1.  2001 Prentice Hall, Inc. All rights reserved. Chapter 16, Online Banking and Investing Outline 16.1Introduction 16.2 Online Banking Services 16.2.1 Hybrid Banks 16.2.2 Internet-Only Banks 16.3 Online Loans 16.4How the Web Is Changing the Investment Community 16.4.1Electronic Communication Networks (ECNs) 16.4.2Online Trading 16.4.3Online Bond Trading 16.5Merging Financial Services 16.6 Financial Aggregation Services 16.7 Wireless Banking and Trading 16.8 Financial Planning Online

2.  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

3.  2001 Prentice Hall, Inc. All rights reserved. 16.2 Online Banking Services Brick-and-mortar banks have become click-and- mortar 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

4.  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

5.  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 bill- paying services Important to the survival and growth of small local banks –By going online, small banks can offer competitive services and attract national customers

6.  2001 Prentice Hall, Inc. All rights reserved. 16.2.1 Wells Fargo Feature Wells Fargo is a hybrid bankWells Fargo 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

7.  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

8.  2001 Prentice Hall, Inc. All rights reserved. 16.2.2 NetBank Feature NetBank is the largest Internet-only bankNetBank 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

9.  2001 Prentice Hall, Inc. All rights reserved. 16.2.2 Internet-Only Banks

10.  2001 Prentice Hall, Inc. All rights reserved. 16.2.2 Internet-Only Banks

11.  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 time- consuming 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.comE-LOANPrimeStreetLiveCapital companyfinance.com The Small Business Administration Office of AdvocacySmall Business Administration Office of Advocacy

12.  2001 Prentice Hall, Inc. All rights reserved. 16.3 Online Loans E-LOAN’s E-TRACK demo. (Courtesy of E-LOAN, Inc.)

13.  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 LoopNetDitech.comMortgageRamp.comLoopNet 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

14.  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

15.  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 ArchipelagoInstinetIslandREDIBookArchipelago

16.  2001 Prentice Hall, Inc. All rights reserved. 16.4.1 Electronic Communication Networks (ECNs) ECNs will benefit from decimalization—the 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

17.  2001 Prentice Hall, Inc. All rights reserved. 16.4.1 Archipelago Feature Archipelago is an ECNArchipelago Provides anonymity to it clients SmartBook software executes orders by searching internally (within Archipelago) and externally (outside of Archipelago’s 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

18.  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)

19.  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.).

20.  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

21.  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.comThe Motley FoolMoneyCentral Money.com Companies offering online services –Have made investing in stocks and options accessible to a larger audience –Provide real-time market information

22.  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 brokersE*TRADE –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 gameAmeritrade

23.  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.)

24.  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 –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)

25.  2001 Prentice Hall, Inc. All rights reserved. 16.4.2 ShareBuilder Feature Dollar-based investing through ShareBuilder. (Courtesy of Netstock Corporation.)

26.  2001 Prentice Hall, Inc. All rights reserved. 16.4.2 ShareBuilder Feature ShareBuilder example of sample investments. (Courtesy of Netstock Corporation.)

27.  2001 Prentice Hall, Inc. All rights reserved. 16.4.2 Online Trading

28.  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 stock’s value could fall to a price that, when sold at the market price, will not cover the loan –The broker can issue a margin call—the broker requires the investor to invest more cash or securities or sell the stock to pay back the loan

29.  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.comCareerDayTrader.comDayTradingOnline.com OnlineTradingAcademy.com

30.  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 –EnronOnlineEnronOnline

31.  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 MuniDirectTradebonds.combondsonlineMuniDirect The Internet can cut the cost of issuing bonds Need for a standardized system for the bond sales process

32.  2001 Prentice Hall, Inc. All rights reserved. 16.4.3 Online Bond Trading Tradebonds.com ’s zero coupon bond query. (Courtesy of Tradebonds.com.)

33.  2001 Prentice Hall, Inc. All rights reserved. 16.5 Merging Financial Services Glass–Steagle 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 –PrudentialPrudential

34.  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 GainsKeeperVerticalOneebalance1View NetworkezloginGainsKeeper

35.  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

36.  2001 Prentice Hall, Inc. All rights reserved. 16.6 Yodlee Feature Yodlee is a financial aggregatorYodlee 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 Yodlee’s services from one of Yodlee’s partners, including AltaVista, AOL, Citibank, Chase Manhattan Bank and Morgan Stanley Dean WitterAltaVistaAOLCitibank Chase Manhattan BankMorgan Stanley Dean Witter

37.  2001 Prentice Hall, Inc. All rights reserved. 16.6 Yodlee Feature Example of Yodlee’s service through Citibank’s myciti. (Courtesy of Yodlee, Inc.)

38.  2001 Prentice Hall, Inc. All rights reserved. 16.6 Yodlee Feature The company’s 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

39.  2001 Prentice Hall, Inc. All rights reserved. 16.6 Yodlee Feature Example of Yodlee’s charting capability. (Courtesy of Yodlee, Inc.)

40.  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 NetbankTD Bank Financial GroupNetbank

41.  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.comAmeritradeDLJ Direct SureTrade. comMorgan Stanley Dean Witter OnlineFidelity Investments 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

42.  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 retirement401kafe –mPower offers retirement-planning advice to employees of member companies that sign up for the subscription-based servicemPower –ihatefinancialplanning.com provides information on all financial-planning topicsihatefinancialplanning.com