"The End of the Beginning" of Internet Banking

Article excerpt

Bill Orr, contributing editor, and editor of a newsletter about banking on the Internet. Orr can he reached via email at orrbc@sover.net

With apologies to Winston Churchill, it's appropriate to say thatthe first phase of the new era of Internet banking ended in March when Security First Network Bank announced that it was selling its banking operations in order to concentrate on its flourishing software business. SFNB launched the world's first Internet bank in the fall of 1995 amid a wave of media attention and a great deal of skepticism that the notoriously free-wheeling Internet could ever be made safe for financial transactions- not to mention total uncertainty about how consumers would take to branchless banking.

From the beginning, cofounders James S. "Chip" Mahan II and Michael McChesney had made it clear they were on a two-track strategy.

One track was to create a "virtual" bank, with only a dozen or so employees, to prove that such a concept was viable. Selling the SFNB banking operations to Royal Bank of Canada in a $20 million deal constitutes proof galore. Royal Bank will get $54.7 million in deposits, $14.3 million in loans, $46.5 million in securities, and $10 million in capital. The deal should close this summer.

The other strategic track was to sell its Internet technology to big banks around the world. This was done through SFNB's subsidiary, Security First Technologies (51), which will be spun off into an independent holding company headed by Mahan. At the time of the deal, S1 claimed contracts with 66 banks and insurance-service providers, including 15 of the top 100 U.S. financial institutions. S1 delivers its Internet technology through licenses, reseller arrangements with service bureaus, and an Atlanta data/service center run by Alltel.

Security First National Bank's legacy

How are we to assess this historic venture, launched without precedent from the platform of a less-than-$l billion S&L and an obscure software developer specializing in security systems for military establishments?

While Mahan and McChesney proved that a handful of employees in Atlanta can deliver a full range of banking services over the Internet to customers in all parts of the country, SFNB did not become profitable in nearly three years of operation. …