Bank product auctions are gradually gaining traction as they reach beyond consumer loans into other products and businesses. But regulatory concerns and hard times will keep the retail banking bazaar from rapid growth in the short term. Writer Karen Epper Hoffman
As confidence in the retail banking industry continues to be hit by the global financial crisis, US customers are being more proactive - not only in managing their bank accounts but also in setting the terms and conditions of their banking relationship.
Bank product auctions, where consumers congregate to 'bid' on products with rates or terms that suit their needs, emerged a few years ago with the rise of websites such as Zopa in the UK and Prosper in the US. These online marketplaces focused initially on retail lending or so-called peer-to-peer personal loans, whereby individual borrowers would be matched with individual lenders based on the loan amounts, rates and terms.
These bank product bazaars are evolving to include more than just loans. In the US, a number of bank-run and non-bank third-party sites have been sprouting up, where consumers can shop and bid on certificates of deposit (CD), high-yield savings accounts and even small business receivables.
Different approaches
There are some broad differences in the way these various sites actually manage the auction process. Experts maintain that some of these marketplaces are more about 'lead generation' for traditional financial institutions, while others are hoping to revamp the entire bank product acquisition process to take financial companies out of the mix entirely.
The expansion of the concept and the use of these bank product marketplaces, however, reflects a growing trend in which retail banking customers take control of the acquisition of the most basic financial instruments. "It's the purest form of pricing," says Jim Bruene, founder of Online Financial Innovations, a Seattle-based company that tracks financial technology trends. "This is how the big capital markets work. This is how big money sets prices and rates."
Breaking new ground
One of the earliest pioneers and one of the only US banks to develop the concept of 'auctions' on the deposit side is Zions First National Bank, a Utah-based unit of Zions Bancorp. Since its site was launched in March 2007, online users have been able to bid on rates for Federal Deposit Insurance Corporation-covered CDs for sums as low as $1000 through Zions Direct, a non-bank subsidiary overseen by the National Association of Securities Dealers. Since then, the market has expanded to offer corporate and municipal bonds and other securities for auction.
The process works much like an internet auction, with investors setting the yield they are willing to pay and the maturity on the CDs available from a number of banks.
"The phenomenal success of internet auctions leads us to believe that the market is ready to accept a similar model for financial products," says W David Hemingway, executive vice-president Zions Bank. In March, the Zions Direct auction site received more than 18,000 visits - three times more than the previous year. Auctions were also up 71% earlier this year, higher than 2008 numbers, with 8000 bidders in February alone.
According to his blog, Mr Bruene sees Zions Direct's approach as a "great way to introduce a bit of Web 2.0-style innovation into what is mostly a commodity".
Zions Direct is one of the only US sites in the bank auction business that is owned by a banking outfit, but it was not the first. Both Pittsburgh-based PNC Financial Services Group and the former Washington Mutual (now owned by JPMorgan Chase) made failed attempts at auctioning CDs in the early 2000s, Mr Bruene points out.
Unlike these early attempts, however, Zions Direct Auctions have richer features and are arguably more appealing to consumers at a time when they are not only more comfortable conducting financial business online but they are also keener to shop around for specific deals rather than have their terms set by the local bank.
More recently, non-bank upstart Money-Aisle rolled out its own CD and high-yield savings auctions in July 2008. Similarly, investors choose how much they want to deposit and for how long, and they are matched with a suitable product from one of more than 112 banks for a small fee. Monthly hits on the site multiplied five times in the eight months from its full-operation launch, with more than 75,000 visitors in February 2009. In the fourth quarter of 2008, Money-Aisle auctions generated $100m.
SME opportunities
Small to medium-sized enterprises are also stepping into the fray. In November 2008, the Receivables Exchange of New Orleans opened a financial market where businesses with as little as $1.5m in annual sales can borrow against their receivables by auctioning them off at market. The company's pitch to would-be borrowers is that "in an era of tight credit" this presents another option for smaller companies to build their liquidity and acquire financing - an alternative larger companies can find through commercial paper and established capital markets.
Businesses register with the exchange by uploading their financial statements and completing an application. Participating businesses must have two years of operating history and may list specific invoices for financing with a minimum total value of $10,000.
Investors accredited by the US Securities and Exchange Commission (SEC) can bid to provide short-term financing until the receivables are collected. Sellers select the terms they are willing to accept, and the bidder that beats the terms by the widest margin wins; if no bidder meets the minimum terms, the auction ends without a trade.
Currently, sellers must also be registered to do business in the US, although exchange founder and president Nic Perkin says he and his partner plan to expand into Europe and Asia soon. He says volumes are still modest - typically an average of $1m a day in auctions.
But he believes the flexibility and transparency of the exchange transaction structure, which reduces the cost of capital by 10%, will attract sellers as well as buyers, who will see this as an opportunity to diversify their portfolio of investments, especially in this turbulent investment environment.
"The economic factors have contributed in a few ways," says Mr Perkin. "You have a large group of [these companies] that have had their credit cards and lines of credit cut, and they still need to manage and grow their business."
Buyers and sellers
Critics of the auction model point out that these auctions do not always yield the best rates or terms for users who might do better by just shopping around among traditional financial institutions. And some, such as Mr Bruene, say many of these exchanges - those that are allowing bidders to choose among a set of predetermined bank products - are more akin to eBay's 'Buy It Now' feature, and less like a true auction.
Also, auction companies that move ahead too fast may find the road a little rocky. Prosper's innovative peer-to-peer model - where consumers could act as both borrower and lender - raised concern at the SEC, which saw Prosper's transactions as more akin to those associated with securities. The pioneering auction site, which brokered an estimated $180m in loans in two and a half years, has been in a government-enforced 'quiet period' since October 2008. Prosper is again in a quiet period while the company seeks SEC approval for its lending platform, according to CEO and founder Chris Larsen.
"I love what Prosper has done for loans," says Mr Bruene. "But the SEC decided it was a security rather than a loan, and should be regulated as a securities dealer."
He adds that the shutdown has had something of a chilling effect on start-ups that sought to pursue a bank auction model, particularly with loans.
Peer-to-peer lending site Loanio, launched in October 2008, is a case in point: the company recently decided to close shop due to regulatory fears. "The financial services industry is a funny thing. New technology often gets [restricted] by regulators," says Mr Larsen.
While the current economic environment has dampened interest in new modes of acquiring products, it has also depleted the coffers for many consumers and companies that might otherwise have been keen to go down the auction route. When the idea to develop MoneyAisle first began four and a half years ago, CEO Mukesh Chatter says the demand for deposits was high. "The investment banking issues [since then] have made matters worse. Now there's a lot of money going to [deposits] at large banks."
Consumers wary
Mr Bruene says some consumers - frightened by the failure of even the largest and most stable financial brands - might be wary about seeking deposit or loan instruments through an auction "being run by a company that's not a household name". He adds: "Anything new, when it comes to your money, people are going to be more sceptical about."
Still, proponents of the auction model believe that in the long term the current financial industry strife will necessitate the growth of the banking marketplace, as consumers and financial providers rebuild the broken system. And financial systems that offer more transparency, flexibility and consumer control might well attract more attention.
"The credit crisis has created a tremendous period of change," says Prosper's Mr Larsen. "We're in the midst of a massive movement."
