Newcomer X.com shakes up the banking
world and gives rivals a run for your money
By Holden Lewis • Bankrate.com

A month-old Internet bank called X.com has startled rivals with rapid growth driven by technological wizardry and social savvy.

Industry insiders say the bank's daring, innovation and consumer-friendly policies have competitors watching and wondering whether they will have to revise entrenched policies and follow suit.

If they do, this feisty newcomer may change the way we bank by summer.

The bank's key innovation is person-to-person payments, a nifty feat of programming that turns accountholders into evangelists who recruit friends and relatives into the X.com fold in exchange for a $10 bounty.

X is the first bank operating within the culture of Silicon Valley, where seizing customers outranks making a profit during a company's growing years. Amazon.com pursues this strategy, and so does San Francisco-based X.

"One of the things to X.com's credit is they're willing to spend money and they're willing to grab customers and figure out later how to make money off them. That's not the way a typical banker thinks," says Chris Musto, an analyst with Gomez Advisers.

X's founder isn't a banker. Elon Musk was 28 last summer when he sold his first company, Web media firm Zip2, for $300 million. He decided it would be cool to build a bank as his next project, so he hired banking and investment talent and recruited former Intuit chief Bill Harris as X's president and CEO. X is in the process of buying First Western National Bank of La Jara, Colo., which in the meantime performs its banking services.

X strives to differentiate itself from traditional banks and the 17 major Internet-only banks, Musto says, adding, "X.com maybe is going to figure out a different way to attract customers."

X grabs customers by deploying four marketing tools: a $20 sign-up bonus, a $10 referral bounty, person-to-person payments, three mutual funds whose assets can be transferred easily among themselves and an X checking account. In this sense, X operates a rudimentary cash management account for the masses that will become more full-featured when the company offers brokerage services.

Redefining financial services
"Our approach is to combine exceptional financial-services experience with real Internet expertise and a kick-ass technology group," Musk says.

That technology group has come up with a couple of innovations that have rivals scratching their heads.

One is person-to-person payments over the Internet, an innovation that has at least one competitor, Checkfree, scrambling to catch up. The other is the ability to transfer money from one's primary checking account to one's X checking account. Within five minutes of opening an X account, you can transfer money electronically into it from your other checking account. At other Internet banks, such a transaction has to be handled by phone or fax.

You sign up for X.com online. The bank runs a quick credit check and searches the ChexSystems database to see if you have written hot checks. If you're approved, you instantly have a checking account containing $20.

A few days later, you receive in the mail 50 free checks (you pay for refills) and a Visa check card that comes with a line of credit at 9.9 percent interest. The check card can be used at ATMs and at point-of-sale terminals at retailers. It comes with free overdraft protection, so you can use it like a credit card.

The way person-to-person payment works, an X account holder can go online and transfer money instantly, for free, to another X account.

Person-to-person payments fuel X's sales approach by giving people a reason to sign up and a reason to get friends and family to sign up. The technology allows two account holders to send each other money. What if you have an X account and you try to send money to a friend who doesn't have an account? Your friend gets an e-mail message that says, in effect, "Open an account and get your money." If your friend does, you get a $10 referral bonus. If your friend declines to open an account, your account remains untouched. You'll have to find another way to get him or her the money, because X won't do it for you.

Musk says Web auction participants are adopting the person-to-person feature eagerly because it allows successful bidders to get their items quicker: no need to mail a check, wait for the seller to deposit it and then wait for it to clear.

The bank's three mutual funds are managed by Barclay's. Two of them, a money-market fund and a bond fund, carry management fees that Musk vows will be among the lowest in the industry. The other, a Standard & Poor's 500 index fund, gives a minuscule rebate: The investor, instead of paying a fee, gets back 0.01 percent -- one penny for every $100 invested.

The company also offers certificates of deposit.

There are no minimum balances. All checking accounts pay interest, with three interest rates that vary depending on account balance. The highest annual percentage yield, for those who keep a balance of $5,000 or more, is 4.5 percent. That's not the highest in the industry. Security First Network Bank, another Internet-only bank, offers an annual percentage yield of 6 percent on its interest checking account.

Grabbing the competition's attention
Competitors are watching closely, Musto says, and if they judge that X is succeeding, expect them to offer similar services.

Musk doesn't sound too worried about rivals. He says they're stuck in the past.

"The thing about financial services is that it's been pretty hidebound for a long time," he says. "Executives sit behind big mahogany desks way up in a skyscraper, and they're pretty far from the man in the street. If you're going to understand what consumers need and how to take advantage of the Internet, you need to come from the Internet standpoint. Starting from the ground up, we asked ourselves how we can improve things. That's why we have no fees and minimums. Why have minimums? They don't make sense in the Internet world."

Musk says X will offer the gamut of financial services this year, including insurance, a brokerage and mortgage loans. Online bill-paying is scheduled in the first quarter of the year. Musk intends to integrate all of the services seamlessly so that money can be transferred back and forth among account types quickly and easily.

Musk won't divulge customer numbers, but he says X is one of the biggest Internet-only banks a month after debuting account offers in early December.

Musto, the analyst at Gomez.com, says he believes X has captured a lot of customers, judging by lengthy hold times on the customer service phone line.

A tale of two customers
One of these customers is Chris Lee, a computer systems administrator in Atlanta. He says he has an account with Security First Network Bank, but he opened an X.com account in mid-December. He is delighted so far, and says he is slowly migrating his financial activity to X. He started searching for a replacement to SFNB, he says, because "in the past eight or nine months they've been getting ridiculous with charges and fees."

Lee had enough when SFNB began charging customers for using other banks' ATMs. That meant that he paid not only the bank that operated the ATM (which he doesn't mind), but SFNB as well -- a practice that Lee deplores as "double-dipping," which can cost $3 a transaction.

"For an Internet bank, the last thing you ought to do is nickel and dime people with all sorts of fees," Lee says.

X does not charge for ATM usage and reimburses customers up to $6 for other banks' ATM charges each month (most 'Net banks, such as Wingspan, have similar policies). That feature compelled Lee to open an X account.

Since then, he has bought shares in two mutual funds, and he persuaded his parents to open an account so he could transfer loan repayment money to them instead of writing a check. He says his parents didn't even have e-mail until a few months ago.

Lee isn't ready to close his SFNB account because he harbors doubts about X. "I'm still a little bit leery about the whole concept," he says. "I wonder if these folks are too good to be true. I'm wondering where the 'gotcha' is."

Another customer of both banks isn't so won over. "I believe SFNB has been a great bank," says Slade Simon, citing SFNB's fast, always-available customer support. He says he opened an X account as a convenient place to stash a rainy-day fund that he won't raid casually at ATMs. He uses only the SFNB card at ATMs.

Simon says he's not interested in X's investment options: "For now, I'm more interested in simply putting my money away. I don't want to risk any money at this time."

Simon has another concern: that X might close his account. During a seven-month period of unemployment a few years ago, some checks bounced. Since then, he has had hassles opening bank accounts, and he is waiting to see if X expels him because of his history.

Up next for 'Net banking
Ultimately, X's future depends on whether customers want to bank over the Internet, Musto says. It's not a given that people will embrace the Internet for all their financial needs, he says, especially if consumers can't deposit checks into their Internet banks through other banks' ATMs. Surveys show that more people would bank online if they could deposit a check into any ATM.

That objection poses a conundrum for many Internet banks. You can't deposit a check into an X.com account at any ATM anywhere, and the same holds true for many other Internet banks. At other Internet banks, you can make a deposit at ATMs in the city where the bank is based -- which doesn't help if your bank is in Houston and you live in Omaha.

Chris Lee, the man who is shedding his current bank because of the fees it levies, says he doesn't mind the inability to deposit checks into an ATM. When he sits down at night to do his finances, he likes to be able to see the account details online.

"I think X has got a formula that if they survive and don't get snapped up by a huge conglomerate, they'll be successful," he says. "What I want to know is how they make money."

-- Posted: Jan. 11, 2000