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Banking on the Net Featured

7:26am EDT May 25, 2004
NetBank Inc. opened its virtual doors eight years ago with the idea of bringing all the services available at a bricks-and-mortar branch bank to customers through the Internet. In less than a decade, that formula has proven itself successful.

"As my chief financial officer says, we're probably the only Internet company making real money to pay a dividend from," says Douglas Freeman, chairman and CEO of NetBank.

Freeman joined NetBank following its acquisition of Resource Bancshares Mortgage Group, where he served as CEO. It was that merger that put NetBank on the financial map.

"Resource Bancshares Mortgage Group was a great mortgage company but needed access to liquidity -- i.e. deposits -- so we were looking at forming a bank," Freeman says. "NetBank, on the other hand ,was using the Internet to attract a number of high-quality deposits, but lending over the Internet hadn't quite caught up with the deposit generation capabilities.

"So we had a situation where neither of our balance sheets balanced as well or as efficiently as we would have liked. RBMG got funding and NetBank got loans, and it worked out (from) Day One. It was one of the smartest merger deals that I've seen in the last 10 years in the financial industry."

Smart Business spoke with Freeman about how the Internet enterprise turns clicks into cash.


What was the original thought behind the creation of NetBank?


The concept was you should be able to do everything over the Internet that you can do through your local, friendly branch bank, but not have to put up with lines, not have to pay the costs associated with those branches, because customers pay for every nickel of cost in a company.

A branch network in a typical retail bank would cost anywhere from two-thirds to three-fourths of their total cost structure. If you don't have to spend that money, you can pass it back to customers in terms of a much, much better deal.


Is there anything a bricks-and-mortar operation offers that NetBank cannot?


We've figured out a way to deliver everything you can get at your neighborhood branch except for your lockbox where you put your stamp collection. Once we have a way to digitize your stamp collection, maybe we'll save that for you, too. If you have a coin collection, a stamp collection or one of our investors had a golf ball collection, we don't give you a safe place to put that, but everything else we can do -- better, cheaper and faster.

It started out mostly as a place for people to put their money, mostly in checking accounts and money market accounts and certificates of deposit. But if you're going to really replace someone's bank, you have to replace their bank, so we added all kinds of lending products, from car loans to mortgages to boat and recreational vehicle loans.

We've added foreign currency conversion. We allow you to order your checks online, get a cashier's check online. Everything you can do from wealth management, the whole way down to paying your bills, you can now do with us online. And last summer, we started a small business bank so they (businesspeople) could bank over the Internet without having to go to the branches.


How did NetBank manage through the dot-com bust?


The companies that I saw go bankrupt in 2000 were companies that had poor business models. There was a financial company that said, I'm going to issue credit cards to people with bad credit, and I'm going to raise money through issuing certificates of deposit on the Internet.

I don't care if they did that out of a car on the street corner or a branch, they were going to go out of business. That was a poor business model.

NetBank continued throughout the entire period to grow customers, grow products, grow deposits, build a business, build a bank, and all of that has served it very, very well. Internet companies that blew up said they were an Internet company. We never said that.

We said, 'We're a bank; we're a financial service company, and we elect to distribute our products over the Internet.'


Does NetBank have a particular customer profile?


(Our average customer is) a 43-year-old, two-income (household), time-starved, professional; they have excellent credit, and over half of our customers have a post-graduate degree. Eighty percent or more own their homes. People are looking for control and convenience so they can do what they want to do when they want to do it.

Averages can be very misleading. Fifteen percent of our customers are seniors. Seniors are finding the Internet -- they're buying their drugs from drugstore.com, they're sending e-mails to their kids, they're trying to save a dime shopping. Seniors don't miss getting in their car and driving around anymore.

I'd say it's interesting to look at who we have, but that's sitting in the caboose looking back down the railroad tracks. If you're in the engine looking ahead, it's a very different mix that you're going to see gravitating toward the Internet.

Still, they're going to be technology savvy, Internet savvy, financially savvy people, but it's going to be a broad spectrum.


Without splashy Super Bowl ads, where do you find your customers?


If you think about our customers -- I'll quote my dad, who was a philosopher in his own way -- he said, 'Son, if you want to go fishing, why don't you go fishing in a lake where there are fish?'

There's a lot of wisdom in that statement. Because our delivery system is the Internet, the people who we appeal to are people who use the Internet. If you're one of the people in society who doesn't have a PC at home or you don't have Internet at home, the fact of the matter is you are probably not going to gravitate to our products and services.

Because of that, we go fishing where the fish are, and we do the bulk of our advertising over the Internet. We also have a number of strategic alliances. We have an alliance with Microsoft Money, which is a PC wealth management/money management program. We have a deal with Intuitive Quicken, which is the same sort of thing.

If you think about the people who would use those two programs, they're using a PC, nine times out of 10 they're on the Internet and they're financially savvy. So our customer is Internet-sophisticated, financially savvy people, and we know how to find them without putting a billboard up at University of Georgia games -- "How about those Internet Dogs?"


What does the future hold for NetBank?


I think you're going to see us push on the promise if it's a financial product or service that you buy, we're going to try to figure out a way to sell it to you over the Internet. We now do insurance over the Internet, wealth management over the Internet. ... We're not going to rest until we figure out a way to provide the one-third of America that never goes into a bank branch with a cost-effective option that allows them to bank better, cheaper, faster, with better support than they ever have before.

The future is extremely bright for NetBank. How to reach: NetBank, (877) 463-8249 or www.netbank.com