2001 Prentice Hall, Inc. All rights reserved.

Chapter 16, Online Banking and Investing

Outline
16.1 Introduction
16.2 Online Banking Services
16.2.1 Hybrid Banks
16.2.2 Internet-Only Banks
16.3 Online Loans
16.4 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
16.5 Merging Financial Services
16.6 Financial Aggregation Services
16.7 Wireless Banking and Trading
16.8 Financial Planning Online

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
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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
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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
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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
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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

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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
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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
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16.2.2 Internet-Only Banks
Internet-Only Banks Description
BankAtlantic.com
Offers services in Spanish. Provides trading
services through ShareBuilder . Offers
customers personal, small-business and
commercial banking.
CompuBank (www.compubank.com) 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.
SFNB (www.sfnb.com) 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.
nBank (www.nbank.com) 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.

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16.2.2 Internet-Only Banks
Internet-Only Banks Description
everbank.com
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.
Gomez.com
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.
CyberInvest.com
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.
bankonline.com
Helps visitors find institutions that offer online banking,
insurance comparison shopping, financial planning and loan
and credit applications
Internet-only banks and online banking information sites.


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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.com
The Small Business Administration Office of
Advocacy
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16.3 Online Loans
E-LOANs E-TRACK demo. (Courtesy of E-LOAN, Inc.)
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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
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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
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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
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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
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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

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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)
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16.4.1 Archipelago Feature
Archipelago order routing and execution example. (Courtesy of Archipelago Holdings, L.L.C.).
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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
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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

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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
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16.4.2 E*TRADE Feature
E*TRADE offers investing and financial services. (Courtesy of E*TRADE Securities, Inc.)
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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)
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16.4.2 ShareBuilder Feature
Dollar-based investing through ShareBuilder. (Courtesy of Netstock Corporation.)
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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 Trading Description
Datek Online
(www.datek.com)
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.
Charles Schwab
(www.schwab.com)
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.
Scottrade
(www.scottrade.com)
Provides online trading services and allows investors
to locate nearby branches by using Branch Locator.
These branches allow investors to have a personal
broker.
Merrill Lynch Direct
(www.mldirect.com)
Offers online trading and investing (mutual funds,
bonds, CDs). Customers can take part in e-IPOs.
Merrill Lynch Direct also offers online bill payment.
National Discount Brokers
(www.ndb.com)
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.
Fig. 16.7 Online Brokerages.


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
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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
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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
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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
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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
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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
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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
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16.6 Yodlee Feature
Example of Yodlees service through Citibanks myciti. (Courtesy of Yodlee, Inc.)
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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
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16.6 Yodlee Feature
Example of Yodlees charting capability. (Courtesy of Yodlee, Inc.)
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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