Euro E Bank Whiz

Fidelity brushed off Gerhard Huber's big idea for online financial services. Big mistake

Like all good Internet stories, this one starts in a garage. Not in Silicon Valley, but at a well-appointed abode in Surrey, England. In 1997, the brokerage arm of Boston mutual fund giant Fidelity Investments retreated from Europe, axing London-based Managing Director Gerhard Huber and a half- dozen of his colleagues. The laid-off financiers took their generous severance packages, retreated to Huber's garage, and plotted their future. "We had wanted to create a financial supermarket and deliver it through the Internet for Fidelity," recalls Huber. "Since they didn't want our idea, we decided to do it by ourselves."

Smart decision. Today, the company Huber started with his colleagues is one of the leading incubators for Internet-finance companies in Europe. Enba, as their firm is called, has started up four companies that offer everything from savings accounts for individuals to investment- banking services for corporations. Huber established Enba in Dublin to take advantage of Ireland's low taxes and to give himself the latitude to start up new companies anywhere in the world. "If I were in Britain, everybody would think I was a British institution when I want to open up in Germany," he says.

One recent deal underscores Enba's growing clout. In March, the company's Internet bank, first-e, agreed to merge with the Net bank created by Spain's giant Bank Bilbao Vizcaya Argentaria (BBVA) and Terra Networks, the top Internet-service provider in Latin America and Southern Europe. Enba is getting a 32.5% stake in the combined entity, to be called the unofirst Group. And in a highly unusual move, BBVA and Terra have asked Huber to become CEO of unofirst--even while he continues to hatch new finance companies out of his incubator. "Huber is one of the world's most impressive dealmakers," says Michael Lafferty, chairman of Lafferty Group, a Dublin-based consulting firm. "Enba will be one of the top 20 survivors of global financial institutions that will dominate the world."

Outsized expectations for what is, after all, just a three-year-old company? Maybe not. Huber has been able to raise an astonishing $560 million for his ventures so far from Intel, Morgan Stanley, PaineWebber, and other investors. And he's putting that money to good use. Besides first-e, he cut a deal with Wit Capital, the pioneering New York-based online investment bank, to create Wit Capital Europe. It will distribute research and sell the stock of initial public offerings over the Net. And he has financed two promising startups that are wholly owned by Enba: factor-e provides back-office services such as handling mortgage payments and processing insurance claims. Xelector is a Web site that lets visitors comparison shop for credit cards, mortgages, and other financial services. "My goal is to become the preferred financial bookmark for customers all over the globe," says the 40-year-old Huber.

Here's why the smart money is betting on him. Back in the 1990s, banks in Europe figured they had little to fear from aggressive startups because, unlike in the U.S., it's extremely difficult for newcomers to get banking licenses. But Huber found an innovative way around the problem: He cut a deal with a small French bank called Banque d'Escompte. Under the terms of the agreement, Huber got to use the bank's license to start up first-e, and the bank took a small slice of equity in the Net bank. "When the established banks saw what Huber had accomplished, they got a nasty shock," says Lafferty. Huber cut a similar deal with Dresdner Kleinwort Benson to get into the brokerage business.

With that kind of aggressiveness and the economic benefits of the Net, Huber represents a serious threat to traditional finance companies. Consider the banking industry. From Germany's Deutsche Bank to Chicago's Bank One Corp., old-line firms depend on costly downtown real estate for branches and legions of back-office workers. The "back office" for Huber's first-e bank consists of 300 workers on two floors of a modern Dublin office building. "There would be 3,000 people in a regular bank doing the same work," says Bernd Rausch, the director of the department and a former Arthur Andersen banking consultant. Rausch says it costs about a dollar to handle a transaction at a bank branch--and only 2 cents on the Internet.

Huber is using that cost advantage to attract clients. First-e is paying British customers 6.81% interest on their savings accounts, or about two percentage points higher than rates most competitors pay. "That's our Trojan Horse into the customer's wallet," Huber says. That has helped first-e attract 71,000 customers since it started in November. Once he's in with customers, Huber figures he'll be able to sell them other financial products, including brokerage services and insurance.

Those additional services, which Huber expects to roll out by the end of June, are part of the reason his venture is likely to fare better than floundering American Internet banks, such as Netbank Inc. U.S. banks are prohibited from offering brokerage services, while Huber will be able to market the stock-trading services that have proved very popular on the Net. "In Europe, banks don't have the same regulatory problems as in the U.S.," says Nick Jones, an analyst at market researcher Jupiter Communications. What's more, Huber won't have the same problems with automated teller machines. In the U.S., customers shied away from Net banks because they had to pay a buck or two every time they went to an ATM owned by another bank. In Europe, customers often are not charged such fees.

Still, Europe's established banks and finance players are conceding nothing to Huber. Old-line institutions, including Germany's Commerzbank and Britain's Prudential Assurance, have launched their own e-subsidiaries--and already, they have hundreds of thousands more customers than Huber. For example, Prudential's Egg Group Internet bank has 800,000 accounts, and Scandinavia's MeritaNordbanken boasts 1.5 million online customers. "Startups such as Enba, with only thousands of customers, are just in a different league from us," says Bo Harald, executive vice-president for Net banking at MeritaNordbanken.

Not to worry, says Huber. The number of existing accounts today has little to do with business prospects in the future. He points out that MeritaNordbanken started several years before first-e and his Net bank is attracting 600 new customers a day. That should accelerate once the bank's merger closes and the combined entity has access to Terra's 750,000 customers and BBVA's 10 million clients.

Huber charges that Egg, MeritaNordbanken, and other established institutions are taking low-value banking customers, not the younger, wealthier Net surfers that he's getting. "The average Egg customer is 50 years old, with $5,000 in deposits, while our average customer is 30 years old, with $30,000 in deposits," Huber says. Egg didn't return calls seeking comment.

Huber figures he has an edge over traditional players such as MeritaNordbanken because his businesses are international. First-e, for example, cut a deal with Singapore's Overseas Union Bank in April to create a joint venture that will provide Internet banking services in Singapore, Hong Kong, Australia, and other Southeast Asian markets. Once the unofirst merger is complete, Huber plans to market the Net bank's services throughout Europe and Latin America. With the help of Enba investor PaineWebber, Huber even plans to expand unofirst into the U.S. to take on companies such as Charles Schwab and Merrill Lynch. "It would take other banks decades to roll out this plan," he says.

He plans to be not only broader, but better. One advantage Huber has in working at incubator Enba is that he can create new businesses with services that appeal to specific customers. Wit Capital Europe, for instance, will have the stock research and IPO shares that are likely to appeal to unofirst clients. To add to the value of those services, Wit Capital Europe sold a 10% stake to Cazenove, the top stock underwriter in Britain, so that it can have access to more initial public offerings. Similarly, the Xelector site's comparison of financial products probably will appeal to unofirst and Wit Capital Europe customers. "[Other Net banks] offer you the same type of services you get in regular branches," says Huber. "And they won't be fast in offering them."

Huber's personal history sheds some light on why he is so ready to break from tradition. Born to a pediatrician in Salzburg, Austria, he has been in self-imposed exile since he finished his education. He finds his native country too small and insular for his taste. And the rise to power of the far-rightist Jorg Haider has appalled him. "I am so glad we didn't decide to set up business in Austria," he says.

After receiving accounting and law degrees from Austrian universities, Huber left the country to make his career. U.S. accounting firm KPMG posted him in Frankfurt, New York, and Paris. In America, he met and married Amy Clarke, a descendent of the Pilgrims, and started a family that has grown to include four children. In France, he became a lover of fine food and first-growth Bordeaux wines. He quit KPMG in 1992 to join Germany's HypoVereinsbank and set up Direct Anlage Bank, a subsidiary that conducts all business with customers over the telephone.

In 1995, he left for Fidelity, where he hoped to create the first online pan-European brokerage. But he ran into a nasty setback: His boss retired after four months, and his replacement didn't believe in expanding outside of Britain. Worse, Fidelity's back office was in such disarray that the British equivalent of the Securities & Exchange Commission almost closed the operation down. "Instead of mapping out an expansion plan, I was dealing with 5,000 customer complaints a day," Huber recalls. It was only after Fidelity shuttered its brokerage operations in Europe that Huber pursued his dream.

These days, Huber is working like a man with some catching up to do. When Enba's technology director, Shane Colclough, wanted to launch a project to provide mobile-phone banking, Huber gave him the green light--and funding--in a single day. "If I wanted to get something like that approved at the big bureaucracy where I used to work, it would have taken months--and tons of committees," says Colclough. Enba is growing so fast, from 13 employees a year ago to more than 400 today, that Huber shares a desk with his secretary. Job interviews are conducted in the entry hall because of the lack of space.

As he builds Enba, Huber needs to retain that kind of startup atmosphere. To compete against the likes of MeritaNordbanken, he'll have to move faster and be more innovative than traditional financial institutions. Outsiders like his chances. "I think Huber's vision is going to revolutionize global finance," says Nina Lytton, a managing director at Global Crossing, a Boston firm that organizes conferences for Net companies. Leave it to an Austrian living in Surrey and working in Dublin to understand the world's financial needs.

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