July 26, 2001

For an upcoming article on the changing landscape of Internet banking scheduled to appear in the September 2001 issue of Banks Systems & Technology magazine, D.R. Grimes, CEO of Netbank, Alpharetta, Ga., spoke with BS&T senior associate editor Ivan Schneider about the Internet banking business model and recent developments at the company. Here are some excerpts from that discussion.

BS&T: There's been some recent criticism of the Internet-only business model. What's your take?

GRIMES: I have never necessarily been a proponent of the Internet-only or the brick- and mortar-only or the brick and click. What we should do is look at the most efficient way to deliver services effectively to our customers.

For checking and savings accounts, money market accounts, savings certificates and bill pay--the things that I might refer to as transactional deposit accounts--as well as credit card, line of credit, home equity line and those kinds of things, the most efficient way of delivering those kinds of services is using a combination of the internet, the ATM, telephone banking, and even wireless access for those people that desire to do that.

What we don't have is a whole series of branches with a large number of people, staffing those branches and adding expenses to the bottom line of those services. It's not a philosophical position. I'm not trying to validate a technology. I'm in business to earn a profit--and to make a change for the better in the way the banking industry works with its customers and delivers services. But there's no philosophical bent here.

BS&T: Some have pointed to recent spate of consolidation among Internet banks as evidence of the decline of the Internet-only bank. What do you think?

GRIMES: When people say, "Gee, some of these banks have been bought and merged," does that mean it's the end of Internet banking? When First Union announced they were buying Wachovia, does that mean that the traditional model is dead?

We live in an era where many businesses are undergoing consolidation or acquisition, and Internet banking is part of that. But that's not an indictment of the model. All that says is that either company A was stronger than company B, or that company A and B together are more effectively able to reach more customers. That's hardly an indictment of the model.

I don't think the Telebank shareholders that became a part of E*Trade would say that it's an indictment of their banking model. And quite frankly, neither would the Netbank investors that have seen their original investment multiply by a factor of two and a half, when virtually no IPO in 1997 has been able to stay above water. We don't believe that's an indictment.

BS&T: Would you consider being acquired?

GRIMES: I've said in the past that there's a 50-50 chance that Netbank would be an acquirer of companies or that Netbank would be acquired one day. It's turned out we have bought some companies.

I don't think that a U.S. bank would be a particularly likely partner. A foreign bank might or a nonbank financial services company that wanted a banking presence might, but I don't think that a bank with a bunch of branches would be.

Our plan is to continue to try to grow our business and create value for our shareholders. You should always run your company as if it were going to be independent--and then let whatever happens happen.

BS&T: Are there any Internet-only banks left?

GRIMES: That's tough to find. Call centers and ATMs have been part of Netbank's business model form the beginning. I remember as early as late '96 talking to people about the fact that we were a direct bank, not just an Internet bank.

From day one at this company we had access to ATMs, we had a voice response unit, we had a call center, we had Internet capability. Do I think that somebody would be willing to bank with us if they had no access to their account through an ATM? That'd be pretty tough. How would you get cash? I've never taken that position, and I don't know if I know anyone who has.

BS&T: How do you compete on brand with established banks?

GRIMES: We don't have a branch system, and as a result we have an operating expense that's roughly one-half that of a traditional bank.

In contrast to that, we also don't have existing customers. What we hope to do is to convince them to give Internet banking a try, and hope that they'll find the convenience, innovation and flexibility and price savings are sufficient to keep them as Internet banking customers.

BS&T: What are your customer demographics?

GRIMES: Netbank customers tend to be in their late 30s--the average age of a Netbank customer is 38. Seventy-five percent are college-educated; 65% own their own homes, which is an indication they've been working for a while and are probably a two-income family. That probably also means they're time-starved and that ultimately means we'll be able to attract and retain them with the ability to do banking on their schedule and not on the bank's timeframe.

They keep a balance of about three times that of what they keep in the traditional bank. These are people who have accumulated money and are looking for a good value, a place to invest that money and to do their banking.

BS&T: Tell me about the Market Street Mortgage deal.

GRIMES: We bought a traditional mortgage company--50% of their applications are done over the Internet, but they still have physical offices where loan officers work and where those loan officers meet with customers to explain to them the options. The mortgage transaction is an extremely complex transaction and it does require high touch.

This is a physical presence but we don't do any banking there; we do mortgage activity there.

BS&T: What kind of cross-sell opportunities do you have?

GRIMES: Our customers log onto the bank in incredible numbers. A little over 10% of our total customer base logs onto the bank every day, so we have great opportunities to show them other products that we have, and we can demonstrate to them on a regular basis that we have a wide breadth of services.