CASE 9: Nexity and the U.S. Banking Industry Overview
Nexity, one of the nation’s leading virtual banks, was established in 1999 when David Long and Greg Lee, along with two other partners, formed the Nexity Financial Corporation, a bank holding company. company. An initial public offering in August of 1999 raised $22.5 million which was used to purchase the People’s State Bank of Grant, Alabama. Long, President, and Lee, CEO, relo reloca cate ted d the the offi office cess of the the Peop People le’s ’s Stat Statee Bank Bank,, chan change ged d the the name name to Nexity, and by February, 2000 Nexity had opened for operations. Nexity’s business model centered on keeping overhead costs low and passing the savings on to customers in the form of better rates while offering more and better products and services than other virtual banks. Nexity targeted a diverse geographic and demographic customer base throughout the U.S. and differentiated its services with a dedication to outstanding customer service. Nexity focused its marketing efforts on Internet-based advertising channels and direct direct mail mail advertis advertising, ing, and benefited benefited from free advertisi advertising ng through through articles in the New York Times and Wall Street Journal . While the number of virtual banks has declined since Nexity’s founding, Nexity has experienced continuous asset and deposit growth and broke even 18 months after it was established, compared to the industry standard of three years. Beginning in March, 2002 Nexity had experienced six straight profitable quarters and was poised for continued growth. The most signif significa icant nt threa threats ts to Nexit Nexity’s y’s futur futuree succe success ss includ included ed grow growing ing Inter Internet net fraud fraud,, which which raise raised d securi security ty concer concerns ns among among potent potential ial custom customer ers, s, and increasing competition from large, well-funded traditional banks with brand name recognition that seek proficiency in online banking in order to directly target Nexity’s customer base. Howeve However, r, in March March,, 20 2004 04 Nexit Nexity y had offi offices ces in Birm Birming ingham ham,, Alabam Alabama, a, Atlanta, Georgia, and Myrtle Beach, South Carolina and reported net income for for the the year year ende ended d Dece Decemb mber er 31 31,, 20 2003 03 of $4 $4,6 ,675 75,9 ,942 42,, comp compar ared ed with with $1,20 $1,206,7 6,730 30 du durin ring g the same same period period in 20 2002 02.. Nexit Nexity’s y’s return return on aver average age assets was 0.95% with a return on average equity of 17.21%; total deposits were $388.0 million, with total assets of $523.4 million and total loans of $324.1 million at December 31, 2003. According to Chairman Greg L. Lee: “2003 was a year of tremendous success and achievement for Nexity Financial Corporation. Corporation. In less than four years from its grand opening on February 22, 2000, Nexity has grown to over one-half billion in total assets and in 2003 generated over a
15% annual return on equity. . .Nexity will continue to seek attractive growth opportunities in its correspondent banking network and via the Internet that will improve our productivity and profitability.” As of 2004 the banking industry was continuing to make significant investments in online banking: A study by Treasury Strategies revealed that 34% of banks had web based payment services, 32% had web-based services under development, and the remaining 34% were not developing any web based payment services.
Information Technology spending on new browser-based cash management solutions was predicted to be $500 million on 2004 and grow to $635 million in 2005.
The number of U.S. households using online banking was expected to grow from 35.3 million in 2004 (with 57% of these households using online payment services) to 56 million in 2008 with 85% using online payment services.
U.S. commercial banks were expected to spend $4 billion on new technologies in 2004 and $5.3 billion annually by 2007.
However, the U.S. lagged behind Western Europe (47.7 million registered users in 2003) in terms of online banking and wireless banking (48 million in Europe in 2003, 42 million in Asia-Pacific, and 5 million in the U.S.).
QUESTIONS: 1) What is the competition like in the online banking industry? Which of the five competitive forces is the strongest? Which is the weakest? What is your assessment of the long run profitability of this segment based on your competitive analysis? 2) What does a SWOT analysis reveal about Nexity’s situation? Is the company in an attractive position? Has it built a competitive advantage? Is this advantage sustainable? 3) What issues do Nexity’s senior managers need to address? Which ones should be top priority? Which ones should be lower priority? Do you agree with David Long’s assessment that the future of Nexity is bright?
4) What recommendations would you make to David Long and Nexity’s top management team concerning the future of the company and how it can sustain its growth? What challenges might Long face in implementing your recommendations?
