What a difference a year makes. Especially in this past year of dotcom death rattles, market downturns, industry consolidation and shifting views on the Internet. In the banking industry, change is perhaps no more evident than in the Internet banking software space-a fact that has been highlighted in the recently released Celent Communications study, "Ranking the U.S. Vendors of Internet Banking Solutions."

An update to last year's report on the industry, the 44-page report breaks down all the leading vendors in this increasingly competitive area, providing the Boston-based consulting firm's take on which vendors offer the best products and services for large, midsize and small financial institutions. The report's author, Celent analyst Meredith Hickman, analyzes each offering in terms of scalability, cost, transaction capabilities, flexibility and-ever-more important as more and more start-ups shut their doors-the financial stability of the vendors themselves.

While Internet banking remains an imperative for most banks, according to Hickman, it's clear that vendors have not escaped the massive repercussions of changes in the overall Internet and public markets. "First and foremost, the industry has been rattled by the financial slowdown we're seeing," says Hickman. "We're seeing a bunch (of vendors) just disappear."

Among the major casualties, Hickman pointed to Englewood, CO-based Cavion Technologies, an outsourcer that supported 200 credit unions and community banks; it filed for bankruptcy in December 2000, and its assets were bought by Liberty Enterprises. Homecom, based in Atlanta, is also having troubles, having been delisted from the Nasdaq in early January when its stock dropped to unacceptable levels. In some cases, the shakeup is forcing consolidation, says Hickman, citing Reston, VA- based Intelidata's purchase of rival Home Account Network.

Richard Bell, director of e-banking for TowerGroup in Needham, MA, believes that the slap of financial reality brought about by the online industry's recent troubles has forced "a lot of institutions to come to grips with the business case for Internet banking."

He says, "The competitive bar has been raised substantially since the days when all things Internet were a no-brainer." And he adds that banks are focusing more sharply on functionality, pricing, and performance-determined to have their vendors justify the return on their investments.

In turn, says Bell, the vendors are responding by "sharpening their offerings," making them more scalable and more consistent with other banking solutions costs.

Celent's standings reflected these changes in the industry, as well as shake-ups among vendors. Notably, competitive pressures have bumped rising star Corillian Corp., of Beaverton, OR, from the top spot it occupied in last year's Celent ranking of large financial institution vendors down to fourth place this year.

In spite of nabbing high-profile converts from competitor S1 Corp. of Atlanta over the past year-including Chase Manhattan Bank, Huntington Bancshares, and Wachovia Bank-Hickman says that Corillian's technology is just not as advanced as new competitors' that have emerged over the past year: Financial Fusion, based in Watertown, MA, and Brokat, based in San Jose, CA, which garnered the top two rankings respectively.

"Corillian's technology works, but it's considered clunky," says Hickman, explaining that Financial Fusion and Brokat can support a wider array of channels, and that Brokat especially provides much better customer support. Last year, Corillian led the race largely because Financial Fusion and Brokat hadn't yet made their full-court press into the U.S. Internet banking business, and, according to Hickman, "S1's customers were generally dissatisfied" when they were interviewed last year.

Veteran S1, in turn, held onto third place for the second year in a row in the face of greater competition. Although Hickman admits that S1 is widely seen as the "giant monster of the industry," she says in the past customers were unhappy with the company's high price tag, budget overruns, and tepid customer service. Also, she added, S1 has often tried to encourage its large bank customers to use its data center rather than run their own operations in-house-an idea that is none too popular with the large banks.

But by exercising greater cost controls and improving service, "it seems like (S1's) kicking it into high gear," says Hickman.

But upstart Corillian is still very much the darling of the midsize financial institutions. In this market, the tables turn-or more accurately, the ranking according to Celent-and Corillian is number one, followed by popular community bank service provider Digital Insight of Calabasas, CA, Financial Fusion and Brokat. Why the reversal of fortune here?

A major factor is that Corillian is dedicated to the NT platform-a big drawback for large banks that often choose Unix, but not such a problem for the midsize banks, which are much more comfortable with Windows NT. Although the Financial Fusion platform is ultimately more flexible, it can be much more expensive and challenging to implement for the middle-of-the-road financial firm that may not have the resources, says Hickman.

But Digital Insight, which also grabbed the highest marks from Celent Communications in its small bank category, may quietly be making the biggest waves of all. Moving up-market as it continues to build a solid following among its traditional community bank customers, Digital Insight, Hickman says, "is really doing amazing things with their technology." What's more, the vendor can get customers up and running for 20% to 30% of the cost of what Corillian charges. But perhaps most importantly, Hickman says that Digital Insight's customers were truly impressed with the vendor's service and its honesty.

"Digital Insight tells it to you straight," says Hickman. "Rather than promise the moon, their customers said that they tell you what they can do for you, and they do it."

As the market tightens and banks put on greater pressure to keep costs down, more and more big vendors are also moving down market- approaching the wider base of small banks that don't have as much money to spend, but are finally going to the Web en masse. Bell of TowerGroup says that asset-based pricing-which provides a sort of sliding scale for smaller banks-has become more common among vendors, who are beginning to see the appeal of this broader market.

"Just a few years ago," says Bell, "if you wanted to be an Internet bank, you had to be able to write a check with six zeroes or more. Now there are many deals that are dramatically below $100,000."

S1's community banking offering is already building an audience among community banks, coming in third in Celent's small bank vendor ranking. Meanwhile, Corillian just announced its own competitive service for this space. Hickman expects that Brokat, too, will resell its Internet banking solution through service bureaus or data centers.

"Everyone wants the top banks," says Hickman. "You can charge millions of dollars and it sounds great to say you have Chase or a bank like that as a customer. But there's a lot of dynamic movement now, as Internet banking contracts are coming up for renewal."

TowerGroup's Bell points to S1's purchase of Q-Up as greater evidence of its growing down-market strategy. As the market matures, says Bell, some financial firms are going into their second and third rounds of deployment, and the base of banks offering such services is widening. He believes that by yearend more than 80% of banks in the $1 billion to $10 billion asset range and more than 30% of all retail financial institutions will offer Internet-based services.

Ultimately, the experts say the consolidation and competition of this space is likely to continue, even as the market grows.

"This past year has witnessed significant change in the Internet banking space. Consolidation occurred at a rapid clip as vendors pursued more diverse and integrated platforms and jockeyed to increase market share," Hickman says. "2001 will be a make of break year for a handful of firms struggling to survive. We expect a further condensed market next year."

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