Web Services Firm Banking on Growth of Online Bill Payment
By KATE BERRY
Staff Reporter
Online banking is not new. It certainly isn’t sexy. But in an era of downsizing, it has become an increasingly common weapon in the arsenals of banks looking to lower costs and retain customers.
Banking on the concept is Digital Insight Corp. of Calabasas, which creates and hosts Web sites for 1,620 small- to medium-size financial institutions. Digital Insight’s customers range from City National Bank in Beverly Hills to Lockheed Federal Credit Union in Los Angeles.
Though the company has been in business for nearly a decade, it only became cash-flow positive last year, as customers slowly began to embrace the idea of online banking. As the largest independent competitor in a crowded field, Digital Insight has a chance to capitalize on projected increases in online banking’s popularity.
Bank of America Securities analyst Bob Austrian expects the number of customers using online banking will rise to 30 million or 40 million in the next three to four years, from 15 million to 20 million today, or about 10 percent of the U.S. population.
“Banks are now driving adoption of the Internet because this is the moment of greatest success,” Austrian said. His firm has done investment banking for Digital Insight in the past and hopes to do so in the future.
Banks spend huge amounts of marketing and sales dollars trying to sign up new customers, even though they typically lose money in the first year of every new account. Online banking gives them a relatively inexpensive way to strengthen those efforts. Studies from Forrester Research and Gartner Group have shown that it can lower operating costs, reduce the attrition of hard-won customers and increase revenues from heavy Internet users.
Leveling field
For an up-front fee of up to $40,000, a bank can quickly be up and running with a Web site that allows customers to “manage” their bank accounts and pay bills online.
Big banks like Bank of America and Wells Fargo have invested in their own online banking products; small fries have turned to Digital Insight and others to provide online services they could never develop on their own.
“All the sophisticated banks are moving as quickly as possible to get their customers online,” said John Dorman, Digital Insight’s chairman, president and chief executive.
The company charges the banks recurring transactions fees and per-use fees. It also develops its own features, such as the newly introduced ability to securely transfer funds on the Web from one bank to another.
The stock has run up 86 percent year to date and closed April 30 at $16.15. Austrian thinks shares can go as high as $24 within the next 12 months.
Challenges remain, including pricing pressure and attrition in its customer base.
Banks are signing new contracts with Digital Insight at the rate of 30 to 50 each quarter, and there are still several thousand banks with no online banking capabilities. “The problem is that what they sell costs less and less each year,” Austrian said.
Competition can become heated.
In March, the company agreed to settle a copyright infringement lawsuit brought by the No. 3 player in the market, FundsXpress Financial Network Inc. of Austin, Texas.
FundsXpress had alleged three of its salespersons hired away by Digital Insight turned over competitive data. Dorman was named as a defendant.
Legal revision
The settlement led to a $6.9 million charge applied retroactively to the company’s already announced fourth quarter 2002 results. Because the revision occurred prior to the filing of Digital Insight’s annual 10-K statement, no formal restatement was required.
Erik Randerson, Digital Insight’s director of investor relations, said the board decided it was in the company’s best interest to settle the lawsuit and “get it behind them.”
In the first quarter, Digital Insight reported net income of $2.9 million, compared with a net loss of $34.7 million in the like year-ago quarter. Sales rose 18 percent, to $35.5 million.
Dorman sees the biggest risk as executing through a period of high growth.
Digital Insight is the dominant player in the industry and has already swallowed up several competitors, including the $51 million acquisition last year of Virtual Financial Services Inc., a private Indianapolis provider with 150 bank clients.
Current competitors range from smaller private companies such as Online Resources Corp., of McLean, Va., to a unit of the much larger S1 Corp. of Atlanta, a provider of banking software.
Dorman expects further consolidation in the industry and said the company is always looking for attractive acquisition candidates.
