Chapter 16, Online Banking and Investing

Outline
16.1 16.2 Introduction Online Banking Services 16.2.1 Hybrid Banks 16.2.2 Internet-Only Banks Online Loans How the Web Is Changing the Investment Community 16.4.1 Electronic Communication Networks (ECNs) 16.4.2 Online Trading 16.4.3 Online Bond Trading Merging Financial Services Financial Aggregation Services Wireless Banking and Trading Financial Planning Online

16.3 16.4

16.5 16.6 16.7 16.8

2001 Prentice Hall, Inc. All rights reserved.

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

2001 Prentice Hall, Inc. All rights reserved.

16.2 Online Banking Services

Brick-and-mortar banks have become click-andmortar 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

2001 Prentice Hall, Inc. All rights reserved.

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
2001 Prentice Hall, Inc. All rights reserved.

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 billpaying services Important to the survival and growth of small local banks
By going online, small banks can offer competitive services and attract national customers
2001 Prentice Hall, Inc. All rights reserved.

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

2001 Prentice Hall, Inc. All rights reserved.

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

2001 Prentice Hall, Inc. All rights reserved.

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

2001 Prentice Hall, Inc. All rights reserved.

16.2.2 Internet-Only Banks

Internet-Only Ba nks BankAtlantic.com Desc rip tio n Offers services in Spanish. Provides trading services through ShareBuilder . Offers customers personal, small-business and commercial banking. 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. 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. 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.

CompuBank (www.compubank.com )

SFNB (www.sfnb.com )

nBank (www.nbank.com )

2001 Prentice Hall, Inc. All rights reserved.

16.2.2 Internet-Only Banks

Internet-Only Ba nks everbank.com Desc rip tio n 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. 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. 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. Helps visitors find institutions that offer online banking, insurance comparison shopping, financial planning and loan and credit applications

Gomez.com

CyberInvest.com

bankonline.com

Internet-only banks and online banking information sites.

2001 Prentice Hall, Inc. All rights reserved.

16.3 Online Loans

Traditionally
Companies and individuals would deal with a few different lenders Filling out documents and comparing options was a timeconsuming 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

2001 Prentice Hall, Inc. All rights reserved.

16.3 Online Loans

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

2001 Prentice Hall, Inc. All rights reserved.

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
2001 Prentice Hall, Inc. All rights reserved.

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

2001 Prentice Hall, Inc. All rights reserved.

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

2001 Prentice Hall, Inc. All rights reserved.

16.4.1 Electronic Communication Networks (ECNs)

ECNs will benefit from decimalizationthe 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

2001 Prentice Hall, Inc. All rights reserved.

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 Archipelagos 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
2001 Prentice Hall, Inc. All rights reserved.

16.4.1 Archipelago Feature

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)

2001 Prentice Hall, Inc. All rights reserved.

16.4.1 Archipelago Feature

Archipelago order routing and execution example. (Courtesy of Archipelago Holdings, L.L.C.).
2001 Prentice Hall, Inc. All rights reserved.

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
2001 Prentice Hall, Inc. All rights reserved.

16.4.2 Online Trading

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

2001 Prentice Hall, Inc. All rights reserved.

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
2001 Prentice Hall, Inc. All rights reserved.

16.4.2 E*TRADE Feature

E*TRADE offers investing and financial services. (Courtesy of E*TRADE Securities, Inc.)
2001 Prentice Hall, Inc. All rights reserved.

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)
2001 Prentice Hall, Inc. All rights reserved.

16.4.2 ShareBuilder Feature

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

2001 Prentice Hall, Inc. All rights reserved.

16.4.2 ShareBuilder Feature

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

2001 Prentice Hall, Inc. All rights reserved.

16.4.2 Online Trading

Online Tra d ing Datek Online (www.datek.com ) Desc rip tio n 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. 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. Provides online trading services and allows investors to locate nearby branches by using Branch Locator. These branches allow investors to have a personal broker. Offers online trading and investing (mutual funds, bonds, CDs). Customers can take part in e-IPOs. Merrill Lynch Direct also offers online bill payment. Offers Flat-Fee Trading , allowing customers to pay only one fee independent of the amount of stock traded. Provides research, account status and StockPulsea graphing tool that graphs the activity of a stock throughout the trading day.

Charles Schwab (www.schwab.com )

Scottrade (www.scottrade.com )

Merrill Lynch Direct (www.mldirect.com ) National Discount Brokers (www.ndb.com )

Fig. 16.7 Online Bro kera g es.

2001 Prentice Hall, Inc. All rights reserved.

16.4.2 Online Trading

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 stocks value could fall to a price that, when sold at the market price, will not cover the loan
The broker can issue a margin callthe broker requires the investor to invest more cash or securities or sell the stock to pay back the loan
2001 Prentice Hall, Inc. All rights reserved.

16.4.2 Online Trading

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
2001 Prentice Hall, Inc. All rights reserved.

16.4.2 Online Trading

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
2001 Prentice Hall, Inc. All rights reserved.

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
2001 Prentice Hall, Inc. All rights reserved.

16.4.3 Online Bond Trading

Tradebonds.coms zero coupon bond query. (Courtesy of Tradebonds.com.)

2001 Prentice Hall, Inc. All rights reserved.

16.5 Merging Financial Services

GlassSteagle 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

2001 Prentice Hall, Inc. All rights reserved.

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

2001 Prentice Hall, Inc. All rights reserved.

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
2001 Prentice Hall, Inc. All rights reserved.

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 Yodlees services from one of Yodlees partners, including AltaVista, AOL, Citibank, Chase Manhattan Bank and Morgan Stanley Dean Witter
2001 Prentice Hall, Inc. All rights reserved.

16.6 Yodlee Feature

Example of Yodlees service through Citibanks myciti. (Courtesy of Yodlee, Inc.)

2001 Prentice Hall, Inc. All rights reserved.

16.6 Yodlee Feature

The companys 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

2001 Prentice Hall, Inc. All rights reserved.

16.6 Yodlee Feature

Example of Yodlees charting capability. (Courtesy of Yodlee, Inc.)

2001 Prentice Hall, Inc. All rights reserved.

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

2001 Prentice Hall, Inc. All rights reserved.

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
2001 Prentice Hall, Inc. All rights reserved.

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.