2001 prentice hall, inc. all rights reserved. chapter 16, online banking and investing outline...

2001 Prentice Hall, Inc. All rights reserved.

Chapter 16, Online Banking and Investing

Outline16.1 Introduction16.2 Online Banking Services

16.2.1 Hybrid Banks16.2.2 Internet-Only Banks

16.3 Online Loans16.4 How the Web Is Changing the Investment Community

16.4.1 Electronic Communication Networks (ECNs)16.4.2 Online Trading16.4.3 Online Bond Trading

16.5 Merging Financial Services16.6 Financial Aggregation Services16.7 Wireless Banking and Trading16.8 Financial Planning Online


16.1 Introduction

• Topics of discussion – Online banking services provided by Internet-only banks

– Click-and-mortar banks

– The impact of the Internet on Wall Street

– Online stock and bond trading

– Electronic communication networks (ECNs)

– Financial aggregators

– Online lending and mortgage services

– Financial planning


16.2 Online Banking Services

• Brick-and-mortar banks have become click-and-mortar

• Internet-only banks lack the brand awareness and recognition of the click-and-mortar banks

• Internet banking services can reduce expenses• Online payment decreases the float

– The time it takes for checks to clear after they have been sent for payment or deposited


16.2 Online Banking Services

• Internet delivers payments faster than mail – Frees up cash and decreases accounts receivable

• The expected amount of payments owed to a company for products and services sold to customers

• Benefits to customers– Can avoid buying stamps– Do not have to send bills out early– Account information available 24-by-7– Can view detailed account history at one time online instead

of listening to individual transactions over the phone

• Risks– Security breaches– Office of the Currency (OCC) has warned people that sites

mimicking bank sites can scam them for account information


16.2.1 Hybrid Banks

• Hybrid bank model – Brick-and-mortar banks offering online services

– Prominence of brick-and-mortar brand names increase customers’ comfort levels when banking online

• Customers can visit a physical branch– Physical presence includes the large network of ATMs

• Some charge monthly fees to use online bill-paying services

• Important to the survival and growth of small local banks– By going online, small banks can offer competitive services

and attract national customers


16.2.1 Wells Fargo Feature

• Wells Fargo is a hybrid bank • Services are broken into three main sectors

– Personal finance, small business and commercial banking

• Offers free bill-paying, checking-account comparisons and specialized resource centers

• Plans to offer a portal site providing financial services, such as stock trading, news, weather and financial aggregation– Allowing people to view information from all of their

financial accounts in one place on the Internet


16.2.2 Internet-Only Banks

• Internet-only banks – Offer convenience and often lower fees and higher interest

rates to their customers as compared to traditional banks

– Can lower costs of buildings and equipment and can decrease payroll as traditional employee roles are eliminated

– Must accept deposits by mail because lack of physical branches

– Little brand recognition compared to brick-and-click banks

– Insured by the FDIC

• Some Internet-only banks are attempting to establish a physical presence


16.2.2 NetBank Feature

• NetBank is the largest Internet-only bank • Customer Online Services

– Checking, savings and credit accounts

– Plan for retirement

– Conduct online trading

– Obtain mortgage, car and business loans

– Obtain a line of credit, free online bill payment and presentment, ATM card and Visa credit card

• Rates and calculators are available



Internet-Only Banks Description

BankAtlantic.com Offers services in Spanish. Provides trading services through ShareBuilder . Offers customers personal, small-business and commercial banking.

CompuBank (www.compubank.com) Offers clickrewards (www.clickrewards.com), allowing customers to earn rewards for direct-deposit and check-card purchases. Pays above-average interest on checking accounts and offers free online bill payment.

SFNB (www.sfnb.com) Offers its customers the Share the Wealth program, which rewards customers for referring new customers. This bank also offers advice on managing your money and provides budget, savings and retirement calculations.

nBank (www.nbank.com) Provides personal and business banking. Business services include merchant credit-card processing and business-credit inquiry. nBank also offers Internet service to local areas in Atlanta and Georgia.



Internet-Only Banks Description

everbank.com Offers free online bill payment, mortgage services, the everCard Visa Platinum credit card with free credit-card management online and trading services through EverTrade Direct Brokerage, Inc.

Gomez.com Evaluates e-commerce customer experiences. Coverage includes banks, brokers, credit cards, home buying, travel and shopping services and health sites. This site provides its opinion of the best online banks and allows visitors to rate and review the banks.

CyberInvest.com Offers information on and evaluations of different financial service providers. Visitors can check out sections such as the Bond Center, Brokerage Center, Educational Center, Mortgage Center and Global Investing Center.

bankonline.com Helps visitors find institutions that offer online banking, insurance comparison shopping, financial planning and loan and credit applications

Internet-only banks and online banking information sites.


16.3 Online Loans

• Traditionally– Companies and individuals would deal with a few different

lenders– Filling out documents and comparing options was a time-

consuming process

• Online– Process can be more efficient, sometimes returning loan

approvals within minutes– Gives people access to many lending institutions, enabling

those seeking loans to shop for the best deals – E-LOAN, PrimeStreet, LiveCapital, companyfinance.com

• The Small Business Administration Office of Advocacy


16.3 Online Loans

E-LOAN’s E-TRACK demo. (Courtesy of E-LOAN, Inc.)


16.3 Online Loans

• Online mortgage services– Decrease the time it takes to find a mortgage– Many online companies still need standard paperwork that

cannot be completed over the Internet• Digital signatures may allow companies to accept documents

legally over the Web

– Ditech.com, MortgageRamp.com and LoopNet

• Some sites provide mortgages directly from the lenders

• Some sites act as brokers and allow customers to search for the best mortgage

• May reduce number of broker jobs • Stability of the lender


16.4 How the Web Is Changing the Investment Community

• In this section, we discuss– Techniques of online trading

– Advantages and disadvantages of trading on the Internet

– The ways in which online trading has affected stock exchanges


16.4.1 Electronic Communication Networks (ECNs)• Electronic communication networks (ECNs)

– Electronic networks that facilitate electronic trading by listing securities order sizes and prices, connecting buyers and sellers and processing digital orders

– Transactions completed faster because buyers and sellers communicate directly

• Faster trading helps to lock in a buy or sell price

– Offer before and after-hours trading and increase price transparency by listing prices from more than one exchange

• May mean the loss of the middlemen and the trading floors

– Instinet Island, REDIBook and Archipelago


16.4.1 Electronic Communication Networks (ECNs)• ECNs will benefit from decimalization—the

change of stock prices from fractions to decimals– Decimalization saves investors money

• Nasdaq and the NYSE do not currently use ECNs– The NYSE is attempting to address ECN competition by

offering many of the ECN advantages

• Securities – Can represent ownership, such as stocks, or debt, such as

bonds


16.4.1 Archipelago Feature

• Archipelago is an ECN • Provides anonymity to it clients• SmartBook software executes orders by searching

internally (within Archipelago) and externally (outside of Archipelago’s system, including other ECNs) for best price

• Once match is made, order is executed in real time• Archipelago has trading hours from 8 a.m. to 8

p.m. Eastern Time• Clients can trade, buy and sell listed, Nasdaq

National Market and Nasdaq SmallCap stocks



• Archipelago has partnered with Pacific Exchange (PCX) to create first U.S. electronic stock exchange– If SEC approves, the Archipelago Exchange will permit the

trading of stocks from the American Stock Exchange (AMEX), New York Stock Exchange (NYSE) and Nasdaq

– Will be in direct competition with current exchanges (AMEX, NYSE and Nasdaq)



Archipelago order routing and execution example. (Courtesy of Archipelago Holdings, L.L.C.).


16.4.2 Online Trading

• Full-service brokers– Offer the speed and convenience of online trading together

with the advice of a broker

• Discount-brokerage service– Requires self-sufficiency, leaving the investor responsible

for making and executing investment decisions

• Internet-only brokerages and hybrid brokerages• Factors to consider when choosing to invest online

– Type of investments you wish to make

– Quality of site navigation tools and customer service

– Cost of transactional fees versus the number of trades per year



• Online companies usually charge a fee for every purchase or sale of securities made

• The Internet serves as a valuable learning tool for new and seasoned investors– The Motley Fool, MoneyCentral and Money.com

• Companies offering online services – Have made investing in stocks and options accessible to a

larger audience

– Provide real-time market information

•


16.4.2 E*TRADE Feature

• E*TRADE allows individual investors to manage their own investments without need for brokers– Community section in which users can chat with others and

view Live Events over the Web

– Extended hours for trading

• Financial services include banking, insurance, taxes, retirement and real estate – E*TRADE BANK is FDIC insured and offers ATMs,

checking, savings, money markets and bill payment

• Offers two games in which you use “game money” to carry out stock and options trades – Ameritrade also offers an online stock game


16.4.2 E*TRADE Feature

E*TRADE offers investing and financial services. (Courtesy of E*TRADE Securities, Inc.)


16.4.2 ShareBuilder Feature

• ShareBuilder offers dollar-based investing (investors can purchase stock based on a dollar amount)– ShareBuilder Securities Corp. collects the money and

purchases stocks once a week in a lump sum at the market price of the stock

– Investors can purchase stock in real time by paying a higher fee

– To sell stock, investors pay the real-time fee per transaction– Investors can choose to periodically invest a designated

amount of money or make a one-time investment• Payment can be made by automatic payroll deductions, check,

wired money or transfers from bank accounts

– The investor can select from more than 3,500 stocks and 68 Index shares (shares of a portfolio of stocks)



Dollar-based investing through ShareBuilder. (Courtesy of Netstock Corporation.)



ShareBuilder example of sample investments. (Courtesy of Netstock Corporation.)


16.4.2 Online TradingOnline Trading Description

Datek Online (www.datek.com)

Offers trading commission free if an order is not administered within 60 seconds, updates portfolios in real time and provides free check-writing services. If necessary, Datek routes orders to the Island ECN to be traded.

Charles Schwab (www.schwab.com)

Provides online trading services, stock quotes and research. If an investor has an account of $10,000 or more, Schwab will give the investor a Web phone and a few commission-free trades through its wireless PocketBroker trades.

Scottrade (www.scottrade.com)

Provides online trading services and allows investors to locate nearby branches by using Branch Locator. These branches allow investors to have a personal broker.

Merrill Lynch Direct (www.mldirect.com)

Offers online trading and investing (mutual funds, bonds, CDs). Customers can take part in e-IPOs. Merrill Lynch Direct also offers online bill payment.

National Discount Brokers (www.ndb.com)

Offers Flat-Fee Trading , allowing customers to pay only one fee independent of the amount of stock traded. Provides research, account status and StockPulse—a graphing tool that graphs the activity of a stock throughout the trading day.

Fig. 16.7 Online Brokerages.



• Trading on margin– When an investor buys stock and borrows money from the

broker to invest in the stock

– Opening a margin account online requires a relatively low minimum balance, answering a questionnaire (which sometimes replaces a credit check) and being qualified electronically, with no assessment made by a human broker

• Potentially, a stock’s value could fall to a price that, when sold at the market price, will not cover the loan– The broker can issue a margin call—the broker requires the

investor to invest more cash or securities or sell the stock to pay back the loan



• Day trading– Making short-term trades in an attempt to profit off of

market inefficiencies (e.g. news affecting the market, disproportionate risk to price value of a stock or arbitrage, wherein someone profits by converting money from one currency to another)

– Easier on Internet

– Transactions limited by modem speed and server-side transaction speed

– Fees can be expensive

– Day traders still bear the same risks as other traders

– CareerDayTrader.com, DayTradingOnline.com and OnlineTradingAcademy.com



• Federal Trade Commission, the Commodity Futures Trading Commission and the Securities and Exchange Commission warn traders about the exaggerations and counter factual claims made by some online trading firms– Online trading does not reduce stock market risk

• Foreign-exchange banks have begun to move their services to the Internet to remain competitive– Foreign exchange systems allow traders to find the best

deals on foreign currency

• The Internet facilitates trading commodities globally – EnronOnline


16.4.3 Online Bond Trading

• Bond– A written promise that an entity will repay a debt that is sold

to an investor (investor receives original investments and a dividend for a certain period of time)

• Traditionally, someone would check the newspapers and call different institutions to buy or sell a bond

• Online companies offer bond trading with the claim that the process is easier and cheaper– Tradebonds.com, bondsonline and MuniDirect

• The Internet can cut the cost of issuing bonds• Need for a standardized system for the bond sales

process


16.4.3 Online Bond Trading

Tradebonds.com’s zero coupon bond query. (Courtesy of Tradebonds.com.)


16.5 Merging Financial Services

• Glass–Steagle Act– Prohibited financial institutions from engaging in multiple

financial operations (i.e.,one institution offering banking services and trading services)

– Since repeal, banks, brokerages and insurance companies are permitted to offer a wide range of financial services

• Most online financial services offer electronic bill presentment and payment (EBPP)

• It is crucial for financial institutions to offer a wide variety of services to remain competitive– Prudential


16.6 Financial Aggregation Services

• Online aggregation services give users the option of keeping all their financial information in one location on the Internet

• Aggregation services use screen scraping– A process whereby the aggregator visits the sites that have

your financial information and services and uses your usernames and passwords to log in, download the information and store it in one place, where the user can access it

– Many banks do not authorize screen scraping, although the aggregators are not required to have authorization

• VerticalOne, ebalance, 1View Network, ezlogin and GainsKeeper


16.6 Financial Aggregation Services

• Financial Services Technology Consortium (FSTC) – Trying to stop the screen-scraping process and implement

another form of gathering information to create a standard

• Privacy and security concerns• Not regulated by the federal government

– Aggregators are not required to compensate users if security is compromised by a hacker

• Pose a threat to traffic at online banking and investing sites– Banks have reacted by implementing these services on their

sites


16.6 Yodlee Feature

• Yodlee is a financial aggregator• Allows transactions through partnerships with

financial institutions and providers • Offers aggregation of non-financial content such

as travel reservations, e-mail, news, shopping accounts, frequent-flyer and reward programs, etc.

• Access Yodlee’s services from one of Yodlee’s partners, including AltaVista, AOL, Citibank, Chase Manhattan Bank and Morgan Stanley Dean Witter


16.6 Yodlee Feature

Example of Yodlee’s service through Citibank’s myciti. (Courtesy of Yodlee, Inc.)


16.6 Yodlee Feature

• The company’s personalized aggregation solution can be delivered over the Web, personal digital assistants (PDAs) and Web-enabled wireless phones– Yodlee2Go allows users to access real-time personal account

information, including investments, banking and e-mail, on their wireless phones and PDAs

• Provides customers with personalized alerts• Can track and chart account activity


16.6 Yodlee Feature

Example of Yodlee’s charting capability. (Courtesy of Yodlee, Inc.)


16.7 Wireless Banking and Trading

• Companies can use wireless technology to offer their customers a value-added service

• Wireless banking – Allows users to pay bills from anywhere

– Transfer funds between accounts

– Check account activity

• TD Bank Financial Group and Netbank


16.7 Wireless Banking and Trading

• While the market may be adopting wireless banking slowly, wireless securities trading is growing rapidly– Traders can receive important information and news about

the market or their investments and make trades immediately

• Companies offering wireless trading services– Ameritrade, DLJ Direct, SureTrade.com, Morgan

Stanley Dean Witter Online, Fidelity Investments and Trade.com

• Wireless access to financial information may grow more slowly in the United States than in Europe and Asia, because the United States has more technical standards and wireless devices in use


16.8 Financial Planning Online

• The Internet has made financial planning easier for service providers and customers– People can educate themselves about financial-planning

options

• Companies can offer online applications, account histories, new-product offerings, investment tracking and other services – 401kafe offers information regarding 401(k) plans—

investing vehicles for employee retirement– mPower offers retirement-planning advice to employees of

member companies that sign up for the subscription-based service

– ihatefinancialplanning.com provides information on all financial-planning topics

2001 prentice hall, inc. all rights reserved. chapter 16, online banking and investing outline...

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