The Perils of Progress

By Steve Klinkerman

Bill Harris' burgeoning Internet mall is helping to revolutionize financial services. It is also posing wrenching challenges for Intuit and its business partners.

At its core, Intuit Inc.'s consumer strategy is about "taking really nasty problems and making them easy," says president and chief executive William H. Harris. But for Intuit and its partners, nothing is easy when it comes to migrating financial services to the Internet.

The company, which rose to prominence as a manufacturer of shrink-wrapped financial software, has spent the last two years furiously shifting its focus to the Internet. The idea is that Intuit's software increasingly will provide an online interactive experience, enriching the customer value proposition while enlarging business opportunities. And what a base to build on: Dominating their respective markets, the Quicken, QuickBooks and TurboTax software packages have automated many of the convoluted tasks in personal financial management, small business accounting and tax preparation for millions of people.

Harris wants to lure these customers -- and countless other Web surfers -- into his self-styled "online financial services mall," a series of Quicken-branded Web sites that enable consumers to engage in comparison shopping for mortgages, insurance and small business loans and select from a variety of brand-name providers. In an ideal world, this will dramatically expand the level of customer service, unleash a torrent of advertising and referral revenues for Intuit, and enable participating institutions to reach a far larger audience than they otherwise could.

But in moving to an Internet business model, Harris is propelling his company and its partners into a territory fraught with difficult and expensive issues. The new Intuit is going beyond automating financial tasks to become a major content provider. In so doing, it is assuming critical merchant and publishing responsibilities, where a certain level of care is owed to consumers in assuring that all of the third parties live up to their online promises. And Intuit doubtless will be subject to intensifying heat from financial services partners, some vying for prime display, others worried about customer encroachment.

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Meanwhile, providers posting their services on sites such as Intuit's are subjecting themselves to intensified price competition and a maze of technological challenges. And as an example of what it costs to bulk up online, Citicorp alone lost nearly a quarter of a billion dollars on its e-commerce initiatives over the past two years.

That Intuit and its partners would put themselves through this pain attests to the powerful allure of the Internet business model. The Tower Group, for example, estimates that 15 million households, or 12% of the market, will be using PC banking by 2002. That spells rich opportunity in customer acquisition, transaction processing, cross-selling and, for the players operating high-volume Internet portals, advertising revenues and referral fees.

The catch is that no one knows exactly how fast consumers will embrace Web-based financial services, or what their online behavior patterns will be. Although online brokerage has taken off like a rocket, it appears that adoption rates for basic banking and personal financial services will be much slower. Then, what portion of the business will flow through portals such as Quicken, MSN Money Central, Yahoo! and Excite, and what portion will flow through bank-sponsored Web sites?

While the jury still is out on whether Harris will prevail in the face of these imponderable issues -- the company posted profits in only one of the last five years -- it does appear that Intuit is among the companies best positioned to tackle the challenge. Endowed with a large and demographically attractive customer base, formidable programming expertise and a mountain of working capital, Intuit has few discernible short-term impediments, giving Harris all the maneuvering room that a CEO could hope for.

Banking and financial service companies will be watching Harris and his counterparts closely, because today's Internet experiments could become tomorrow's market paradigm.

Consumer Advocacy

Founded in 1983 by Scott Cook and Tom Proulx, Intuit published the first version of Quicken in 1984 and now claims more than 10 million users. Based in Mountain Valley, Calif., Intuit incorporated online banking into Quicken in 1995, but then slumped over the next year as market saturation and price competition crimped growth in software sales revenues. Meanwhile, the Internet exposed some basic architectural constraints in Intuit's first online model, which used proprietary networks. Selling millions of single-user stand-alone software packages built the business, but left users working in isolation and handling transactions via proprietary dial-up channels that were both expensive and short on content.

Succeeding William V. Campbell as CEO last August, Harris has intensified the company's push into the Internet. He is opening new horizons by building Web functionality into Intuit's personal finance, accounting and tax software, and by erecting browser-accessible online malls.

Users can now function more in workgroup settings, access all sorts of remote capabilities such as database services, and evaluate and access an ever-growing spectrum of online financial services offerings. Intuit can also expand the distribution of its software, both to other aggregators such as America Online and to individual bank sites; generate Web site advertising revenues; and gain eligibility for referral fees when people go through its portals to locate and purchase a provider's financial services wares. "This is where we are devoting the bulk of our product development energies," says Harris, who spent a decade of his career working for Time Inc. and U.S. News & World Report.

By placing Intuit into the role of a publisher, however, the new strategy exposes the company to the age-old conflicts of that role. Illustrating the pressures and temptations attending the control of display space, the New York Times recently reported that Amazon.com, the dominant online bookseller, had publicized editorial endorsements of certain books in exchange for fees ranging up to $12,500. Intuit itself is booking advertising revenues at nearly a $40 million annual pace. Without going into specifics, Intuit senior vice president Mark Goines acknowledges that some sponsors exert pressure for special treatment. He promises to resist, saying, "Our partners have to be totally comfortable in distributing through us, and to do that, we have to be editorially pure in the way we array the content."

For Intuit and its strategic counterparts, the issue comes down to consumer advocacy. "To the extent that you impact the quality of an online search to further one sponsor's agenda, integrity is compromised," says Chuck Hieronymi, a former NationsBank Corp. executive who now is a managing director at Dove Associates, Charlotte, N.C. "How can Intuit and other portal players maintain unbiased consumer advocacy over the long term when their business model is driven by fees based on the product they move?"

A conjoined issue is merchantability. To attract repeat business and uphold the brand, Intuit must perform some level of surveillance of each financial services market segment included in its online repertoire -- and of each provider listed on its sites. That's what it takes to assure product selection and comparability, adequate disclosure, and prompt fulfillment. "'Referee' probably is a good description," says Brooks Fisher, an Intuit vice president who heads its Internet division. "We're assessing the willingness of our partners to make a commitment and set very high standards for follow-up. Conversion rates fall sharply when people can't get a quick response at the moment they are ready to make selections."

The Banking Perspective

Some have questioned whether a sufficient number of major financial institutions will consent to list their products on the Quicken sites. While there are some notable holdouts, it seems that the issue inevitably will be decided in Intuit's favor. The name of the online game is exposure, and providers cannot afford to ignore the millions of customer inquiries directed through aggregator Web sites. "The player that sits there and does nothing beyond its own site may be locked out of the picture in four or five years' time," says Diogo Teiexeira, president of Tower Group, Newton, Mass.

That said, there are numerous issues to be reckoned with in becoming a supplier for an online financial services mall. Chief among them is intensifying price competition. It's not that margins are decimated, bankers say, but rather that the dispersion is narrowed. When the customer must manually retrieve shreds of local information to make comparisons, it's harder to discern premium pricing. But when juxtaposed with comparable items drawn from a national pool, fat quotes can stand out conspicuously. "You have to be at least close to the price leader to be in the game," says David Everett, a Des Moines, Iowa-based vice president at Principal Residential Mortgage, which solicits business through QuickenMortgage.com.

Within that narrowed price range, however, it does appear that brand strength makes a difference -- a substantial one, according to Intuit executives. Among the customers who submit a mortgage application to a provider located through the QuickenMortgage site, more than half make their selection on some basis other than the absolute lowest price, says Goines. "People care about brand character," he says.

Among the QuickenMortgage participants are Chase Manhattan Mortgage, Countrywide Home Loans and PNC Mortgage. At the Quicken InsureMarket site, providers include Allstate Insurance Co., Prudential Insurance and State Farm Insurance. Small business lenders populating the Quicken Business CashFinder site include American Express, Citibank and Key Bank.

At least in the Quicken sites, the online challenge seems more about standing toe-to-toe with a small but powerful group of players than about standing out among hundreds of providers. For many types of financial services offerings, Fisher says, the relationship between the number of choices offered and the likelihood that an online customer will make a selection becomes inverse fairly quickly. "Often, the ideal number of partners for a given product is more like 15 than 50," he says. "There's a benefit in grossly simplifying the choices."

Assuming that the slots are not only few but ultimately precious, then why haven't all of the biggest names in financial services beaten a path to the Quicken sites? There are many factors, and they underscore the challenges that providers face in trying to capitalize on the Internet.

To begin with, not all players are technologically ready. Difficulties in linking legacy mainframe systems, Y2K distractions and mergers have slowed progress. Bank One Corp., for example, first had to dig itself out of the "Uncommon Partnership" -- a strategy that perpetuated dozens of separate banking entities -- before it could undertake more sophisticated pursuits, says Bruce Luecke, president of interactive delivery services.

Online marketing and fulfillment must be handled with the same intelligence, responsiveness and care required in other channels, compelling banks to assemble a variety of capabilities falling under the heading of customer relationship management. Rock-solid reliability must be assured, as evidenced by the 16% single-day drop in Ameritrade Holding Corp.'s stock following disclosures of a system crash that suspended service for about half an hour. Security and underwriting issues also must be addressed. MBNA Corp. reportedly rejects 80% of the credit card applications received online because they are either fraudulent or flunk the credit scoring models.

Then there's the portal question. Which point(s) of entry to the Internet will do the most good? The Quicken sites are not always the obvious first stop. When Chicago-based Bank One got ready to make a major move, it staked out an exclusive position on Excite's home page in a multiyear deal that reportedly will cost the bank up to $125 million. New York's Citibank staged a similar digital land grab with Netscape. At the product level, there are even more alternatives. About $500 million of mortgages was sold through the QuickenMortgage site last year, for example, but that compares with $4 billion for rival aggregator E-Loan.

Stickiness

Amid these uncertainties, Harris has an anchor -- Intuit's well-established personal and small business financial software. Millions of people use these "interactive financial tools" to handle their checking accounts and family finances, calculate their taxes, and manage their small businesses. Given the critical tasks that people already entrust to Quicken-branded products, it seems plausible that Harris can extend affinities into the Web environment. It's a digital relationship, admittedly, but a relationship nonetheless, and it engenders the repetitive interaction -- the stickiness -- that drives the portal value proposition.

Getting the maximum mileage requires some compromises and cajoling. Individual banks and competing portals also would like to strengthen customer-Web site ties with PFM software. In the name of incremental sales and keeping Microsoft Corp. at bay, Harris licenses versions of Intuit software that appear under the licensees' own names.

Harris also spends time trying to diffuse prospective partners' anxieties about potential customer relationship erosion. "The first priority is to make your own Web site as good as it can be, because the best thing in the world is to have a direct link with the customer," he says. "But you must also reach beyond your own borders, because the number of people on the Web is huge and growing."

It's unclear whether banks will fully participate in Intuit's aggregator sites, says consultant Hieronymi, because they fear being demoted from managers of financial services relationships to mere product providers. And with the exception of brokerage, says analyst David Farina of William Blair & Co., Chicago, "There's no indication of a wholesale customer migration to Web-based financial services."

Behind all of the jockeying and excitement is the cold fact that Internet economics remain massively uncertain. Despite an 80% market share and 6 million customers, for example, online bookseller Amazon.com has yet to earn a dime. In financial services, Charles Schwab Corp. is one of the few players showing meaningful bottom line results. Nearly everybody else, including Intuit, is giving more than they're getting -- often far more -- and the situation promises to persist for years. And even if the medium does become golden, no one knows how the traffic will flow and who will reap the rewards.

Of necessity, then, Intuit and its partners must approach this endeavor with substantial backing and a vision that extends beyond the startup years. Although just 3% of mortgages were originated online last year, for example, Tower Group estimates that figure could rise to 30% by 2006. Opportunities abound in electronic bill presentment and payment, cross-selling, and myriad new business propositions.

That leaves Harris going a hundred directions at once. Software that previously was upgraded annually now must be constantly revised to meet the changing demands of the Web environment, and the company is being forced to perform more intricate work on the fly. It is also harder to establish priorities. "It's like the mule that starved to death while trying to decide between two equidistant bales of hay," Harris says. "We are really challenged to assemble enough human resources to do all of the things we've put on our plate. And as a publicly-traded company, we have to be very careful about our short-term earnings even while we build and invest on a long-term basis."

At the same time, Intuit is one of the companies best positioned to tackle the challenge. "There aren't that many companies that have stood up to Microsoft and are still around to talk about it," Farina says, noting how Intuit has maintained a dominant PFM market share in the face of withering competition from its larger rival. Along with skills and a track record, Intuit is sitting on roughly $500 million of working capital, plus a billion dollars' worth of stock investments in other software and transaction-processing companies. This provides crucial staying power.

Banks have undeniable clout, but few have Intuit's programming expertise, and none have its track record in software sales. That perhaps would not matter, except that we've apparently passed the point of no return with Internet-based financial services. It seems that enough players and customers now are committed to assure the market's future. In which case, institutions will have to find more ways to cooperate with the companies whose software and strategies drive the market. Intuit is among the front-runners in this game, making Harris a man to watch.

Mr. Klinkerman is managing editor of Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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