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Calvin D. Johnson Electronic Commerce & OnLine Financial Services Consultant

FirewallServer

ProxyWeb

Server

InternetBanking

ApplicationServer

InternetBankingDatabase

Server

FirewallServer

Service Provider Owned and Managed Elements

TransactionSoftware

MyBank.comWeb Site

Optional ISPProvided Elements

Bank Providedand Managed Elements

BankBankCustomerCustomer

Internet

BankBankDataData

Bank HostBank Host

INTERNET BANKING & ONLINE FINANCIAL SERVICES:INTERNET BANKING & ONLINE FINANCIAL SERVICES:A UNIQUE APPROACH FOR COMMUNITY BANKSA UNIQUE APPROACH FOR COMMUNITY BANKS

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OnLine Banking Statistics

There were almost 10 million Online banking households in 1998 Forecasts project 25 to 30 million Online banking households by 2002 There are already over 17 Financial Institutions with over 100,000 users, each

representing almost 5% customer penetration rate Over 1,200 Financial Institutions already signed on for Online banking with over

7,000 more expected to acquire Online banking applications in 1999-2000 Internet Banking application sales were almost $100 million in 1998 and are

forecasted to be over $325 million in 1999, and growing to over $850 million by2002

15% of all bank retail technology spending will be invested on PC and InternetBanking

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Customer-Bank Interactions

InteractionClassifications:

Electronic(cyber)

10%

Phone and Mail(virtual)

58%

Branch and ATM(physical)

32%

Includes: Wholly electronictransactions

Non-electronicinteractions not requiringa physical location

Interactions requiringa physical location

PrimaryChannels:

Phone (VRU) Electronic funds transfer

Mail Phone (involving person)

Branch ATM

Source: Boston Consulting Group

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Financial Services Delivery Channels

Delivery Channels Offered by Large Banks

Delivery Channel Type Currently Support Plan to Offer by 2000

Call Centers 89% 96%

ATMs 95% 100%

PC Banking 33% 90%

Internet Banking 6% 87%

Source: Mentis Research 1997 Annual Survey

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OnLine Banking &

Electronic CommerceOnline Banking and Bill Payment Forecast

(US Millions of Households)

Online BankingActivity

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Total U.S. Households 98 100 100 101 102 103 105 106 107 108 109

Mid-Range Forecast:

Account access & billpay

.03 0.8 2.0 3.5 6.0 9.5 13.5 16 18.5 20.5 23

Checking accessonly**

0.05 1.25 1.7 3.0 3.5 3.5 3.5 3.5 3.5 3.5 3.5

Credit Card accessonly

0.05 0.25 0.5 1.0 2.5 3.5 3.5 3.5 3.5 3.5 3.5

Bill pay only 0.2 0.2 0.3 0.5 1.5 2.5 4.5 5.0 5.5 6.0 6.0

Total Online bankingHouseholds

0.6 2.5 4.5 8.0 13.5 19 25 28 31 33.5 36

Household penetration 0.6% 2.5% 4.5% 7.9% 13% 18% 24% 26% 29% 31% 33%

Low-End Forecast:

Total Online bankingHouseholds

0.5 2.25 4.0 7.0 11 15 19 22 25 27 28.5

Household penetration 0.5% 2.3% 4.0% 6.9% 11% 15% 18% 21% 23% 25% 26%

High-End Forecast:

Total Online bankingHouseholds

0.75 2.75 5.0 9.5 16 23 30 35 39 42 45

Household penetration 0.8% 2.8% 5.0% 9.4% 16% 22% 29% 33% 36% 39% 41%

Source: Online Banking Report 12/98

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Internet Banking Deployment

Number and Percentages of Banks Offering Internet Banking

0

5

10

15

20

25

30

35

40

Over $100B $50B - $100B $10B - $50B Under $10B

Total Assets

Num

ber

of B

anks W eb Banking Unavailable

Coming Soon

Offer W eb Banking Now

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EC Cost Efficiencies

Relative Cost of Customer Transactions

Transaction Type Cost

In Branch Teller Transaction $1.07

Call Center - Agent/IVR Average $.54

Automated Teller Machine $.27

PC Banking (Dial-Up) $.02

Internet Banking $.01Source: Booz Allen & Hamilton

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Banking Industry Performance Metrics

Projected 1999 Performanceby Market Capitalization

Large Mid-Size Small

Earnings Per Share Growth 14% 7% 15%

Return on Assets 1.56% 1.38% 1.11%

Return on Equity 20.1% 16.5% 13.0%

Net Interest Margin 3.87% 4.26% 4.12%

Fee Income/Revenues 41.0% 38.0% 23.8%

Efficiency Ratio 52.4% 60.8% 61.4%Source: SalomonSmithBarney/Robinson-Humphrey

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Big Banks Can Survive

Large Cap BanksMargin Compression Scenario

Net Interest Margin 4% 3.5% 3% 2.5% 2%

Net Interest Income 60.0 52.5 45.0 37.5 30.0

Fee Income 41.7 41.7 41.7 41.7 41.7

Total Revenues 101.7 94.2 86.7 79.2 71.7

Expenses 53.9 53.9 53.9 53.9 53.9

Provision for loan losses 3.8 3.8 3.8 3.8 3.8

Pretax Income 44.0 36.5 29.0 21.5 14.0

Net Income $ 28.2 $ 23.4 $ 18.6 $ 13.8 $ 9.0

Return on Equity 23.1% 19.1% 15.2% 11.3% 7.4%

Fee Income/Revenues 41% 44% 48% 53% 58%

Efficiency Ratio 53% 57% 62% 68% 75%

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Disintermediation Threats

Small Cap BanksMargin Compression Scenario

Net Interest Margin 4% 3.5% 3% 2.5% 2%

Net Interest Income 60.0 52.5 45.0 37.5 30.0

Fee Income 18.9 18.9 18.9 18.9 18.9

Total Revenues 78.9 71.4 63.9 56.4 48.9

Expenses 48.2 48.2 48.2 48.2 48.2

Provision for loan losses 3.8 3.8 3.8 3.8 3.8

Pretax Income 27.0 19.5 12.0 4.5 (3.0)

Net Income $ 17.3 $ 12.5 $ 7.7 $ 2.9 $ (1.9)

Return on Equity 14.2% 10.2% 6.3% 2.4% (1.5%)

Fee Income/Revenues 24% 27% 30% 34% 39%

Efficiency Ratio 61% 67% 75% 85% 98%

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Virtual Banks Thrive

Internet Bank.comMargin Compression Scenario

Net Interest Margin 4% 3.5% 3% 2.5% 2%

Net Interest Income 60.0 52.5 45.0 37.5 30.0

Fee Income 10.6 9.3 7.9 6.6 5.3

Total Revenues 70.6 61.8 52.9 44.1 35.3

Expenses 17.6 15.4 13.2 11.0 8.8

Provision for loan losses 3.8 3.8 3.8 3.8 3.8

Pretax Income 49.2 42.6 36.0 29.3 22.7

Net Income $ 31.5 $ 27.2 $ 23.0 $ 18.8 $ 14.5

Return on Equity 27.4% 23.7% 20.0% 16.4% 12.7%

Fee Income/Revenues 15% 15% 15% 15% 15%

Efficiency Ratio 25% 25% 25% 25% 25%

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Electronic Commerce Competencies

• Application Development

• Web Hosting

• Transaction Processing

• Payment Systems

• Internet Access

• Transport

• Managed Services and Solutions

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EC Deployment OptionsComparison of Time to Market, Cost and Flexibility of Solutions

Low

High

Fast SlowTime to Market

Costs

CustomBuild

Vendor-provided application,runs in-house in banks’sdata center OR may bemanaged and run by Servicebureau’s data center

Service bureau, using bureau’s applicationand running in bureau’s data center

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Internet Banking Solution Offerings

• On-Premises Solution

• Dedicated, Off-Premises Solution

• Shared, Off-Premises Solution

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Internet BankingInternet BankingON-PREMISES SOLUTIONON-PREMISES SOLUTION(Super Regional Bank Model)(Super Regional Bank Model)

FirewallServer

ProxyWeb

Server

Internet BankingApplication

Server

Internet BankingDatabase

Server

FirewallServer

Bank Owned and Managed Elements

TransactionSoftware

MyBank.comWeb Site

Optional ISPProvided Elements

BankBankCustomerCustomer

Internet

BankBankDataData

Bank HostBank Host

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Internet BankingInternet BankingDEDICATED, OFF-PREMISES SOLUTIONDEDICATED, OFF-PREMISES SOLUTION

(Regional Bank Model)(Regional Bank Model)

FirewallServer

ProxyWeb

Server

Internet BankingApplication

Server

Internet BankingDatabase

Server

FirewallServer

Service Provider Owned and Managed Elements

TransactionSoftware

MyBank.comWeb Site

Optional ISPProvided Elements

Bank Provided and Managed Elements

BankBankCustomerCustomer

Internet

BankBankDataData

Bank HostBank Host

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Internet BankingInternet BankingSHARED, OFF-PREMISES SOLUTIONSHARED, OFF-PREMISES SOLUTION

(Service Bureau Model)(Service Bureau Model)

FirewallServer

ProxyWeb

Server

Internet BankingApplication

Server

Internet BankingDatabase

Server

FirewallServer

Service Provider Owned and Managed Elements

TransactionSoftware

Bank 1Data

Bank 2Data

Bank 3Data

Bank nData

MyBank.comWeb Site

Bank 4Data

Optional ISPProvided Elements

Bank Provided and Managed Elements

BankBankCustomerCustomer

Internet

Bank 2Bank 2

Bank 3Bank 3

Bank 4Bank 4

Bank 1Bank 1

Bank Bank nn

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Internet Banking Solution Requirements

• Graphical Customer Presentation Software

• Host Data Access Software

• Bill Payment Transaction Processing Software

• Secure Web Hosting Environment

• Telecommunications Connectivity Capability

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Internet Banking Components

Core Internet Banking Software—Consumer and Business Versions

Specific Software Modules—Bill Payment, OFX, Check Register, etc.

Professional Services for Software Customization & Systems Integration

Web Hosting for the Financial Institution’s dot Com Site—Dedicated or Shared

Web Hosting for the IB Application & Custom Modules—Dedicated or Shared

Managed Network Services—Providing and Managing a Telecommunications LinkBetween Hosting Site and Financial Institution’s Data Center, possibly includingManaged Router Services, Encryption Devices, and Disaster Recovery Services

Dedicated Internet Access for Financial Institution Employees

Joint Marketing Programs for New Customer Acquisition for the Financial Institutionand ISP

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EC Online Financial Services Enhancements

Electronic Bill Presentment & Bill Payment, for both Internal Biller Benefits &External Client Usage

One-To-One Customer Marketing and Cross-Selling Services using Internet Tools,Client Data Bases, and Decisioning Algorithms

Common IVR/IB/EC Application Platforms as an Integrated Solutions Offering

Call Center/Web Customer Care Services Integration

Digital Certificate Issuance & Trusted Third Party Services for Client FinancialInstitutions and Other Organizations

Remote Call Center Agent & Outsourced Call Center Client Services

E-Commerce Enabled Merchant Web Sites

Web-Based Human Resource Applications for Financial Institutions

Partnerships & Links to Other Electronic Financial Services such as OnlineBrokerage, Shopping Services, Automated Lending & Decisioning Services, to offer

to Clients as a One-Source Supplier of Internet-Based Financial Services

Managed Customer Financial Applications such as Tax Preparation Services forCustomers of Client Financial Institutions

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Internet Banking Portal Strategy

• Internet Banking Quickly Becoming A Commodity Like ATMs

• Technology No Longer The Real Differentiator

• Marketing Is The Driving Force

• Wingspan.com Spending Over $150 Million

• Community Banks Must Pool Resources

• Competition Focussed On Real World vs.. Virtual World

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Internet Banking Portal Strategy• Single, Common Brand For Identity,

Security, & Promotion

• Single Bank Charter Site For New Internet Banking Customers

• Participating Banks Have Equity Positions In New Internet Banking Entity

• Participating Banks Share In Technologies & Services

• Portal Technologies Serve As Gateway To Participating Banks’ Own Web Sites & Customers

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Where Do We Go From Here?