Just 11 months after introducing his version of a full-service, Internet-only bank, Elon Musk, X.com's 20-something founder, threw in the towel.
I guess this is what cyber-entrepreneurs call moving at Internet speed.
X.com has decided, at least for the next few nanoseconds, to focus on its person-to-person payment service, PayPal, which it acquired last March. PayPal claims to have attracted four million customers for its Internet service during the past year.
Unlike X.com's original, FDIC-insured bank accounts, PayPal invites customers to put their funds in privately insured but unregulated accounts and to trust the company to act as an intermediary for funds transfer. Is there anything in X.com's brief but newsworthy record to justify such trust in Mr. Musk's company?
X.com was started in December 1999 to be, as one analyst put it, "a pure Silicon Valley take on how to develop financial solutions." It was going to make its mark by offering a wide range of online financial services at bargain prices and showing traditional bankers how to operate on Internet time.
Eleven months later it quit the banking and mutual fund businesses - but not before making a series of dubious contributions to Internet banking history.
X.com was trying to show traditional bankers how business should be done, but it promptly demonstrated that it had absolutely no idea what it was doing. Its original version of a money transmission service negligently facilitated fraudulent transfers from other banks.
The company's next move was to precipitously reduce the credit limits on its newly issued credit cards. There was no explanation for the move, but such changes are usually triggered by some combination of funding shortfalls and (more frequently) escalating credit-quality concerns.
Further proving that it was still committed to moving at warp speed, X.com then fired its chief executive officer after a few months on the job. You can only wonder what the banking regulators were thinking about these exhibitions of management expertise.
After a few months of relative tranquility, X.com e-mailed to its customers a new fee structure and minimum balance requirements for what had formerly been free checking accounts. The company brashly told anyone who did not like it to close his account.
Mind you, these were the very accounts X.com had been bragging about just 10 months earlier. It had been so anxious to obtain this business that it was handing out free check orders.
Though customers were still digesting this latest bit of news, Mr. Musk apparently decided X.com should just dump the banking business, as opposed to trying to fix the mess he had created.
Though X.com's exit from the Internet banking stage is welcome (and something that should be considered by the rest of the Internet-only institutions), we are not rid of the genius who inspired the pitiful situation in the first place. Internet bankers will be tainted as disgruntled X.com customers retell their experiences with Mr. Musk's organization.
Unfortunately, PayPal also survives. Its customers are apparently willing to let a privately insured, unregulated company - untested by crisis - hold and move their money.
FDIC insurance seems to be irrelevant to these customers. I suspect that most of them had never heard of the Electoral College until Nov. 8. They simply assumed that they directly elect the President - and that any company that holds their money in an account is FDIC-insured.
Is X.com a credible institution? Consider this bit of marketing spin from X.com in the wake of its withdrawal from Internet banking, as reported by CNET: "The wind-down of X.com's financial services had been planned since March, when the company acquired PayPal."
We are asked to believe that a four-month-old enterprise was already shifting gears and planning to exit its brand spanking new business. If this is true, it is an amazing case of mercantile attention deficit disorder.
It strikes me as remarkable that a company that has the dismal track record of X.com is trusted by anyone. Fortunately, with the entry of financially substantial companies (Wells Fargo, Fleet, Citigroup, etc.) into the P-to-P market, it is just a matter of time before PayPal feels the competitive pressure.
All other factors being equal, whom should a consumer trust more with his or her funds? A transparently profitable bank with billions of dollars of equity, FDIC insurance, and access to the Federal Reserve, or a financially insubstantial, closely held start-up that is forced to regularly raise new venture capital to keep going?
Our financial system depends on trust. The traditions and the rules of the industry exist to preserve that trust. Just because most of us have never seen a bank run (and won't in the regulated world) does not mean that it can't happen. It would be most unfortunate to have rank amateurs with gimmicky names undermine confidence in the financial services industry and its payment systems.
We can only hope that Mr. Musk quickly grows weary of the payments business and quits again.
Mr. McGrath is a managing partner of Bank Earnings International LLP, a consulting firm in Orange, Va.