Digital Insight Hopes to Cash In on Cyber-Banking’s Potential

Brookline Savings Bank in Boston, in business since 1871, leaped into cyber-banking this year by offering online banking to its customers. Keeping up with technology is one thing, keeping down costs is another. So the tiny bank leased its home banking service from Digital Insight Corp. in Calabasas.

Cyber-banking is the bread and butter of 4-year-old Digital Insight, with 380 customers, mostly credit unions and pipsqueak-to-mid-sized banks. These institutions don’t have capital to build their own Internet home banking systems, so they buy time on Digital Insight’s network.

Now Digital Insight hopes to raise as much as $59.5 million in its initial public offering, with Morgan Stanley Dean Witter as the lead underwriter--though a market date hasn’t been set.

Digital Insight is the brainchild of Paul Fiore, 34, executive vice president, and Daniel Jacoby, 33, chief technology officer. Both worked at a data processing firm that had credit unions as customers. Then in 1995, the pair set off to start their own company, betting, correctly as it turned out, that as Web systems improved, even small financial institutions would jump into online banking.

Since then, Digital Insight has grown rapidly, riding the Internet banking wave. Today, 3.4 million households bank online, according to Forrester Research in Cambridge, Mass., and that figure is projected to jump to 18.5 million in five years.

“Some community bank customers find it very convenient to have access to their accounts, transfer funds and maybe pay some bills online. Providing this service is a good way to keep them as customers,” said Brook Newcomb, an analyst with Forrester Research.

Newcomb said that though demand for online banking will grow, a key for Digital Insight’s longer-term prospects is to further refine and customize its home banking products for clients, rather than offer a narrow choice of vanilla accounts.

Digital Insight’s sales spurted from $1.6 million in 1996 to $4 million in 1997 to $8.2 million last year, and its first-quarter sales doubled to $3.2 million this year. The company’s losses have also piled up, including a $4.4-million loss last year and a $1.5-million loss in this year’s first quarter.

Digital Insight’s executives would not comment, citing the Securities and Exchange Commission’s “quiet period,” which restricts comments about upcoming stock offerings. But its prospectus makes clear that the company won’t make a profit until at least 2002. Digital Insight plans to boost its sales staff and product offerings, hoping to grab more customer traffic to cover the high costs of its Internet banking system.

Digital Insight may be a small firm, but Brookline Savings selected it over two much bigger rivals, Electronic Data Systems and Edify Corp. in Santa Clara.

“Digital Insight was an up-and-running company that had a whole bunch of customers. It wasn’t just ‘vaporware.’ They also had good word-of-mouth within the data processing industry,” said Susan Ginns, Brookline Savings’ treasurer.

For years, Brookline Savings had considered adding online banking, but found the early systems to look like an ugly computerized version of an ATM. As Web technology was streamlined, the five-branch bank concluded that 2% of its customers would try banking online. The bank just started offering online banking July 1, but customer traffic has already been higher than it expected, Ginns said. “It’s very simple, and anybody using a computer can do this.”

Things have worked so smoothly that the bank hasn’t hired any extra staff to answer questions about home banking from its customers. Brookline Savings paid a setup fee to Digital Insight and continues to pay a fee for every transaction processed.

Digital Insight hosts Brookline Savings’ Web page, which it customized, including installing the bank’s logo. Brookline was able to pick from a menu of offerings, and now its customers can get up-to-date account balances, transfer funds, pay bills (for a fee) and get stock quotes.

Clearly, though, the bank wants to use the Net to steer more business its way. So its home banking service also offers a new-car loan program with consumer reviews of new models, names of local dealers and information on how to apply online for a loan at the bank. “Once you can get customers trusting you with their money, local banks have the potential to take advantage of [online] technology to offer other financial services,” said Ray Dirks, an analyst with Security Capital Trading.

Community banks, of course, are merely following the pattern set by the biggest banks. Wells Fargo & Co. has signed up about 1 million online banking customers. In June, Bank One Corp. launched WingspanBank.com, a separate Internet-only bank. And in an effort to broaden online banking, Wells Fargo, Chase Manhattan Corp. and First Union Corp. recently said they will form a company enabling customers to pay and receive bills entirely over the Net.

Meanwhile, Digital Insight has been adding executives to help ramp up for its next growth stage, including hiring John Dorman, 48, as its chief executive. Dorman was a founder of Treasury Services, a banking software firm in Santa Monica that was purchased for about $120 million two years ago by Oracle Corp. Dorman joined Oracle as a senior vice president, then in October jumped to Digital Insight.

Any growth field, though, attracts plenty of rivals, and Digital Insight now faces about 100 competitors. Even giant companies that do data processing for banks, such as EDS and Fiserv Inc., are pushing their own online banking services.

Another worry for Digital Insight is that community banks are moving into home banking at a slower pace than large banks, and there remain concerns about a sales slowdown near-term because of Y2K computer bug worries.

Yet another issue is the ongoing consolidation in the banking industry, which means Digital Insight could quickly lose clients. Granted, no single Digital Insight client accounts for more than 5% of its revenue, but some of its contracts run for only one year.

Home Savings of America, for instance, was one of Digital Insight’s blue-chip accounts until Washington Mutual acquired the bank. Digital Insight lost that business after the takeover because Washington Mutual has its own home-banking system.

Still, the potential of Internet banking has already excited some investors--briefly, at least. One of Digital Insight’s smaller rivals, NFront Inc. of Norcross, Ga., in late June raised $33 million in an IPO.

NFront, which also supplies Net banking to small banks, has 122 clients but posted a $2-million loss on $2.8 million in revenue in its latest nine months. Even so, NFront’s stock, priced at $10 in the IPO, jumped to $23.69 in July before falling back to $11.88 as of Friday.

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Barry Stavro, who covers local companies, can be reached at barry.stavro@latimes.com.