Financial services on the Internet gained legitimacy last month when Dean Witter, Discover & Co. said it had agreed to acquire Lombard Institutional Brokerage Inc. of San Francisco. No longer would Lombard be regarded as a disintermediating thorn in the side of the traditional brokerage community. The company known to its public as is becoming part of that establishment.

But as American Banker reporter Drew Clark learned in this recent conversation with John H. MacIlwaine, chief technology officer of Lombard and president and chief executive officer of its Bay One Technologies subsidiary, there can be nothing traditional about a securities operation that does most of its business over the World Wide Web.


What is Lombard's history?

Lombard was formed in 1992 as a discount brokerage focusing on customer service and picking up the phone within two rings. We introduced the Internet stuff about a year ago, and that's when we really kind of blew out into the mainstream.

How did you get interested in doing discount trading over the Internet?

About three years ago, when I had saved up enough money to start playing the stock market, I called my father and asked what was the best way to start trading stocks. He said to open an account with Schwab. I called Schwab and it was busy, so I hung up, picked up a newspaper, saw a Lombard ad, walked down the block, opened the account, and started trading. At that point I said, Why can't one get this information over the Internet? One thing led to another, and we ended up doing a big project for Lombard.

Do you view the Internet as the primary means of trading in the future?

We don't think the Internet is exclusive. Lots of our customers will use the Internet and will want to talk to a broker. Lombard has 7x24 live broker access; that is the difference between us and the E-Trades of the world who are purely electronic. I think it is an important distinction. The company is not going to cater to just an Internet type of crowd.

Having said that, Internet trading has gone from 0% to 50% of our revenue in one year. So it is quite an active crowd and a pretty popular channel. We have 45% of our account base registered to use the Internet.

What kind of numbers are we talking about?

Lombard has 50,000 clients. We also have a public access side that has 320,000 registered users.

Public access lets people come in and kick the tires, check out what kind of technology we have and what services we can provide. We also think it is a pretty good revenue channel - we have advertising revenue coming in and we can put marketing materials up. That side is getting a million hits per day and is good for generating leads.

Why is the Internet activity growing so fast?

It is an extremely effective, available mechanism giving people control and access on their own time schedules. It is a perfect medium for the financial industry, which is very analytical and transaction-oriented. I can't give an intra-day graph over the telephone.

Because many companies provide access to the Internet, people can get to it when they are at work, which is generally when the markets are open, and they don't pay for that access.

How do you see the Internet affecting other areas of finance?

It is going to be the mechanism by which all financial service information is merged. The Internet and Internet-type technologies are going to lead to financial convergence, so you will very shortly be able to see your bank and brokerage statements within one particular Web page. Historically, proprietary systems could not be integrated. With open technology, it will be possible to get one seamless statement, even if there is no joint venture between the bank and brokerage.

What implications is that going to have?

We see a bank and brokerage firm being the same institution in a few years. You are going to be able to go to your brokerage firm and do all the banking that you need, and vice versa. The catalyst, or the stimulus, is Internet technology.

Banks have traditionally been very poor at executing a brokerage- type operation. They don't get it, they don't know how to do it, it is not their business model. They partner with discount brokerage firms to provide the stability through cobranding.

What causes the great divide?

When you think "bank" you still think of security, and with brokerage firms you think risk. I don't necessarily see that changing. On the technology side, banks are somewhat voluminous batch-oriented systems; they do a mainframe download of all the checking activity once a day. Brokerages are more real-time, transactional, complex operations. They are very different institutions on the technical side.

You can go to Wells Fargo and buy a mutual fund in the lobby, but you won't go there to buy Iomega call options. Nobody does that. They are competing with full-service firms, if you can say competing. Every brokerage-firm customer is a lost bank customer, because if the bank was successful, then the assets would have stayed in the bank.

Similarly, lots of capital is coming out of full-service brokerage firms and into discount firms, and the brokers are trying to cater to banking needs. Now you can get check-writing and ATM-debit and credit cards from brokerage firms.

Do you see any problems for the brokers crossing over into banking?

The biggest problem is this notion of risk. Banks have a majority of customers, and inertia is always in favor of the bank. People think banks are secure, and they want to keep their money there.

Children saving money don't walk down to Lombard and open an account; they go to the corner bank. I tend to think that will take a long time to change.

But it is much easier for a brokerage to do banking-type transactions than vice versa. Few obstacles are in their way. They pay much higher returns and don't have many of the service fees you associate with banks.

Are there banks that do "get it" or are in a position to take advantage of technology like you did?

You have Security First Network Bank, and I know they are trying to move into brokerage. I think the successful banks now understand that they need to have some sort of discount brokerage presence. American Express jumped into the brokerage game and is making a lot of big banks nervous. Banks can be, and to some extent have been, successful in mutual funds.

Your company, Bay One, is offering the Lombard technology to other financial institutions. What is your sales pitch?

We can bring up stockbrokerage with Internet access within three to five months. That is a time-to-market advantage, using something that is known, well-tested, proven to be successful, continually updated, and all those kind of things.

Do you think about software companies like Microsoft and Intuit as competition?

Technology companies, banks, and brokerages are the three players in financial services. (Intuit chairman) Scott Cook and (Microsoft chairman) Bill Gates understand that, and we've got IBM and Integrion and those kinds of players. But a Microsoft generally does not get into the idiosyncracies and complexities of developing and deploying these systems. They are more, "How can sell a million copies of this application?"

I am more worried about the information systems departments of banks and brokerage firms that want to do it themselves, and potentially the Quickens of the world that are capturing large markets and relationships with some of the larger institutions.

What about the on-line services like America Online, Compuserve, and Prodigy?

They are all becoming just big Web sites. I think they are going to have a very difficult time continuing to be able to charge for content. But they are capable of bringing financial institutions together - in a way that leads to a commoditization of their business.

If you go to Compuserve and you are brokerage firm 12 on a list of 20, how will the clients differentiate you from the other 19? In brokerage there is a risk that they will do that on price, and Compuserve becomes the intermediary between the institution and its customer.

As for the Quicken network, which has signed up lots of banks, my question is: What happens when Quicken comes out with their own bank, and their icon is slightly bigger than all the others on the list?

And if I am a bank and withdraw from Quicken because I no longer want to give Scott Cook a percentage of my transaction fee, Intuit will send a letter saying, this bank is no longer a member of this network, but there are 25 others that would be happy to take your business. I think banks realize the danger now. Most are coming up with their own Internet home banking strategies to maintain the direct connection with their customers and not become commoditized by a Quicken or an on-line service.

What do you feel will be the access medium of the future - a PC, a network computer, the WebTV approach?

It is somewhat irrelevant how people get to Lombard. My personal opinion is that people are going to want to perform certain transactions anywhere. Therefore, systems that are loaded onto your hard disk at home are going to be inconvenient. I believe in the Web-centric environment where I can go to any terminal, log in, perform any function I want to, and get a reasonable real-time view of my finances.

How do you do your banking?

The only reason I have a bank is to deposit third-party checks and get cash from the ATM. My pay is directly deposited into, and all of my savings are in, the brokerage account, and I write checks off of it.

Then what are banks for?

I really don't see a role for banks. Why do you need a bank if you can do all these things at a brokerage firm? Your money is insured, there are no service fees, and you get a higher interest rate. I think banking is going to converge with the brokerage and insurance industries, creating a financial hub by which you'll be able to do any of these transactions all over the world.

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