.
A: Our demand for (bandwidth) will always go up because every time there's more capacity you're going to use it to send things or download things you wouldn't normally have been willing to do. It would have taken too long.
Bandwidth lets you turn a terrible chore that you only do a little bit of into something you just casually do about a hundred thousand times -- well, maybe 10 -- in order to explore alternatives. And so it's the interaction that the high bandwidth delivers, as opposed to necessarily the ability to deliver a large quantity, that may make it some much dramatically different.
Q: Do you think the Internet is where it should be in terms of privacy now?
A: Oh, it's not where we need to be in a number of different ways. For one thing, from the policy point of view, consumers don't know enough about what is being done with their personal information. And they need to know more so they can make some informed judgments. I have to say, though, I think most users will tend to decide in favor of releasing the privacy information in exchange for convenience.
I offer you the credit-card example. At the end of the year, the details of where you were, and what you bought, and where you ate, and what airplane you flew on, and where you went from and where you landed are all there. And, you know, it's like somebody having a copy of your diary.
Mostly you don't think about it because the credit card enables you to do things that would have been really hard to do otherwise. And yet, it's sort of stunning to look at that data and say, well, there's some person in the guts of the organization that has access to the whole database.
It's very clear that we've allowed ourselves to give up a lot of that information. But we should do so knowingly, as opposed to blindly.
Second, there are things we could do technologically that will let you decide or control better who has access to personal information. And that's using the public key cryptography techniques.
It still is a big issue. It's not a panacea, because even if you've encrypted something, then the question is, who's allowed to decrypt it, to look at it?
Let's say the medical field, for example. You don't always know who's going to be taking care of you that needs to know what your medical condition is. And you don't want in the middle of a life-threatening situation to have somebody say, `What's the key for this?'
And of course you're out cold, don't know, your credit card's been smashed up, or your smart card was smashed in the automobile accident, and everybody is saying, ``I can't get to the data.'' Very quickly, people would say, ``The heck with that, that's really dumb. I'm not going to die over this.'' What you end up with, I guess, is sort of categories of access.
Q: Do you see this as largely an issue of public education?
A: It's really two things here. Consumers need to be more knowledgeable. But I think businesses are already heavily motivated by the threat of regulation. It is very clear that if somebody decides to regulate privacy practices by a corporation without really understanding what the implications are technically or economically, you could write some pretty bad law that would essentially disable a business from being able to function.
It doesn't mean I'm anti-privacy. Believe me, I prefer to have privacy. But I think we need to understand at what price and under what circumstances it could be supplied.
Week of June 20, 1999
Bank One Starts Web Bank with A New Brand, American Banker, By Chris Costanzo, June 24, 1999 - With its launch of a separate Internet bank, Bank One Corp. is daring to start over.
Organized under its First USA credit card subsidiary, the branchless bank, to be launched officially today, will take Bank One beyond its midwestern footprint to target a national audience of Internet users.
Already perhaps the most aggressive bank in terms of on-line advertising and promotion, Bank One will project a new brand name -- WingspanBank.com -- that will clearly distinguish the Internet entity from an existing Web banking service and from First USA's on-line credit card activities.
The "clean slate" approach represents a bold bid to gain the banking loyalty of the growing number of Internet users, said Jim Stewart, the president and chief executive officer of Wingspan and formerly executive vice president of Wilmington, Del.-based First USA.
A major portion of Wingspan's budget will go toward marketing, officials said. Wingspan today begins a multimillion-dollar nationwide ad campaign on cable television, in print media, and on the Internet. Its main message: "If your bank could start over, this is what it would be."
Heavy advertising is considered crucial to the success of newly branded on-line ventures. PricewaterhouseCoopers has estimated that top Internet companies such as Yahoo, Amazon.com, and E-Trade Group spend 45% to 60% of their operating expenses on promoting their brands.
Bank One is pursuing a multi brand strategy -- considered novel among U.S. financial companies -- by retaining the Bank One and First USA names while also developing Wingspan, a moniker chosen to denote a broad range of services.
"Bank One will be in position to attract all types of customers," said Richard W. Vague, chairman of First USA and of the new bank.
He said the three-pronged push for customers who are either Internet-savvy, in need of face-to-face service, or credit card-oriented, is equivalent to a consumer product company's use of multiple brands to appeal to several demographic or lifestyle markets.
Other financial institutions are headed in the same direction.
In aiming for a "universal" customer base of one billion, said Citigroup corporate executive vice president Edward D. Horowitz, "we have to remake ourselves."
He said at a recent meeting of the New York New Media Association that "it's not about black and white," which leads in the direction of "a multiple-brand approach."
Some experts view Bank One's new-branding decision as risky.
"Dot-com companies are challenged with how to gain credibility," said Tammy Edmiston, account director at the McCann-Erickson ad agency in Seattle. "One of the ways they do it is through their existing physical presence."
But extending an existing brand to the Internet also runs a risk of alienating current customers who may fear big changes, said John Grace, executive director of Interbrand Group, a New York-based brand consulting firm. Or younger prospective customers might get the message that the institution is not changing fast enough.
Alternatively, the cost of building a new brand is enormous, Mr. Grace said. "Customers are going to ask, 'Why should I turn my assets over to something I never heard of?' "
Compounding Bank One's challenge is the fact that hundreds of Internet banking options are already available. Mr. Grace said, "Bank One has to prove why it's different."
Wingspan customers will not have access to services at Bank One branches, but they will be able to use Bank One's 7,000 automated teller machines free of charge. Wingspan also plans to reimburse any fees customers incur at other banks' ATMs.
Wingspan officials did not reveal prices but said the "general philosophy" is low interest rates on loans and high rates on deposits.
Electronic bill payment and presentment will be available to anyone who comes to the site, even if they do not have a Wingspan account. Noncustomers would pay for the service, however.
Wingspan's checking account, credit card, and home equity loan products will be "manufactured" by Bank One and First USA. Mortgage, insurance, and mutual fund products will be available from a number of providers.
"This is a step in the direction of becoming a trusted adviser to the consumer," Mr. Vague said.
Another move toward that end, he said, is a concierge service that will book travel tickets or restaurant reservations on behalf of customers. Mr. Stewart described a scenario in which a customer traveling to Italy could inquire about the best restaurants in Tuscany and make reservations through Wingspan.
About 100 people have been hired to run Wingspan, which has been available on a limited basis to First USA cardholders "for some time," Mr. Vague said. "The Internet makes it possible to do this in a way that is cost-effective."
Some observers were cool to the concierge idea. "It's so far removed from financial services," and "a bit absurd," said Octavio Marenzi, research director at Meridien Research.
"It's nonsense," said Diogo Teixeira, president of Tower Group. "Why go into direct competition with travel agencies on the Web?"
Against other institutions going the new-bank route, Wingspan may have a promotional head start.
Sovereign Bancorp, North Fork Bancorp, and Synovus Financial Corp. have Internet-only banking subsidiaries that are still in the formative stages. Security First Network Bank, the U.S. Internet pioneer now owned by Royal Bank of Canada, has not announced plans for any major advertising campaigns.
Only USABanc.com -- known as USABancshares until May 21, when it became the first bank holding company to get an official "dot-com" name -- is close to mounting a national advertising campaign. It started airing radio commercials June 14 in eight cities during the "Howard Stern Show" and will add cable TV spots Monday and billboard and print ads in the next two weeks.
"It's hard to say how many Internet-only banks the market will be able to support," Mr. Marenzi said.
Bank One and First USA are well established on the Internet. Both work with major Internet portal companies to reach out to new customers. The plan is to transfer to Wingspan their banner ads and other promotional agreements, Mr. Vague said.
Chase, First Union, Wells Fargo in e-billing pact. June 23, 1999, InfoBeat - Chase Manhattan (CMB), First Union (FTU) and Wells Fargo (WFC) said Wednesday they will form a new company to exchange electronic bills.
The new venture, tentatively called The Exchange, will function as a hub, allowing members to send e-bills through a single connection to other members of The Exchange. The members receiving the bills will, in turn, deliver those bills to their customers who will pay them using their own financial institution.The Exchange will use technology from Sun Microsystems (SUNW) to build the operating platform, the companies said. Visa U.S.A. will also supply software and support. The founders' intent is to create a for-profit company which will be open to other financial institutions and be a standard for e-billing transactions. Chase, First Union and Wells Fargo have a combined customer base of nearly 60 million consumers and small businesses, and relationships with more than 59,000 corporations and institutions nationwide. "Easy access to a critical mass of billers and consumers is fundamental to the wide-scale growth of electronic bill presentment and payment," said Ronald Braco, chairperson of The Exchange's steering committee and senior vice president of Chase Manhattan.
Gen X Travels Web, Not Main St., to Buy 1st Home, American Banker Online, By Hala Habal, Second in a Series, June 22, 1999 - When Ken and Geneve Hendricks, both 30, decided to buy a home, their first stop was the Internet.
The Norwalk, Conn., couple surfed real estate agents' Web sites, taking virtual tours of houses for sale. They read on-line articles about the mortgage process and what to expect. Then they hired an agent, who helped them find a town house that they could afford -- the price was $250,000 -- and get it financed through Cendant Mortgage.
People in the Hendricks' age group -- whom demographers label generation X -- are beginning to buy homes in droves, but not quite the way their parents did. They are shopping on the Internet, using gift money for down payments, and viewing homeownership more as a temporary investment in real estate than a chance to settle down.
Unlike the baby boomers who preceded them, they prefer to conduct home-buying research themselves, then consult a professional after doing the homework.
Generation X -- those born between 1965 and 1979 -- is becoming a major force in the market for first homes, so its habits and preferences are of growing concern to mortgage professionals. The National Association of Realtors says Internet-originated mortgage loans will increase from $265 million in 1997 to more than $25 billion by 2001, largely because of younger people's familiarity with the Web.
For now, it is the 20-somethings and early-30-somethings who are contributing to a bidding frenzy for starter homes. The prosperous economy and tight labor market have helped this group start saving money soon after college, and the considerable wealth of their parents' generation has offered added lift.
Their disposable income has translated into soaring housing prices, particularly in first-home markets in urban areas. The Hendricks learned this the hard way. All the properties they liked on the Internet had been sold by the time they called to inquire, and the homes they were able to bid on were sold for well above the asking prices.
"We had upward of seven people bidding on the same house," said Mrs. Hendricks, a swimming coach, whose husband is a business analyst. "Property is moving so quickly, by the time you can even post a picture [on the Internet], it's too late."
In one instance, the Hendricks bid $236,000 on a home listed for $229,500, but lost out to bidders who offered $245,000.
"I asked the Realtor if the property was worth it, and she said, 'It is now,' " Mrs. Hendricks said.
The couple's six-month search, which ended in February, led to the conclusion that the market is "very frustrating for young people," Mrs. Hendricks said. "We work so hard and we think we are making enough money to buy a decent house, but by the time we start to look in our range . . . it's very discouraging."
Generation X, with 20 million members, is much smaller than the groups that came before and after it. There are 83 million living baby boomers (born from 1946 to 1964), and 70 million baby busters (born after 1980, and sometimes known as generation Y or the millennium generation).
The relative scarcity of generation Xers has helped them economically. "Wages are up, and there is a crying need for skilled labor," said Forrest Pafenberg, director of the National Association of Realtors' real estate finance research.
In a recent survey, the association found that 64% of first-time homebuyers, and 22% of repeat buyers, were under 35.
George J. Patterson, a Norwest Mortgage branch manager in Southborough, Mass., said 30% to 40% of the loans he approves are to members of generation X. The typical borrower in this age group is married, has a combined family income of more than $100,000, and works in computers or biotechnology, he said.
Younger borrowers are noteworthy for being "very sophisticated" about the process, Mr. Patterson said. Through on-line research, "they know who the top players are in the marketplace and who has the best rates." They are interested in newly constructed homes, and some who are planning ahead delve into the reputations of school districts in various communities they are considering.
Their financial savvy seems to point them toward homeownership, Mr. Patterson said: "Younger people are realizing, 'If I have to pay $1,200 a month for rent, I'm earning the money, and have all these alternative sources for down payment, why don't I just buy the home and get the tax advantage?' "
Professionals who belong to generation X tend to marry later in life than their parents did, which can mean they learn more about financial planning before they settle down. Whereas previous generations of homebuyers typically tapped savings from a bank account for a down payment, the current crop of young borrowers is "selling stock, exercising options, and tapping into retirement accounts and gifts from family members," Mr. Patterson said.
Leanne Lachman, a managing director of Boston Financial and a trustee of the Urban Land Institute in Washington, said this younger group has been able to buy new homes because of a wealth transfer.
By 2010, about $3 trillion will have moved from a parent or grandparent to a child or grandchild, she said. By 2040, the figure will reach $10 trillion.
"The baby boomers' parents are the wealthiest generation in American history so far," Ms. Lachman said. "They have assets that they have been storing up, and there is a lot more information about tax-free transfer."
Older people who have amassed such wealth are taking advantage of the option of giving their children up to $10,000 a year tax-free. For the young, this means "a lot of people are getting family help with down payments, whereas before they would have remained renters," Ms. Lachman said.
Though their circumstances may sound comfortable, generation Xers earn lower wages than people their age did 20 years ago, said Bruce Tulgan, founder of RainmakerThinking Inc., a research and consulting firm in New Haven that specializes in studying generation X as a work force.
Mr. Tulgan sympathizes with Mrs. Hendricks' complaint about her generation's dwindling rewards.
"Among those who are buying houses, [younger people] are likely to be working a lot and working pretty hard," Mr. Tulgan said.
To compensate, these consumers seem more willing than others to move to a different region to get a better deal on a home. Relatively few of them approach homebuying with idea that they will remain in the same community forever, Mr. Tulgan said. Mobility and liquidity are "very important among young homebuyers," he said.
"The one thing these people don't want to do is limit their options," Mr. Tulgan said. "A lot of people are going to be looking for how much the decision commits them, and if they will be able to turn around and walk away from it."
Ms. Lachman said no single region is benefiting from the surge in young homebuyers.
"You don't just have to be in New York to be an investment banker anymore -- there are big operations in Chicago, Charlotte, N.C., Dallas, and Los Angeles," Ms. Lachman said.
Moreover, the type of youthful wealth associated with high-tech companies in Silicon Valley can be found in pockets around the country, including Denver, Raleigh, N.C., and the suburbs of Boston.
Young, affluent single people are helping drive up real estate prices in urban areas.
They are "helping cities blossom," Ms. Lachman said. "They want to have the active nightlife, they like the concept of living in the city, and they have the money to do it."
Mr. Tulgan said credit was increasingly easy to come by for generation X, and many young people have built credit histories that their predecessors had not.
Housing experts say that as the demographics of homebuyers change, so do their preferred methods of financing.
A recent Fannie Mae survey questioned households headed by 25- to 39-year-olds about their attitudes toward homeownership and financing. Whereas 27% of baby boomers said home equity would be part of their retirement planning, only 6% of gen Xers said the same.
The survey also found 52% of generation X respondents and 45% of baby boom respondents were attracted to the option of reverse mortgage, a product usually associated with older people. Reverse mortgages allow people to borrow against the equity in their home.
Mr. Patterson, the Norwest branch manager, said younger people tend to have higher debt service -- the percentage of income dedicated to repaying obligations -- and less fear of borrowing large amounts with little money down. He also has observed that many generation X members are willing to accept private mortgage insurance, whereas older borrowers "want to do everything they can to get away from" such payments.
Another trend among young homebuyers is their reluctance to actually complete mortgage transactions on the Internet, experts said. Many are shopping, learning, and comparing on-line, but most are still first-time homebuyers who want personal guidance and reassurance when it comes time to part with their money.
Mrs. Hendricks, the Connecticut swimming coach who researched homes on-line, is a case in point.
"I wouldn't have felt comfortable doing the transaction on-line," she said. In the end, she said, she was glad "we had a mortgage counselor to ask questions."
This study analyzes the potential erosion of state and local sales and use tax revenues from the growth of ecommerce. An estimate of the sales and use tax not collected in 1998 from remote sales due to the Internet is less than $170 million, or only one-tenth of one percent of total state and local government sales and use tax collections. The Advisory Commission on Electronic Commerce, state and local governments, and Congress have time to carefully deliberate on the appropriate taxation of ecommerce. The future sales and use tax system of state and local governments should be fair, minimize adverse economic costs, encourage economic growth, reduce taxpayer compliance costs, and minimize government administrative costs. Download the full report (Adobe Acrobat - 70Kb) or read our press release.
Commission begins tough Internet tax questions, June 21, 1999, Mercury News
Keeping electronic commerce tax-free will help the economy grow faster, say many in business. But merchants large and small, on Main Street and in the mall, fear online shopping robs them of customers, while local governments worry about eroding the tax base needed for schools and public safety.
Everybody frets about losing business if high U.S. taxes are imposed on Internet purchases: Americans might buy from foreign companies while consumers in other countries might bypass U.S. products.
A 19-member commission created by Congress meets Monday in Williamsburg, Va., to begin sorting through tax options for Internet commerce. The goal is to have new laws in place before a federal moratorium on new taxes for e-commerce expires Oct. 21, 2001.
The panel's incoming chairman, Virginia Gov. Jim Gilmore, a Republican elected in 1997 on a tax-cutting platform, said in an interview he has no illusions about how difficult it will be to reach a consensus.
``I would not overestimate the conflict. It may not be resolvable,'' Gilmore said. ``My goal is to run the commission in a way that allows all ideas to be aired out and to give a fair hearing. We will not cook up a policy and try to ram it down somebody's throat.''
With the growth of e-commerce, the commission's work promises to have a lasting effect on Americans' shopping habits.
Austan Goolsbee, an economics professor at the University of Chicago, said most research indicates online sales next year could reach $200 billion to $1 trillion. His own study of 25,000 online buyers concluded that imposing a sales tax on remote commerce would cut spending by 30 percent.
``Internet sales are highly sensitive to local taxation,'' Goolsbee said.
In most states with a sales tax, people who buy things online or from out-of-state catalogue companies are supposed to calculate and send in the sales taxes, but it is rarely enforced. In 1992 the Supreme Court said Congress would have to change the law to require one state to collect and remit taxes for business done in another state.
Commission members include government officials and executives from telecommunications and Internet industry companies such as AT&T Corp., computer maker Gateway Inc., America Online and broker Charles Schwab & Co.
Democratic Gov. Gary Locke of Washington and Republican Gov. Michael Leavitt of Utah are among the political members.
Even before the commission's first meeting, the lobbying has been intense.
Organizations representing mayors and counties used a federal lawsuit to block the commission from meeting until Senate Majority Leader Trent Lott, R-Miss., replaced Netscape chief James Barksdale with a local public official -- tipping the membership's balance toward government.
Those same groups, joined by governors and other local officials, said in a recent letter to commission members that its tax priorities should include ``equitable treatment for all Main Street sellers and preservation of the single most important resource for education in our nation.''
``Our ability to raise, educate and train children ... will determine whether we can meet the needs of the nation's new information technology,'' their letter said.
In contrast, commission member Grover Norquist, president of Americans for Tax Reform, opposes any federal tax on the Internet and wants to make permanent the current tax moratorium.
``There's a real danger (politicians) will pick on electronic commerce,'' Norquist said. ``Some politicians say, 'Oh, this is new. Let's tax it.'''
Most business groups fall somewhere in between, but many that are active on the Internet fear being targeted with taxes.
Frank Kelly, vice president in Schwab's Washington office, said the investment firm now does up to $4 billion in trades a day on line.
``For a company like Schwab, our customers are already taxed,'' Kelly said. ``We are concerned that new taxes will impact our customers.''
Yet Mark Nebergall, vice president of the Software & Information Industry Association, said Internet business is unlikely to escape taxation unscathed. Most companies just do not want to face a patchwork of taxes from some 30,000 state and local governments.
``What's fair and equitable for other forms of commerce ought to apply to electronic commerce as well,'' Nebergall said.
Beyond U.S. borders lie many more tax questions.
For example, how does the United States or a state collect a tax on the purchase of a sweater from a European Union country? And how does the United States prevent its own businesses from moving elsewhere if domestic Internet taxes are too high?
``The issue we are dealing with is global,'' Gilmore said. ``You can buy from Akron, Ohio, or you can buy from Moscow. We don't want to surrender our position of world leadership in electronic commerce, and we could do that easily if we do something shortsighted.''
Week of June 13, 1999
The 'Net Puts Banks and Brokers to the Test
Just as the internal combustion engine eventually led to the U.S. interstate highway system, drive-in banking windows and airbag safety systems, the rise of the Internet will transform businesses in ways that we can't imagine now.
The financial services industry is at ground zero for these changes. Banks, brokerages and insurance companies could be unrecognizable in five to ten years.
The impact of the Internet was hammered home on Wall Street recently, when Merrill Lynch, once an outspoken opponent of online trading, announced that it, too, would offer its own Web-based system at commissions far below its traditional full service fees. Since that bombshell dropped, brokerage stocks have fallen sharply from their highs; banking and most other financial service stocks haven't performed well all year.
Merrill's surprise move, however, marks only beginning of the next phase for online financial services: a competitive free-for-all to get into every home in America. For those that get with the program early enough, the Internet will provide a great opportunity. Everyone else will be toast.
Why financial services? Because it's expected to be a boom industry of the next decade, thanks to the rapid accumulation of private wealth and increased interest by the public in investing, says Arnold Danielson of Danielson Associates, an independent industry consultant.
For banks and insurance companies, in particular, the Internet effectively "commoditizes" many conventional sources of revenue, says Danielson. With the click of a mouse, consumers will be able to compare interest rates on savings accounts and mortgages and premiums on auto and home insurance. Nasty price wars and a squeeze on profit margins is inevitable, he adds.
And it's happening quickly. A recent report by CIBC World Markets said Web-based mortgage origination revenue will explode to 25%-30% of this $1.4-trillion market by 2005, from less than 1% last year. Meanwhile, the average loan margin -- the revenue an originator receives as a percentage of the total loan -- will plummet to 0.75% from 1.25%, the report predicts.
On the plus side, the Internet should help cut the costs of maintaining bank accounts, says Invesco Strategic Financial Services Fund manager Jeff Morris. Indeed, a recent report by consulting firm Booz, Allen & Hamilton estimated that the average cost per transaction over the Internet was less than 1% of the average cost of a branch transaction and only about 4% of the average cost of using an ATM.
More importantly, there will be sources of revenue for banks that use the Internet effectively, asserts Morris. Banks that lead the Internet charge will take market share, he predicts. Credit card operations, for instance, can do more customized marketing of products and get better and faster feedback, he says.
Yet size will still matter, says Danielson. "The major players -- a small group after the recent wave of mergers -- will dominate the game," he predicts. Danielson picks Citigroup, Wells Fargo and Bank One as the banks best positioned to exploit the Web.
At Monday's close of 39 11/16, shares of Wells Fargo trade at 18 times First Call's consensus estimates of $2.22 per share in 1999, a discount to the 27% earnings growth expected this year. They also change hands at about 15x 2000 estimates of $2.57 per share, which is a projected 16% rise from 1999. Meanwhile, Citigroup shares trade at 16x consensus profit estimates of $2.63 per share this year and at 14x next year's estimates of $2.98, roughly in line with the company's long-term expected earnings growth of 14%.
Of the major banks, Danielson singles out Bank America and First Union, "with their large branch networks and a lot of deposits," as the most vulnerable to Internet banking. But the biggest losers of all may be small and mid-sized banks in the U.S. "This is a scale business, and smaller institutions won't be able to compete, " Bank One president and CEO John McCoy predicted at a recent banking conference. That should step up pressures toward even further consolidation in banking.
In the brokerage industry, online trading, whose commissions can be as little as ten percent of what full-service brokers charge, will squeeze the traditional brokers, says Invesco's Morris. And CIBC estimates that online brokerage accounts will more than triple to 25 million by 2001-2002, from fewer than seven million last year.
Full-service brokers that remain complacent risk losing many potential new clients, and may have to pay even more to woo them later. Firms like PaineWebber and A.G. Edwards have been slow to offer online trading. Even Merrill -- despite being hailed for suddenly "embracing the 'Net" -- will go through some pain making the transition over the next year or two, Morris says.
The difference in market valuations is telling. Charles Schwab shares change hands at 61x consensus estimates of $1.33 per share this year, a 57% increase in earnings from 1998, and at 50x 2000 estimates of $1.62 (a 22% gain from 1999). Meanwhile, Merrill stock trades at only about 13x 1999 estimates of $5.21 per share in 1999 at 12.5x estimates of $5.33 per share next year. Schwab's 22% projected long-term growth is nearly twice that of Merrill.
Even online brokers aren't immune to the competitive pressures they've helped create. Merrill's move is certainly a shot across their bow, and any serious market correction could discourage many new investors who have flocked to online trading. (On Monday, shares of Schwab, E*Trade Group and Ameritrade fell sharply on news of lower online trading volume in May by Schwab customers.)
Ironically, the Internet may push online and traditional brokers closer together in some ways. While full-service firms slash their fees for online trades, online brokers are now moving up market with products and services like research and advice in an effort to snare wealthier -- and more profitable -- clients.
For traditional brokers that can leverage the technology properly, there are "huge opportunities," says Jim Folwell, a consultant at Cerulli Associates, a Boston-based research firm that specializes in brokerages. He likens the situation to what movie-theater operators went through with the advent of the VCR 20 years ago. Theaters survived by adding more screens and seats, improved the sound and increased admission and concession prices, he says. (It's arguable whether the movies have gotten better, though.)
The full-service firms will have to provide a menu of services and prices for different customers, he says. Folwell singles out Prudential as one of the leaders among traditional brokers with a "wide range" of account offerings and pricing. In the long run, he says, the Internet will take over a broker's more mundane responsibilities -- like giving out stock quotes and news -- thereby freeing up time for more profitable activities. That should make individual brokers more productive, he says.
Because of the Internet, everything is up for grabs in the once-staid financial services industry. But by the time every home in America is wired to the Internet, only the companies that make the best use of new technologies -- and do it early enough -- will still be around to profit from it.
Online auction site back on line, InfoBeat, June 14, 1999 SAN JOSE, Calif. (AP) - This was the most significant outage since the AOL problems of a few years ago. "MarGee Charlier knew her business was in trouble when she logged in and saw eBay, the wildly popular online auction site, had crashed. Charlier supports her small business in Kewaunee, Wis., by selling between 50 to 100 antiques, bringing in between $2,000 and $4,000, each day through the site. But not Friday.All bidding was suspended at eBay as the so-called "personal trading community" with more than 3 million users in 50 countries struggled to rebuild a corrupted computer server. Bidding stopped Thursday night and didn't begin again until Friday, some 22 hours later."
Mutual Fund Building a Portfolio To Ease Banks Over CRA Hurdle, June 15, 1999, By Barbara A. Rehm, American banker Online - An investment company in Florida is launching a mutual fund today that is designed to help banks meet the Community Reinvestment Act's investment test.
The CRA Qualified Investment Fund will take on the tasks of finding eligible securities, documenting that they satisfy CRA, and earmarking them for specific banks.
The fund's organizers claim it will make passing the investment test -- which makes up 25% of the CRA ratings of banks larger than $250 million of assets -- a snap.
"We purchase an array of investments specifically for your institution -- a portfolio within our portfolio -- to meet the credit and community development needs of your assessment areas," a brochure describing the fund states.
A bank's minimum initial fund investment is $250,000; subsequent investments may be any size. Money may be withdrawn at any time, and the fund expects to pay market returns.
Sound too good to be true? Even some of the fund's trustees thought so -- at first.
"Yes, I was skeptical," said John E. Taylor, president and chief executive officer of the National Community Reinvestment Coalition, which represents 700 organizations. "It took them a half dozen calls for me to even talk to them."
But Mr. Taylor is now convinced the fund will revolutionize CRA investing.
"I can't see any reason why this doesn't take off like sliced bread," he said. "This is a vehicle waiting to happen." (Mr. Taylor, as a board member, will be paid $12,000 a year. He said he turns over the fee to his coalition.)
By the end of next year, organizers expect the CRA Qualified Investment Fund to have $1 billion of assets under management. "It could easily be $10 billion," said Neil Solomon, a principal with CRAFund Advisors, the fund's Fort Lauderdale, Fla.-based portfolio manager.
"The response from banks has been incredible," said David Zwick, president of the mutual fund and the investment company.
Mr. Solomon and Mr. Zwick have been talking up the idea at industry conferences in recent weeks. They are planning the official launch today at a CRA conference in Newport, R.I. The mutual fund won final Securities and Exchange Commission approval June 10.
Regulators will not discuss particular products, but one senior official said backing CRA-eligible loans with securities "is a burgeoning industry."
This month, Local Initiatives Support Corp. of New York introduced the Community Development Trust, a real estate investment trust that will buy fixed-rate affordable housing mortgages.
More than 1,800 banks holding $6 trillion in total assets must satisfy the investment test. The CRA Qualified Investment Fund is targeting banks with $250 million to $30 billion of assets. "The larger banks have the resources to do this on their own," Mr. Solomon said.
The fund will invest primarily in AAA-rated securities backed by single- and multifamily mortgages, as well as taxable municipal bonds whose fundamental purpose is community development. Management, distribution, and other fees total 0.94%. According to the prospectus, the only other cost is a 1% redemption fee.
The founders contend the fund will be successful because it is the first to bring together experts from the banking business, the investment world, and the community realm.
Besides Mr. Taylor, the board of trustees includes veterans of Citibank, KPMG Peat Marwick, and the Wharton School at the University of Pennsylvania. The board's chairman is Kenneth H. Thomas, a Miami-based CRA expert who is also one of the fund's four owners.
"We have the dream team of CRA," Mr. Solomon said.
Banks with more than $250 million of assets are examined under CRA for their lending, investment, and service to low- and moderate-income communities. While lending is the dominant factor, investments count for 25% of a bank's overall score. At smaller banks not subject to the three-part test, CRA-related investments can mean the difference between a "satisfactory" and an "outstanding" rating.
Federal regulators consider an investment to be CRA-related if the securities primarily promote community development. For example, according to a 1996 interpretive letter from the Office of the Comptroller of the Currency, "a mortgage-backed security is considered a qualified investment only if the entire security primarily funds affordable housing for low- or moderate-income individuals."
A similar letter in 1997 said examiners judge a bank's investments on five criteria: dollar amount; innovativeness or complexity; responsiveness to credit and community development needs; and the degree to which the qualified investments are not routinely provided by private investors.
Regulators have said both direct and indirect investments qualify.
This test can be difficult because such investments are hard to find and even harder to document. But the CRA Qualified Investment Fund's organizers are promising to do the legwork for banks.
"The whole key to this is providing the documentation to the regulators," Mr. Zwick said. Such paperwork proves the investment was made in a particular bank's assessment area and that it is truly serving the low- to moderate-income community.
"If a regulator is giving a bank in Nebraska a hard time, I'll hop on a plane and go there," Mr. Solomon said. "We intend on providing a level of service that will impress."
Jo Ann S. Barefoot, a CRA compliance expert and partner of KPMG Barefoot Marrinan in Columbus, Ohio, has met with the fund's organizers and was impressed.
"I think this concept is great," she said. "In many markets it's very difficult [for banks] to find appropriate investments." "I think there's a market, a need for this."
Week of June 6, 1999
Linux vendor Red Hat to go public, June 7, 1999 DURHAM, N.C. (AP) - Red Hat Inc., which won investments by major information technology companies seeking to build a software challenger to Microsoft, says it will go public with a $96.6 million stock offering. The company, which found a way to take software available free worldwide and sell packaged versions backed with technical support, said Friday it has filed a registration statement with the Securities and Exchange Commission for an initial public offering of its common Stock. Red Hat is a leading vendor of Linux, a software code developed by Linus Torvalds in the early 1990s when he was a student in Finland. Linux is best known for being an operating system that rarely crashes.
Online trades 16 percent of business, InfoBeat, June 9, 1999 - The number of online trades placed during the first quarter averaged 500,000 a day according to Credit Suisse First Boston
analyst Bill Burnham. He said that reflected growth of 47 percent in daily activity from the last quarter of last year. "Online trading firms now appear to be penetrating the mass markets, not
just the techno-philic early adopters," he said. Almost 16 percent of all stock trades now take place in cyberspace, he also told Reuters.
Internet's worth: $301 billion, InfoBeat, June 10, 1999 - A University of Texas study estimates the Internet's value to the economy was $301 billion in revenue last year and 1.2 million jobs. Sponsored by Cisco Systems (CSCO), the study, which is to be repeated quarterly, found that electronic commerce worldwide generated nearly $102 billion, or roughly 1 percent of the U.S.
gross domestic product, the Associated Press reported. The balance of revenues came from computer hardware and software sales, consulting work and Web-site design. UT professor Anitesh Barua said revenues attributable to the Internet have been doubling annually for the past three years. "Ultimately, the (online) transactions will go through the roof," he said.
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