A network intended to help community banks affordably offer Internet banking has become another casualty of the dot-com implosion and drained profits at some of the banks that invested in it.
BankZip.com, established less than two years ago by Patriot Bank Corp. of Pottstown, Pa., started out with a simple enough premise: Community banks would be able to lower their online banking costs by joining the network and footing technology, marketing, and service bills together.
The plan was to get as many as 500 community banks on board within five years. But the company, which incorporated as Zipfinancial.com Inc. in Pottstown in July 1999, managed to sign up only six customers before shutting down in February. None of the banks had gone live on the network by that time, and four of them ended up writing off millions of dollars on the failed venture.
Like other dot-com entrepreneurs, BankZip.com's organizers are blaming the capital markets. The company was unable to secure additional money after an initial round that netted $13 million.
"The issue came down to a funding problem with the dot-com stock market blowing up and venture capitalists not inclined to fund dot-coms anymore," said Richard Elko, the former chief executive officer of BankZip.com, who is now chief executive of Patriot.
Patriot, which spun off BankZip.com in December 1999, took the biggest hit. It wrote off $5.067 million ($3.349 million after tax) in 1999, according to documents filed with the Securities and Exchange Commission.
Other local banks that bought into the BankZip.com idea also paid a heavy price. PSB Bancorp in Philadelphia, the holding company of First Penn Bank, wrote off a $2.5 million investment in BankZip.com last year, according to an SEC filing.
PSB's 2000 net income was $165,000, against with $2.1 million in 1999. It would have earned $2.7 million had it not invested in BankZip.com, the filing says.
Anthony DiSandro, president of $260 million-asset First Penn Bank, said BankZip.com "was great venture. The unfortunate thing was it became a victim of the e-commerce debacle we went through. It wasn't the system or the concept that killed that business, it was the inability to secure necessary capital."
Jade Financial Corp. of Feasterville, Pa., which PSB is acquiring, wrote off $2.5 million in 2000 for a BankZip.com investment that it made on behalf of its IGA Federal Savings Bank subsidiary. IGA ended up losing $1.1 million last year, compared with a profit of $293,000 in 1999, according to the company's filing. Now IGA, like PSB, is installing an in-house system to support Internet banking.
"We thought BankZip.com was a great concept, but unfortunately the timing was wrong in the capital market," said Domenic DiPillo, vice president of marketing for IGA. "We feel the Internet is an integral part of competing in today's marketplace."
Another bank holding company, Madison Bancshares Group Ltd. of Blue Bell, Pa., wrote off a BankZip.com investment of $1 million for its Madison Bank subsidiary. As a result, it lost $442,774 last year, versus a 1999 profit of $925,775.
One way BankZip.com proposed to save banks money was by using just one outsourcing contract for the purchase of online banking software. In addition, BankZip was to manage a call center, and the banks would offer their automated teller machine services surcharge-free to BankZip.com customers.
A Web site would let consumers enter their ZIP codes to find the nearest community bank in the BankZip.com network. That and the company's promotion of the BankZip brand would save members marketing dollars. But the banks balked, fearing their names would be subsumed by BankZip's.
"We received resistance from community bankers unwilling to share brand identity with other banks through the BankZip.com brand," Mr. Elko said. As a result, "we never really tried to build BankZip.com as a brand, which was one of the initial business concepts."
Because of that resistance, BankZip.com shifted to focus more on providing aggregated services that banks could private-label, said a source who was involved in the creation of the company and left before it folded. "What we ended up with was a business proposition that was somewhat different than what we started out with," he said.
He said BankZip.com's ZIP code segmentation also proved problematic. "We found it difficult to make some of those decisions about territories."
Mr. Elko said he "absolutely believes in BankZip.com's model." Had capital markets not dried up, "I believe BankZip.com would have been wildly successful. The costs for individual community banks to build very robust Internet sites are significant and still present a significant challenge to community banks."
He is not alone. A former executive of Patriot Bank and BankZip.com, who asked that his name not be given, said: "I think BankZip.com was and is still a very sound idea. My argument from the beginning was that it is expensive and difficult for small banking companies to get themselves online in an effective manner. We thought the economies of scale could be accomplished by putting lot of companies together."
Unfortunately, he said, the "capital the markets turned the wrong way at the wrong time."
