The 2003 Online Finance 40

Our fourth annual selection of the upstarts and veterans, the entrepreneurs and chief executives, who are leading the way in the world of e-finance.

Our fourth annual selection of the upstarts and veterans, the entrepreneurs and chief executives, who are leading the way in the world of e-finance.

By Jeffrey Kutler
March 2003
Institutional Investor Magazine

THE TECHNOLOGY CRASH THREE YEARS ago hit few areas harder than online financial services. As profits evaporated in the bear market, so did the financial industry’s predilection for throwing money at dubious Internet business models. How, then, to explain the staying power -- and, in a growing number of cases, the profitability -- of a select few e-finance enterprises born of the dot-com boom?

Call it post-Internet Darwinism. The fittest of the e-finance innovators, highlighted in Institutional Investor’s annual ranking, gained an edge with Internet-based technological building blocks that are cheaper, more flexible and quicker to implement than older systems and networks. That’s true not only of those that built entire new businesses on an Internet platform -- consider Financial Engines’ advisory portal (see William Sharpe, No. 9) -- but also of companies that used the Net to complement traditional delivery channels, like Wells Fargo & Co. (Clyde Ostler, No. 2) and Bank of America Corp. (John Rosenfeld, No. 3). Nor has the elite’s commitment wavered in tough times. Says James Hale III of venture capital firm Financial Technology Ventures (No. 25), “They know they have to keep investing to stay competitive.”

The Online 40 profiles were compiled under the direction of Global Technology and Banking Editor Jeffrey Kutler and written by Kutler; Senior Editor Steven Brull; Senior Writers Deepak Gopinath and Justin Schack; Staff Writers Jenny Anderson and Rich Blake; and Contributors Jane Adams and John Wagley.




“What’s key is making good, easy tools aimed at all segments and all levels of sophistication and age groups.”

Fueled by a $2 billion technology budget, which it is holding steady this year, Fidelity Investments continues to build on the pioneering Internet work that resulted in the launch nine years ago of the NetBenefits portal for retirement plan participants. Steven Elterich, who ran that project before becoming e-business czar at the Boston-based mutual fund giant, notes that Fidelity’s commitment to jumping on new technology opportunities early has paid off: At the end of 2002, 55 percent of Fidelity’s 8.8 million retail accounts were online; 89 percent of its equity trades and 54 percent of its mutual fund transactions were completed over the Internet. In December Elterich’s group unveiled a set of Web-based upgrades for sponsors of employee benefits plans -- the start of a two-year effort to improve the technology of the firm’s fast-growing employer services business. “The Web has been very good at providing data and doing transactions,” says the 53-year-old Elterich. “What the Web hasn’t been good at is providing people with assistance in making decisions.” That’s the goal for 2003: Elterich plans to roll out simplified portfolio planning tools and to make it easier for telephone representatives to see the same desktop screen that a client sees when discussing investment issues.




“Building a Web site from scratch is interesting and noteworthy, but it’s even better when you can sustain that growth and gain in sales and revenue.”

Wells Fargo & Co. launched the first consumer Internet banking service in 1995 and has never looked back. Last year alone its active online customers increased 27 percent, to 3.6 million, or a third of the retail bank’s total. “The only bank that really compares is Bank of America, and it has a much bigger retail base,” notes Christopher Musto, vice president of research at Waltham, Massachusettsbased consulting firm Gómez. Clyde Ostler, who oversees San Franciscobased Wells’s Internet initiatives, says the key to success was integrating the Net into broader marketing strategy. “Using the Internet to improve customer service is worth doing,” says the 55-year-old. “But actually turning it into a complementary sales channel is very worth doing.” It’s not just a retail play: Wells also has 300,000 businesses online, and more than half of its middle-market and large corporate customers utilize its Commercial Electronic Office portal to manage their cash positions. Wells increased revenues from another niche it dominates, Internet payments processing, by 85 percent last year, to $21.8 million. The company services most of the transactions for EBay subsidiary PayPal. “Last year was absolutely our best ever,” exults Ostler.




“In online bill payment we’re leaving the rest of the industry behind.”

Bank of America Corp. signaled the direction of its online banking strategy three years ago when it announced an alliance with CheckFree Corp. to push electronic bill payment services. Last year BofA made the offer that bill payers couldn’t refuse: free transactions with no minimum balance requirement. The result? A whopping 1.8 million increase in active online customers, to 4.7 million. “Our free bill-paying campaign was revolutionary,” says John Rosenfeld, 35, who championed the initiative after joining the Charlotte, North Carolinabased bank from General Electric Co. in 2001. “It challenged what everyone else in the industry was doing.” The service, which channels online payments to more than 220 companies, also paid bottom-line dividends: Online customers’ deposit balances are 30 percent higher than average, and loan balances are 40 percent higher, says Rosenfeld. These clients’ attrition rates are 80 percent lower than average, and after 19 months banking online, they are 14 percent more profitable. “Bill payment is one of the top three drivers of online customer satisfaction,” says Rosenfeld. “We’re always looking to drive value for customers.”




“In the early days people looked to us for word processing and spreadsheets -- not servers. They wouldn’t trust us for anything mission-critical.”

When he joined Microsoft Corp. in 1994, William Hartnett recalls, “you rarely heard anybody from the company speak at a financial industry conference.” The software giant had little of what’s now known as domain expertise. Hartnett, fresh from a 15-year career as an insurance agent, was one of a cadre of experienced executives Microsoft hired to help it get smart about key sectors like banking, health care, insurance and manufacturing -- to send the message that, as he puts it, “we’re serious about these industries.” Today, from his Redmond, Washington, base, Hartnett oversees a team of 300 who call on the biggest financial institutions, drilling down into issues like Web server reliability and straight-through processing. Hartnett, a Newport, Rhode Island, native and former sail maker who won a bronze medal in yachting at the 1979 Pan American Games, boasts, “We’re especially pleased with our capital markets penetration; we’re deep inside the Merrill Lynches, the Morgan Stanleys, the Goldman Sachses.”



“Investing is where our largest, most loyal base is.”

A successful online brokerage might serve a couple of million visitors on its Web site each month. The U.S. Yahoo! Finance channel gets at least 8 million, according to Nielsen/NetRatings. All those eyeballs make Nathan Richardson, Yahoo! Finance’s New Yorkbased general manager, the Web’s leading financial impresario. The site outdraws Intuit’s, Microsoft Corp.'s MSN Money and EBay’s PayPal -- each captures between 6 million and 8 million visitors, and none match the total Yahoo! worldwide population of 200 million. A former emerging-markets banker at Citigroup, Richardson, 32, heads a team that is constantly tweaking the site to attract Web surfers and the advertising revenue that makes Yahoo! a rare hot Internet property, with annual revenues exceeding $1 billion. “During the boom people came to our site to look at stocks,” says Richardson. “Now they’re looking at things such as taxes, credit management, lending and insurance.” Recent Yahoo! enhancements: a College Savings Center; an Industry Center, for investors following specific market sectors; and a link to Intuit’s TurboTax. Richardson also has eliminated ads that interrupt smooth navigation of the site. “Investors are serious people and want an easy-to-use experience,” he says.




“It was always obvious to me that checks would eventually get displaced.”

Like other e-finance executives who have weathered technology market storms, Peter Kight believes that the promised land is finally within sight. The CheckFree Corp. CEO, 46, started his payment processing company in his grandmother’s Columbus, Ohio, basement 22 years ago. CheckFree grew up to dominate electronic bill payment services, a business that didn’t catch on as fast as online banking and brokerage. Now online finance is maturing, and such institutions as CheckFree shareholder Bank of America Corp. are aggressively selling bill-paying (see John Rosenfeld, No. 3). Says Kight, “What you see happening at BofA is filtering out through the banking community.” Atlanta-based CheckFree -- still not profitable according to generally accepted accounting principles but enjoying double-digit revenue increases (12 percent, to $136 million, in the second fiscal quarter, ended December) -- has 784 financial services industry customers, which serve 8 million consumer bill payers. Still, this latter number, up 36 percent since year-end 2001, is 22 million shy of the prediction for 2006 that Kight made in 2001. “I’m sticking to that,” he says. “I’m convinced it would be at least 30 million if they knew it was available to them.”




“We remain focused on meeting customers’ needs for efficiency and speed -- and privacy and security.”

Citibank doesn’t operate the biggest online bank, and Salomon Smith Barney isn’t tops in e-brokerage. But add up all the Internet accounts of those and other Citigroup business lines -- credit cards and corporate and small-business banking -- and you get a whopping 18 million, more than at any other financial institution. “We have been successful in expanding our online customer base by being a low-cost provider,” says Robert Druskin, who as chief operations and technology officer is responsible for keeping the back-office engines firing. That customer total grew by 3 million over the past year as Citi introduced design and navigation improvements on its Web site. Examples: My Citi, a customizable home page; and an expanded Planning & Tools section that offers hundreds of budgeting and educational aids. “Citibank has gotten much more consistent in the way it clearly explains how features can be used online,” notes Paul Jamieson, president of FiSite Research, an Evergreen, Colorado based consulting firm. Druskin, 55, who concurrently serves as COO of the global corporate and investment bank, says that despite budget pressures, Citi continues to invest in online channels: “We will make investments particularly where we gain new market positions through our acquisition strategy. In our consumer finance business, for example, we see an opportunity to expand online capabilities for such products as mortgages and home equity lines of credit.”




“We’ve been focused on providing advice for a number of years. But last year there was a pretty aggressive push in that direction.”

Arm in arm with company founder and co-CEO Charles Schwab, David Pottruck led the largest discount brokerage to the No. 1 position online as well -- with more than 4 million Internet customers. But that meant the firm fell farther than others in this bear market. Now the burden of recovery rests on Pottruck, who becomes sole CEO May 9 when Schwab steps aside. In 2002 the company’s revenues declined 4 percent, to $4.1 billion, while operating profits fell by 3 percent, to $396 million. January’s average of 126,300 trades per day was 19 percent below the January 2002 level. But Pottruck, 54, has a plan centering on product diversification and advice-centered relationships with customers. “A combination of information, tools and guidance,” including a revamped adviser-referral program and an independent stock analysis service, he says, is in place. “With the launch of banking services such as mortgages and FDIC-insured checking on the near horizon,” adds Pottruck, “we think we’ve put together a collection of services that will serve investors of all types.”




“Google may be the greatest boon to knowledge. I almost never go to the library anymore.”

Bill Sharpe, Stanford University economist and Nobel prizewinner, has beaten the odds against Internet entrepreneurs. Financial Engines, the company he started in 1996, is providing retirement advice online to 4 million people through some 850 plan sponsors -- General Motors Corp. brought in 100,000 beneficiaries just last month -- and 15 financial institutions. “The Internet is absolutely phenomenal,” marvels the 68-year-old. “Twenty years ago it would have taken weeks and a couple hundred thousand dollars to produce the reports we deliver in seconds or minutes for next to nothing.” Sharpe leads Palo Alto, Californiabased Financial Engines’ small pension fund consulting practice and leaves day-to-day management to CEO Jeff Maggioncalda, a 34-year-old former McKinsey & Co. consultant who was the first hire by Sharpe and his co-founders -- Stanford law and business professor Joseph Grundfest and Venture Law Group co-founder Craig Johnson. Maggioncalda says Financial Engines is doubling its revenues annually and is on the cusp of being cash flow positive. Could an IPO be far behind? “There will come a point,” says Sharpe. “In terms of my involvement, that’s a second-order issue.”




“Compared to the last big new financial technology -- online bill paying -- aggregation is being adopted twice as fast.”

Three years ago, newly arrived at Yodlee from Gateway, Anil Arora faced an uproar from bankers complaining about his company’s technology for lifting customer data from their Web sites. Those tensions over “screen scraping” subsided as Redwood City, Californiabased Yodlee met the banks’ specifications for security and customer service. Nearly 200 institutions -- including virtually every top commercial bank and Wall Street firm -- now use Yodlee’s account aggregation system to give more than 3 million individuals a full view of their assets and transactions at all of their financial service providers. Although Yodlee claims a 95 to 98 percent share of the aggregation market, “Our customers haven’t yet put the full weight of their marketing programs behind this,” asserts the 42-year-old Arora. To give them a push, Yodlee last year commissioned an Oliver, Wyman & Co. study that showed that aggregation increased a brokerage firm’s profitability by $178 per customer over five years. On the strength of that data and a recent $24 million capital infusion from Accel Partners and Warburg Pincus, CEO Arora says, “I’m confident we’ll have double-digit millions of end users within a year.”




“Options market volume has grown to the point where institutions can now access the kind of liquidity they need for a large portfolio.”

Six years ago the International Securities Exchange was just a glimmer in the mind of co-founder and CEO David Krell. In January ISE passed the American Stock Exchange to become the second-largest U.S. options bourse, with a 25 percent market share, just a percentage point behind the Chicago Board Options Exchange. Traders praise ISE for capturing the best aspects of the traditional human auction in a fast, transparent electronic platform. Now the 56-year-old Krell -- who founded ISE with former E*Trade Group vice president Marty Averbuch, current ISE operating chief Gary Katz and former E*Trade chairman William Porter -- suggests that there might be other asset classes in its future. “We definitely have an interest,” he says. “But we’re going to approach it carefully.”




“Christos Cotsakos led the company for seven years. I’m ecstatic that now it’s my turn.”

E*Trade Group’s recently deposed CEO, Christos Cotsakos, tried desperately to portray the company as more than a mere online brokerage. But nothing that Cotsakos did -- including his attempt to rebrand the company last year as E*Trade Financial -- made the point as forcefully as the company’s choice of Mitchell Caplan to succeed him. Caplan was CEO of online bank Telebanc Financial Corp., which E*Trade acquired three years ago. E*Trade Bank, which Caplan ran until becoming E*Trade Group COO last year, now has more than $8 billion in deposits and owns the second-largest U.S. ATM network. Banking activities, including mortgage and auto lending, accounted for $459 million of the Menlo Park, Californiabased company’s $1.3 billion in net revenues last year. “I’m confident we have the right strategy and the right vision,” says Caplan, 45. “What I’m focused on now is taking us from adolescence to maturity as a company.”




“I don’t think anybody who works under me would describe me as a hands-off manager.”

As chairman of Island ECN in the late 1990s, Ed Nicoll was a thorn in the side of Instinet Group, slowly but surely chipping away at the Reuters Group subsidiary’s former monopoly in electronic stock trading. Now that Instinet has bought Island and installed Nicoll as CEO, the erstwhile sheep farmer and co-founder of Waterhouse Investor Services finds himself in the unaccustomed position of protecting a lead. The early signs are encouraging: Instinet slashed its costs and prices and introduced a couple of well-received products for institutional investors. It also reclaimed some lost market share by the time it closed the Island deal in June to become the No. 1 ECN operator. The bad news: Nicoll faces fiercer competition than ever from the Nasdaq Stock Market’s SuperMontage system and from rival ECN Archipelago. Says the 49-year-old Nicoll: “The question for us is, What’s the right mixture of price and service? We maximize our revenues and profits by trying to understand how those two things interact.”




“We have a lot of respect for our competitors, but their business models are very different from ours.”

Joe Moglia is a glass-always-full optimist. And not a single drop spilled two years ago when Moglia moved from Merrill Lynch & Co.'s private client group in New York to the modest Omaha digs of Ameritrade Holding Corp. -- at a time when many analysts were writing off the online brokerage. Moglia looked to untapped strengths. “Our founder and chairman, Joe Ricketts, invested hundreds of millions of dollars to create the industry’s lowest-cost producer, with a world-class brand,” he says. “I could lever that.” A onetime college football coach with more bark and bite than Ricketts, Moglia, 53, and his management team have cut Ameritrade’s workforce by 38 percent, to 2,000. And that’s after spending $1.5 billion on the acquisitions of National Discount Brokers in 2001 and Datek Online Holdings Corp. in September 2002 to become the industry leader in daily trades, which total roughly 135,000. The company has posted profits for seven straight quarters; with its low cost base and still-unrealized merger synergies, Moglia is superconfident -- and that’s in bad market conditions. “We manage this company to be ready for the good times,” he says. “One day they’ll be here again.”



“I hated the distinction of being the largest liquidity provider in SuperMontage.”

Archipelago has been growing steadily and gaining market share since becoming one of the first electronic communications networks in 1996. It controls almost a quarter of Nasdaq Stock Market volume, up from the high teens six months ago. But its profitability is fading fast. “This is a commoditized industry,” says CEO Gerald Putnam of the stock trade-matching services that have been the ECNs’ stock-in-trade. To get out of the bind, Archipelago is transferring its over-the-counter orders from Nasdaq’s SuperMontage to its own Archipelago Exchange, launched in January; that saves Archipelago the fees that it used to pay Nasdaq. The company also aims to add trading features like a faster and more stable matching engine, developed in part with technology from GlobeNet Securities, which Archipelago bought last fall. Longer term, the company will target higher-margin futures and options transactions. “Anything that trades is fair game,” says Putnam, 44, who has run Archipelago since it was spun out of Chicago-based trading technology house Townsend Analytics in 1996. But amid ever-stiffer competition from Instinet Group and Nasdaq, margins will continue to shrink. Putnam’s small comfort: “Nobody is making money at these prices.”




“FX Connect is the flagship example of what we can build and will continue to roll out in other asset classes.”

The Internet spawned three multibank foreign exchange trading markets -- Atriax, Currenex and FXall -- but Stanley Shelton had the idea first. And he expects his FX Connect service at Boston-based State Street Corp. to outlast them all. (Atriax closed last year; Currenex is struggling; and for FXall, see Philip Weisberg, No. 34.) In 1994 Shelton, head of State Street’s global markets unit, mapped out a strategy to create a single technology platform for a wide variety of electronic trading capabilities and to aggregate as much liquidity as possible by opening the system to other financial institutions. The platform, Global Link, went live in 1996 and serves some 425 buy-side firms. Its FX Connect component, according to London-based research firm ClientKnowledge, does about $9 billion in daily trades, more than Currenex and FXall combined. Shelton, 48, attributes that to the fact that “electronic trading is part of our broader strategy in the finance world,” complementing asset management, research, analytics and securities-processing businesses. “Naming FXall and Currenex as competitors doesn’t do that strategy justice,” he says. Notes ClientKnowledge CEO Justyn Trenner, “Shelton had a vision in 1994 that was validated in 2000, when Deutsche Bank became the second bank on his system.” More than 30 others have followed, including Citibank and J.P. Morgan Chase & Co. -- co-founders, with Deutsche, of Atriax.




“In the fixed-income space, people want one-stop shopping.”

If liquidity tells the score in electronic fixed-income trading, then Jim Toffey’s brainchild, Trade-Web, leads the game by a big margin. Daily trading volume averages $60 billion among 19 dealers and 1,200 investment firms in 24 countries. TradeWeb’s annual volume doubled in 2002, to $10.8 trillion. In contrast to the other big fixed-income success, the corporates-oriented MarketAxess, Trade-Web has diversified well beyond its original asset class -- Treasuries, which accounted for $4.5 trillion of last year’s volume -- to include agency discount notes, supranational securities and commercial paper. “After a year and a half, our commercial paper platform is the biggest in the U.S.,” boasts CEO Toffey, 41, the former head of electronic fixed-income trading at Credit Suisse First Boston who founded TradeWeb in 1997. The Jersey City, New Jersey, company isn’t prospering on its front end alone; last year it introduced a straight-through processing capability to improve participants’ back-office efficiencies. “While people were focusing on other solutions, we quietly built something that works and is used every day,” says Toffey.




“We’ve repositioned our advertising to focus on full-service brokerage customers who belong here.”

Full-service brokerage clients, stung by the bear market, are looking for alternatives, and Frank Pe-trilli wants to reel them in. Petrilli, who’s run Toronto-Dominion Bank’s TD Waterhouse affiliate since 1995, never put all of his eggs into the online brokerage basket: The company has 150 U.S. offices. Nor was the strategy strictly brokerage, given the TD Bank connection. Petrilli, 52, still believes that the “bricks-and-clicks,” diversified-product approach will pay off. Stressing its ability to combine self-service with investor education in its “learn before you can earn” advertising campaign, Waterhouse is projecting that its 3.3 million clients will increase by 10 percent this year. It managed 11 percent and 9 percent growth in 2001 and 2002, respectively. “Our data consistently shows that we are gaining more quality accounts from full-service firms than we lose,” says Petrilli, who spent seven years at American Express Co. before joining TD Waterhouse. “Even though our customers are online 90 percent of the time, they enjoy dropping off checks and coming in to talk to investment specialists.”




“Electronic trading is the future of the nonequity capital markets.”

Howard Lutnick will always bear the scars of September 11, 2001, when 658 employees of the firms he heads, Cantor Fitzgerald and its 52 percent-owned ESpeed technology subsidiary, lost their lives at New York’s World Trade Center. He grieved very publicly, and his public relations were at times heavy-handed, but Lutnick, 41, made good on his vow to keep the companies intact and to channel 25 percent of the Cantor partnership’s profits to victims’ families. Cantor wouldn’t have remained the dominant U.S. Treasuries brokerage had it not been able to fall back on the ESpeed trading systems, which are widely deployed in the finance and energy industries. Lutnick now wants to bring that technology into new markets; he’s eyeing interest-rate swaps later this year. “Once electronic trading gets a toehold, it will snowball, just like it did in Treasuries,” he predicts. ESpeed earned a record $31.4 million last year, despite disappointing growth of 3 percent in revenues, to $126.4 million.




“No one cares where a trade gets executed. That’s a lot different than, say, five years ago.”

Maybe it’s because his offices are in New York’s garment district, but Seth Merrin sees an apparel industry analogy to the mission of Liquidnet. The major stock exchanges have become so geared to retail-size transactions, says Merrin, that the process of moving large institutional blocks “is like going into a Gap store and asking for 500 red shirts.” Merrin, 42, created a purely institutional venue two years ago, linking the likes of Barclays Global Investors and Putnam Investments to a pool of liquidity large enough to effectively execute orders that now average 49,107 shares, compared with the New York Stock Exchange average of 665. Merrin’s concept was born of the Internet boom -- Liquidnet’s underlying technology is akin to the Napster peer-to-peer approach -- but was timed perfectly to address cost-conscious institutions’ growing insistence on best execution. The system increased its membership by 85 percent last year, to 235 institutions, and handled 1.21 billion shares worth $33.5 billion. Volume in the fourth quarter surged 92 percent from 2001, while stock trading overall declined 8 percent. “It takes a while for people to gravitate to something new,” says Liquidnet’s CEO. “But I think we’ve reached critical mass.”




The financial industry is as much a terrorist target as water and power, communications, shipping and transportation. The U.S. Critical Infrastructure Assurance Office, currently headed by Nancy Wong, aims to work with all of the above to strengthen their defenses and prevent a repeat of the September 11 disasters -- or worse. Now being folded into the new Department of Homeland Security, the CIAO was formed following a 1997 Clinton administration directive to coordinate private and public sector infrastructure protection initiatives. “Without firing a shot or crossing a border,” a January 2001 CIAO report noted, “an enemy with the right tools and techniques can damage our economy and slow down our military.” That’s true whether the target is a building, a power grid or an Internet communications hub -- and any one of those, if taken down, can affect numerous infrastructures. These so-called interdependencies are a key concern at the CIAO, where Wong, a former head of computer and network operations at California-based utility PG&E Corp., is acting director following the recent resignation of veteran Washington lawyer John Tritak.




“Integrating PayPal will turbocharge the EBay experience.”

Matthew Bannick doubted business life could get much more exciting: Through last summer he ran EBay’s international side, whose revenues were soaring at a feverish 163 percent annual rate, more than double the e-auctioneer’s U.S. pace. (Last year $298 million of EBay’s $1.2 billion in net revenues came from outside the U.S.) But after EBay CEO Meg Whitman agreed in June to acquire electronic payments pioneer PayPal for $1.5 billion, she tapped the 38-year-old Bannick to run it. Why? Mountain View, Californiabased PayPal, which enables consumers to send credit card payments to each other over the Web, was also growing like topsy (payment volume by more than 70 percent per year; accounts -- now exceeding 20 million -- by more than 100 percent). Last year almost half of EBay’s $4 billion in gross merchandise sales were paid for using PayPal. But it has only just begun to spread its wings overseas. “The merger was complementary in many ways,” says Bannick, a former McKinsey & Co. consultant who also served in the U.S. diplomatic corps in Germany. “The international leverage is one of the most exciting things about it.”




Hirani: “The credit derivatives market is getting bigger and more liquid, and that will attract more people to play in it.”

Unlike just about everything else on Wall Street, credit derivatives are hot, and former Deutsche Bank derivatives pros Sunil Hirani, 36, and John McEvoy, 38, couldn’t have had better timing. Creditex, which they formed in New York four years ago to build an electronic marketplace for credit derivatives, came into its own in the past two years as investors flocked to credit default swaps as protection against the rising tide of corporate failures. The firm’s impact on a formerly fragmented market is akin to that of the Nasdaq electronic quote montage on over-the-counter stock trading three decades ago. Creditex’s volume grew by 1,000 percent in 2001 and more than 200 percent last year. Still, the default swaps market isn’t quite liquid enough for fully electronic trade executions. “Clients are demanding a consolidated, real-time view of prices, rather than electronic execution services,” says Hirani.




“Large organizations are looking for comprehensive solutions. They don’t want to have to stitch a lot of small things together.”

Of $15 billion in private equity investments since 1971, Warburg Pincus has placed $2.4 billion at what it calls the intersection of financial services and technology. Having realized a return of more than $5 billion from that sector to date, the New York firm made “FST” a formal practice area last year, assigning Stewart Gross to direct the traffic. A former Morgan Stanley banker, Gross, 43, presides over the biggest financial-technology private equity fund, with $1.5 billion in 23 investments. These include public companies like Intuit, dating back to Gross’s $11 million 1989 investment in its TurboTax unit, then a start-up called ChipSoft; and aggregation pioneer Yodlee, which got a $20 million infusion last year and is one of several companies where Gross is a board member. “Deals take longer, and companies need to preserve their capital because they can’t count on going public,” Gross says of the postbubble climate. “The good news is that valuations are more realistic, and we can look for companies that are past the pilot stage, with real customers and revenues.”




Huret: “The venture capital business is back to the way it was before the bubble, and that was lots of fun.”
Hale: “Most technology spending is now in search of lower costs, and so is our investing.”

Financial Technology Ventures co-founder Robert Huret says it’s always best to “lean into the wind. When things are going great, chances are they’re not as great as they look.” The converse applies to the currently depressed venture capital market, which looks especially bleak in the financial services sector that is FTV’s sole area of concentration. The San Franciscobased firm, formed in 1998 by former Montgomery Securities colleagues Huret, 58, and James Hale, 51, closed its second, $423 million fund in fall 2001, bringing its portfolio to $623 million. It placed money from its 38 limited-partner financial institutions in some dot-com-era rockets, such as wireless applications developer 724 Solutions and bank software vendor Corillian Corp., but FTV sold its positions as soon as IPO lockups expired, when the stocks were at nine to ten times current levels. Today FTV holds such potential highfliers as advisory portal Financial Engines and enterprise software provider Managed Objects. New investments in 2002 included U.K. market data software innovator Caplin Systems and business-process outsourcer Exlservice. Says Hale, “The trend is positive if you get a sense of the industry’s priority, which is to lower costs.”




“It once looked like electronic trading was the be-all and end-all, but it looks like the better answer is a hybrid approach -- electronic and voice.”

Having recently sealed its deal to acquire BrokerTec Global from a consortium of investment banks for as much as $291 million, U.K.-based Icap is poised to attack the U.S. interdealer brokerage market. Ste-phen McDermott, a 16-year Icap veteran who was instrumental in negotiating the purchase, will be the point man. First, he awaits a favorable antitrust ruling from the U.S. Department of Justice, which is expected within weeks. And then Icap will go head-to-head against Cantor Fitzgerald and its high-tech ESpeed subsidiary, which fended off an aggressive assault from BrokerTec to retain its Treasuries market leadership after being decimated by the September 11, 2001, terrorist attacks. BrokerTec stands to give its new owner, formerly known as Garban-Intercapital, a sorely needed technological boost. Though Icap is the world’s biggest interdealer fixed-income brokerage, its electronic businesses have been losing money, while BrokerTec last year reported a $15 million profit on $73 million in revenues through September. “Most of the losses are a result of investing in new areas -- commodities, for example,” explains McDermott, 45. The coming confrontation pairs two fiercely competitive firms with conflicting approaches to technology: Cantor and ESpeed have gone all-electronic, while Icap still sees a place for voice brokers. Argues McDermott, “To compete in the brokering world of the future, you need to be strong in both voice and electronic.”



“Companies can’t protect themselves completely from e-risks.”

When corporations took a fresh look at risk exposures following the September 11, 2001, terrorist attacks, their vulnerabilities to computer and network failures came up big, but insurance options were scarce. American International Group was ready to underwrite because Gretchen Hayes, who began exploring the emerging cyberinsurance realm in the mid-1990s, had formed a dedicated e-business unit in March 2000. Today AIG is “the most mature company in cyberinsurance,” says Michael Rasmussen, director of information security research at Giga Information Group in Cambridge, Massachusetts. Hayes’s organization has issued more than 2,300 policies. The pace has doubled in the past year as companies have grown increasingly concerned about electronic fraud, computer hacking, cyberterrorism and other operational risks. Hayes, 47, is building on the success with new products: In 2002 she introduced AIG, a Web-based service for companies to assess the credit quality of trading partners and insure against losses, and Personal Internet Identity Coverage, which AIG has sold through banks and credit card companies to more than a million consumers. “Identity theft is the fastest-growing crime in America and is something Americans are very concerned about,” Hayes notes.



“We have multiple large, underpenetrated opportunities.”

A decade before the Internet boomed, Intuit helped invent online finance. Today the 15 million affluent, computer-savvy users of its flagship Quicken personal financial management software are among banks’ and brokerages’ most coveted marketing prospects. But when Intuit CEO Stephen Bennett, 48, talks about “growth engines” -- terminology he brought to the Mountain View, California, company in 2000 after 23 years with General Electric Co. -- Quicken isn’t one of them. He’s more focused on product lines like TurboTax, for tax filing, and QuickBooks, for small businesses. Those programs fueled Intuit’s 17 percent revenue growth, to $558 million, in the second fiscal quarter, ended January 31. Bennett has the company churning out new products tailored for specific industries, such as accounting, construction and retailing. “Different industries have very different needs,” he explains. Still, Intuit hasn’t been neglecting the mature Quicken: In September it teamed up with New Yorkbased Muriel Siebert & Co. to launch Quicken Brokerage, and in January it announced electronic bill payment enhancements for users with Mac computers.



“The Internet economy lifted a lot of boats, but the tide went out. We had to change.”

S1 Corp. was the leading supplier of software for online banking in the mid-1990s. It still is, but CEO Jaime Ellertson takes special pleasure in proclaiming that it’s not just an Internet company anymore. If it were, says Ellertson, “we might not be around.” S1 has carved out a much bigger financial systems niche, with 4,000 customers worldwide, 2002 sales of $248 million and, in the fourth quarter, its first-ever net profit, of $1 million. Ellertson, 44, the former chief global strategist of BroadVision, another dot-com-vintage software firm, took over at S1 in November 2000 from founder and chairman James (Chip) Mahan. Ellertson adopted a broader, enterprise-wide strategy akin to that of general business software purveyors like Oracle Corp. and SAP. S1 products now cut across retail and business banking, branches, online channels and call centers. Buying all as a package improves a bank’s economics and gives it a complete picture of all of a customer’s relationships. And the math works much better for S1. “We did more than 60 enterprise sales in the past year, averaging $800,000 to $1 million apiece, and several went up to $10 million,” says Ellertson. “An Internet-only sale was $100,000 to $150,000.”



“We intend to be the dominant player in the trading of Nasdaq stocks, and we will do whatever it takes to get there.”

Dean Furbush, like his employer, has bet the future on SuperMontage. As the Nasdaq Stock Market’s head of transaction services, Furbush, 44, launched the souped-up, $100 million trading system in October after three long years developing it. If the upgrade works as planned -- with the market responding to its deeper, more consolidated view of trading in Nasdaq stocks -- then Nasdaq will reclaim trade executions that it has lost in recent years to alternative exchanges and electronic communications networks like Instinet and Archipelago. But if SuperMontage doesn’t deliver, Nasdaq’s all-important trading revenues will suffer, and the market’s plans to go public and expand globally could be in jeopardy. The verdict? So far Nasdaq sees little change in market share, but Furbush insists it’s too early to discern long-term trends. “Our first job was to make sure the technology works, and on that I give us an A,” he says.



“We’ve come out of the period when realtors were concerned about online lenders -- ‘dot-bombs’ -- going out of business.”

Chris Larsen is breathing easier these days. “People realize we’ve survived, we’re profitable and we’ve got money in the bank,” says the co-founder and CEO of online consumer lender E-Loan. The Dublin, Californiabased company’s future wasn’t so certain in 2001, when dot-com start-ups were crashing and burning. But Larsen, 41, stayed the course; last year E-Loan posted its first full-year profit, of $11 million (it lost $40 million in 2001). Revenues rose 52 percent, to $103 million, as Larsen reduced the company’s dependence on mortgage refinancings, which generated 58 percent of 2002 revenues. That’s projected to fall to 42 percent this year as home equity, auto and first mortgage loans pick up the slack. In 2002 E-Loan introduced Loan Advisor, an automated system that recommends financing options based on variables such as the Treasury yield curve and the client’s credit history. “It treats every household like a business with a balance sheet that’s going to be optimized,” Larsen says of Loan Advisor. “We think that’s the Holy Grail, and we don’t see any other company doing it.”



“We help create order out of the chaos in the way buyers and sellers find each other.”

Since LendingTree commenced operations in 1998, two years after former Price Waterhouse executive Douglas Lebda started the company, it has been responsible for disbursing $40 billion in consumer loans. That’s more than the total assets of all but about 20 U.S. banking companies. But direct, banklike lending never interested Charlotte, North Carolinabased LendingTree. Unlike online lender E-Loan (see Chris Larsen, No. 31), Lebda modeled LendingTree on the intermediary strategies of auctioneer EBay and travel site And he poured money into media advertising to pound home the message that LendingTree is a kind of online credit bazaar: “When banks compete, you win.” A typical LendingTree applicant will receive several offers within 24 hours from among the 130 participating lenders. (With interest rates low, home refinancings are especially popular.) “If you can get the scale and critical mass, it’s a model that’s perfect for the Internet,” says the 33-year-old Lebda. LendingTree, which went public in 1998, turned profitable in the second half of 2002; for the year it netted $9 million on $111 million in revenues, which were up 74 percent. It’s projecting $137 million in revenues and $13 million in income this year. LendingTree is about to launch an ad campaign trumpeting a move into real estate referrals, linking consumers with agents. Says Lebda, “Real estate could be as large or larger than our core lending exchange.”



“We are focused on continuing to deliver more technology and more solutions in the credit space.”

In 2002, a dreadful year for the corporate bond market, the MarketAxess electronic trading platform grew its volume 316 percent, to $48.4 billion, while participating dealers increased to 16 from 11. Technological efficiency is one reason, says the New York firm’s CEO, Richard McVey. But he also credits product releases like Corporate BondTicker, a data service that MarketAxess built on top of NASD’s Trace pricing feed. “We think Corporate BondTicker is one of the key reasons we saw an acceleration of our growth in the second half of 2002,” says McVey, 43, who launched MarketAxess out of J.P. Morgan’s LabMorgan in 2000. The platform also benefited from its introduction of portfolio trading and from growth in emerging-markets and Eurobond issues. “MarketAxess hit the nail on the head when it decided to aggregate a broad inventory of bonds in one place,” says James Mauro, a portfolio manager at State Street Global Advisors. McVey sees straight-through processing and instant-messaging features boosting growth this year. “What is happening at the back end will drive the front end,” he asserts.




“Last year was the year to show platforms can serve customers properly. This is the year to generate critical mass.”

Online foreign exchange trading venues are shaking out, and FXall is playing for higher stakes. It defeated a rival bank-owned consortium, the now-defunct Atriax, but FXall CEO Philip Weisberg is facing tougher competition. With more than 50 liquidity-supplying banks, 425 transacting customers and an estimated $4.5 billion in average daily volume, New Yorkbased FXall trails State Street Corp.'s market-leading FX Connect, although it recently surpassed third-ranked Currenex, which is regrouping after the year-end resignation of its founding CEO, Lori Mirek. “Our volumes grew by a factor of eight in 2002, and they seem to be growing at an equally robust rate so far in 2003,” boasts Weisberg, 35, who spearheaded FXall’s development while working in J.P. Morgan Chase & Co.'s LabMorgan technology incubation unit. The three-year-old spin-off has been praised for its quality and efficiency, but Weisberg knows that he’ll be judged on harder financial measures, and he says he’ll deliver: “We had a wonderful January, with month-on-month growth of 25 percent. We’ll be into profit very shortly -- within this year.”




“We’re focused on expanding the user group.”

Investment banks have had their fill of electronic trading consortia that failed (Remember Atriax? BondBook?) or got rolled up in acquisitions (Brut, Tradepoint, Trading Edge). Yet they came up with a winner last year in EquiLend, an online marketplace for securities lending. Backed by ten top Wall Street firms, New Yorkbased EquiLend has completed some $250 billion of transactions since its July launch. The platform was two years in the making, owing to the complexity of bank-to-bank communications and of the back-office documentation that accompanies loans of securities. “The business was ripe for automation,” notes Dirk Pruis, 42, who helped lay the foundation while working in Goldman, Sachs & Co.'s technology strategy group and became EquiLend’s CEO. “In a market like the one we’re in, it becomes very important to be able to increase the number of transactions you can do at equal or lower costs,” says Pruis. Validation came in October, when Deutsche Bank became the first nonfounding bank to participate. Pruis is actively soliciting more. “This is a critical-mass game,” says Tim Lind, a senior analyst at Needham, Massachusettsbased TowerGroup. “My prognosis for the company is good.”



“Finance people tend to take themselves terribly seriously. That’s why we’re slightly quirky and not too pompous.”

You won’t find hedgerows in quaint Albourne Village -- just hedge funds. A three-year-old Internet community started by U.K. hedge fund consultant (and native of a town near the real Albourne) Simon Ruddick, 42, the virtual Albourne boasts a library, pub and shopping mall. They serve as icons for a research database, a chat room and a fund marketplace, respectively. It’s a whimsical front for the serious business of Ruddick’s firm, Albourne Partners, which advises on $8 billion in hedge fund clients’ portfolios. “They are excellent hedge fund analysts,” says Peter Roffman, vice president of investment services at Standard & Poor’s, an Albourne client and Albourne Village data supplier. “The Web site and its ability to help with the monitoring process is an added benefit.” Says Ruddick, a former hedge fund trader with Westminster Equity: “The village works for us. It’s an efficient way to collect the kind of information we’d need to collect anyway.” Village registration is free, and the population has doubled in the past year, to 7,734. But that kind of growth doesn’t tax the infrastructure, which, as they say, is highly scalable.



“We were B2B before there was a word for that. It has a bad connotation now.”

Before TradeWeb and the handful of other now-established fixed-income trading networks, there was BondExchange, a system founded by former Morgan Stanley Dean Witter broker Charles Almond in Mill Valley, California. “We did the first-ever fixed-income trade on the Web in May 1997,” Almond recalls. It got little notice because of BondExchange’s retail orientation; the big Wall Street firms focused first on higher-stakes institutional platforms like TradeWeb and MarketAxess. But BondExchange, developed by Almond and chief information officer Joseph Nirta, restructured in 1999, morphing into BondDesk, and Wall Street firms coalesced around its full fixed-income product menu. Goldman, Sachs & Co.; PaineWebber; and Spear, Leeds & Kellogg put in new capital. Several regional, retail and clearing firms followed, linking to the network and adding to the liquidity pool. Last year BondDesk, serving 60 customers, turned profitable, and it’s now generating more than 10,000 daily trades. “Participants in this market used to have limited inventory and almost no competitive bidding,” says the 42-year-old Almond. “We fixed that.”



“We’ve attracted issuers because of technology. Every single step of what could be an administratively burdensome retail note process is handled online.”

With stocks in the doldrums, individual investors have awakened to bonds, and Tom Ricketts has a product pipeline just for them. Ricketts, the 37-year-old son of online brokerage pioneer and Ameritrade Holding Corp. founder J. Joe Ricketts, launched Chicago-based Incapital two years ago to replicate what he had previously done in ABN Amro’s SmartNotes program for General Motors Acceptance Corp.: create a comprehensive direct-to-retail issuance system. As with SmartNotes, Incapital’s InterNotes process is fully automated -- complete with online prospectuses -- through a distribution network of more than 300 retail brokerages, including Ameritrade, A.G. Edwards, Salomon Smith Barney and Charles Schwab & Co. Since February 2001, issuers ranging from Bank of America Corp. to General Electric Capital Corp. to Walt Disney Co. have raised more than $18 billion. “The market for this product has grown tremendously over the past two years,” says CEO Ricketts. “We are just starting to harvest the value in the market.”



“Going public has always been the plan, but the market isn’t so amenable right now.”

Back in 2000, billing itself as a business-to-business dot-com, Atlanta-based MortgageRamp had little trouble raising $50 million in start-up capital from the likes of Bank of America Corp., GMAC Commercial Holding Corp., Goldman, Sachs & Co. and the major bond rating agencies -- all of which shared an interest in automating commercial real estate transactions. Then the B2B model lost favor, and MortgageRamp had to struggle to survive. It did more than that: Its DealCentral technology, engineered by 31-year-old CEO Ken Beyer, is now automating the loan-underwriting and closing processes for thousands of brokers, their lenders and investors. MortgageRamp is profitable enough to be contemplating an IPO, according to Beyer, the firm’s chief technology officer until he replaced founding CEO Michael Greco, 53, in December. Greco still keeps an eye on things as a liaison with the investor group. Beyer expects to take MortgageRamp overseas and into the related fields of residential mortgages and asset-backed securities. “We’ve been successful targeting the big players,” says Beyer, who joined MortgageRamp in 2000 from Denver-based consulting firm Cornerstone Concepts. “Now we’re seeing interest among a wider base of clients.”



“Not many have succeeded at creating valuable tools online. We’ve been able to corral information and translate it into actual analysis.”

Even in slow times investment bankers are constantly scrambling to keep up with the latest moves of private equity firms and venture capitalists as well as the companies in their portfolios. Neal Goldman, a onetime Lehman Brothers merger banker, decided that he could make his Wall Street peers’ lives easier. In 1998 Goldman formed Capital IQ to build and sell advanced searching, analytical, relationship management and transaction management tools for prospecting and deal making. The result is “a database more huge and current than any firm of any size could afford to create on its own,” says user Oliver Cromwell, president of New Yorkbased middle market investment bank Bentley Associates. Explains Capital IQ’s CEO, “Our system is part information, part software.” Much of the corporate and market data deal makers seek is fragmented in multiple databases. “What we’ve done is create a holistic view of the data,” says Goldman, 32. Capital IQ has 350 investment banking, corporate and institutional investor clients; its financial backers include Credit Suisse First Boston and Merrill Lynch & Co. In the M&A dog days last summer, the company raised $8 million in a Series C round led by Bear Stearns Asset Management’s Constellation Ventures.