What the analysts say

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The names Gary Craft, Richard Zandi, Michael Hodes and Stephen Franco are hardly household names. But they're becoming quite well-known to b-to-b e-financiers at banks and banking technology vendors.

Deutsche Banc Alex. Brown's Craft, Donaldson Lufkin & Jenrette's Zandi, Goldman Sachs & Co.'s Hodes and U.S. Bancorp Piper Jaffray's Franco are emerging as the top brokerage analysts in the e-finance arena.

Here, they give their takes on the state of b-to-b e-finance. For banks, the outlook isn't pretty. The four panned most banks for a lack of Internet ingenuity and limited product selection. For vendors, the analysts' outlook is better, especially when it comes to bill presentment and payment technologies.

Expect what these four say, whether it proves to be on target or not, to hold increasing sway in the b-to-b e-finance world.

Name: Gary Craft
Title: Managing director-electronic finance
Company: Deutsche Banc Alex. Brown
Top e-banks: "I don't think any bank has really done a good job. But Chase Manhattan Bank Corp. is the top producer in cash management and Wells Fargo & Co. is on the fringes."
B-to-b e-finance prediction: "The e-finance marketplaces will be neutral, not supply-centric."
Top stock pick: Bottomline Technologies Inc., a bill payment and presentment solutions developer.

In 1995, Gary Craft wrote what is generally cited as the first online banking report. "No one was writing about this stuff," said Craft, who joined Deutsche Banc Alex. Brown in Januarycq. after a stint at online investment bank E*Offering Corp. "I thought it'd be a hot area. I decided to hang my hat on online banking."

In the late 1990s, Craft, like many brokerage analysts, rushed to cover the crackling retail online brokerage space but eventually decided he'd had enough. "You're not adding any value if you're the 13th evaluator of, say, Ameritrade Holding Corp."

He has since emerged as a leading booster of the b-to-b Internet bill presentment and payment industry. "Business bill presentment far outshadows the consumer side," said Craft, who works out of Deutsche's San Francisco office. "There are no latency issues here, as there are with consumers. Business will see this and will drive efficiencies. And they'll do it right away."

Craft's forecast of a bill payment and presentment boom, while getting louder, is not new. While an analyst at Robertson Stephens in 1997, he wrote the first major report on the topic, "A Tale of Two Camps." His top stock pick is Bottomline Technologies Inc., which he believes is best-positioned as a b-to-b financial intermediary.

Craft predicts troubles for big banks in b-to-b e-finance if things continue on their present path. He noted a lack of product neutrality in the bank-hosted Web hubs. While he said Wells Fargo and Chase Manhattan have done passable jobs, most banks' Web efforts are downright scary.

"Banks have been pitiful in trying to blend in their Internet platforms," he said. "The big banks have built a whole suite of Internet products based on distribution. And a lot of these are inferior products."

Big banks are rushing to launch transactional b-to-b portals-with only their own financial products available. Some, including Chase and Citigroup, have joined to launch joint b-to-b payment platforms. Unless banks open these sites to competing products, Craft sees most flopping. "Banks have failed to offer choice," he said. "Today these institutions are set up around relationships. But what will happen is an unbundling of them."

Name: Richard Zandi
Title: VP-equity research analyst, e-finance
Company: Donaldson Lufkin & Jenrette
Top e-banks: "I have not seen a legacy bank doing a good job on the Internet." Zandi said Citigroup has the most potential.
B-to-b e-finance prediction: "Financial institutions will hollow out as they outsource their back-office functions to vendors."
Top stock pick: E*Trade Group, the third-largest online brokerage.

Richard Zandi started out in 1983 as a first-year investment banking analyst-Wall Street's version of infantry duty-at Lehman Bros. He soon left to get a dual master's degree in science and engineering and an MBA at the Wharton School of Business. He didn't forget finance, but concentrated on other things.

The attraction of quick money pulled him back to Wall Street, this time at Smith Barney. He soon bolted to start his own software company, Hudson River Works, which he ran for a decade before going to Smith Barney execs to ask for venture capital funding in 1996. They didn't want to bankroll Hudson River, but instead gave Zandi an offer he couldn't refuse. "They wouldn't fund me," Zandi said. "But they did have an analyst position for me."

Zandi, who left Smith Barney to join Donaldson Lufkin & Jenrette in February to head up e-finance research, has become one of the Street's leading Internet banking watchers.

He said no bank has yet done a good job on the Internet. But giants such as Citigroup will probably succeed on sheer mass alone, he said, while regional and smaller banks will need to specialize to survive.

"Citigroup has a cost and pricing advantage over the mid-market banks," Zandi said. Power banks such as Citigroup have in recent years cemented their relationships with Fortune 500 clients, and the Internet will quicken this trend, he said.

Regional banks will need to outsource their Internet operations to technology vendors and concentrate on offline service, he said. "They will concentrate on what banks do best-relationships," said Zandi, who works out of Donaldson, Lufkin & Jenrette's Park Avenue offices in New York.

Smaller and online-only banks will need to aim their Internet services at specific sectors, such as gas stations or dry cleaners, Zandi said. This will let them carve out profitable niches that are currently underserved, he said.

Zandi's top stock pick is E*Trade Group. He said the Menlo Park, Calif.-based Web brokerage is among the best-positioned financial companies to gain from the globalization of financial services. E*Trade, which has consumer roots, recently branched into b-to-b with an options site aimed at retirement plan administrators. It has also launched a $300 million venture capital fund.

Name: Michael Hodes
Title: VP-securities analyst, e-finance
Company: Goldman Sachs & Co.
Top e-banks: "We've generally been disappointed and see a lot of room for improvement."
B-to-b e-finance prediction: "Bill presentment is going to be a very big space."
Top stock pick: S1 Corp., an Atlanta-based Web banking software developer.

Michael Hodes' introspective demeanor and careful speech reminds one of the patricians who used to run investment banks, rather than hard-charging types who do today. "I didn't mind wearing a suit," he said, when asked how he has taken to Goldman Sachs' recently adopted all-the-time casual dress policy.

His traditionalism, however, ends there.

Over the past half year, Hodes, who heads Goldman's e-finance research team, has emerged as one of the leading authorities on the topic, which is only beginning to garner attention in the larger Internet world.

Like other top e-finance analysts, he is down on the big banks. But more than most, he thinks the technology vendors could come to dominate the space.

"Non-banks will be very successful," said Hodes, who holds a bachelor's degree in mathematics and economics from Cornell University and joined Goldman in 1994. Some bank execs fret that vendors will cut them out and deal with businesses directly, or as an Internet financial link between businesses.

Hodes' top vendor stock pick is S1 Corp. "With a year time horizon we would focus people on S1," Hodes said. He points to the vendor's big bank customer base and a recent marketing pact with IBM Corp. as evidence of S1's momentum.

Small-business e-finance is another area with big potential for vendors, Hodes said. He said Intuit is in the pole position for this demographic. "Part of our enthusiasm for small business is our analysis of Intuit," he said. "Intuit has 5 million small-business users. This is very powerful." Intuit has signed business insurance marketing deals with powerhouses such as Hartford Life within the past year.

Hodes is also sanguine on bill presentment and payment. Checkfree Holding Corp., which builds bill payment and presentment platforms, is best-suited to lead this space, he said. "Checkfree has a strong position here, working with nine of the top 10 banks," he said.

Name: Stephen Franco
Title: Senior research analyst-e-finance
Company: U.S. Bancorp Piper Jaffray
Top e-banks: "It's too early for me to handicap them." He said Chase Manhattan Bank Corp. has the early lead.
B-to-b e-finance prediction: Franco said wholesale banking exchanges hold the most potential.
Top stock pick: eSpeed Inc., an online exchange for wholesale financial products such as bonds.

Stephen Franco in 1998 inherited what was one of the least-enviable brokerage analyst jobs-replacing Bill Burnham. His predecessor, now a mega-millionaire partner with Softbank Capital Partners L.P., had achieved minor celebrity status among financiers by being the first to predict online stock trading boom. "Bill was the first analyst to really see e-commerce coming," said Franco, who works out of U.S. Bancorp's San Francisco office.

Franco started out by concentrating much of his coverage, too, on the online brokerages. He has since refocused on b-to-b e-finance, although he still covers online brokerages such as Ameritrade Holding Corp. and National Discount Brokers Group.

"I spend 70% of my time on b-to-b, 30% on business-to-consumer," said Franco, who holds an MBA from Boston University. "That's the exact opposite of last year."

While Franco's work has not yet generated as much buzz as Burnham's, he is attracting a growing following for his solid coverage of b-to-b players such as Checkfree Holding Corp. and eSpeed Inc.

Franco is down on many non-financial b-to-b exchanges. "Most b-to-b exchanges are going public with nosebleed valuations and little business," he said. He does, however, view some financial product exchanges favorably.

Franco's stock pick, eSpeed Inc., is one. He likes it precisely because it has built-in business-its parent company is interbroker-dealer giant Cantor Fitzgerald. Since Franco began covering eSpeed, the company announced it would expand beyond bonds and into non-financial exchanges such as hubs for natural gas and electricity.

Franco is banking on his non-financial Internet experience to provide sound coverage on companies such as eSpeed. He is one of a growing number of brokerage analysts who, like Donaldson Lufkin & Jenrette's Zandi, is equally comfortable with tech specialists and money men. Prior to joining U.S. Bancorp in the mid-1990s, he oversaw general e-commerce coverage at Boston-based Internet consultancy The Yankee Group.

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