A Look at the Future of E-Finance

After the recent deluge of online financial innovations, here's how it may all shake out

By Geoffrey Smith

A year ago, the financial-services industry was relentlessly pursuing new inventions for the Web. Companies chased after person-to-person payments, financial portals, online investment advice, scan-and-bill pay services, and statement aggregation as if e-laggards would face obsolescence.

Now, many of these technologies themselves appear destined for the great silicon scrapheap. Indeed, too much stuff has been crammed onto the Web too quickly, and some should either disappear or undergo a major overhaul.

Here's a rundown of some of the major trends in online finance and where I think they're headed:

-- Many financial portals from nonfinancial companies will disappear as more Web traffic migrates to brokers, banks, and a handful of leading nonfinancial sites. The big brokers and banks are hungry for this space for an obvious reason: That's where the money is. Still, Yahoo! and America Online have become such important repositories of financial information, they should continue to thrive. Though there's little chance they can become financial-services providers, they hold great potential to expand their audience.

One example of a nonfinancial portal that could be on the losing end of this trend is Microsoft's Moneycentral.com (moneycentral.msn.com). Investors are eager for investment advice, but they might want to think twice before following the recommendations they find here. The site contains a "Research Wizard" tool for evaluating stocks, and -- surprise, surprise -- it says Microsoft's very own shares would be worth $105 if the giant were valued similarly to its peer software companies instead of at a discount. Microsoft's shares recently traded at $62. To be sure, the program doesn't recommend buying or selling stocks based on its Research Wizard, but if you take its advice on faith, I've got a bridge to sell you. In addition, Moneycentral has yet to find a satisfactory mix of useful financial information and ads.

-- Online investment advice will remain the broker's domain -- it's just too hard to turn into a mass-market product. Companies can spend millions of dollars building fabulous technology to give investment advice, but their efforts will find only limited markets. By contrast, analytical tools for evaluating portfolios and analyzing personal-spending patterns will become even more complex and useful than they already are, and some may even find large markets.

-- Online bill presentment through banks may never happen, because of a hopelessly complex set of conflicting interests between banks and billers. Instead, look for bills to be sent via e-mail.

-- Scan-and-pay bill payment will wither, if not die. Bill-payment services offered by banks are increasingly popular and consistently more reliable.

-- Account aggregation will slowly catch on. In the last few months, it has become the rage at many top banks and brokers. But consumers won't widely adopt the technology until it is improved. At least two added features are needed to make this happen: One is better analytical tools. Simply viewing multiple account balances in one place isn't very useful. Also needed is interbank transfer technology to enable simple transfers between accounts and different institutions. Stick this on a wireless device, and someone might notice.

-- Easier interbank transfers might come online this year, but I won't count on it. This technology is one of my favorites because it has the potential to jump-start a large market -- mobile commerce. Once deployed, it will allow consumers to easily transfer funds from their bank or brokerage accounts to another financial institution, or any company or person equipped with the technology. Theoretically, consumers should be able to make payments at online stores without credit cards, or make person-to-person payments directly from their bank accounts. Because this could wreak havoc on the credit-card industry, and most banks sell credit cards, don't look for any revolutions overnight.

-- Wireless banking will be rolled out at hundreds of banks over the next 18 months. This is likely to remain a niche product, like wireless stock trading, because it initially will offer little advantage over online banking through a PC.

If you have any comments or questions about this column, please send an e-mail to the address below.

Smith covers a wide variety of topics, including personal finance issues, from BusinessWeek's Boston bureau.

You can e-mail him at geoff_smith@ebiz.businessweek.com.

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