CALABASAS, Calif. – In the traditional business world, being profitable is more of a given than an exception, but not in the dot-com world. It was pretty clear at the end of last year that Internet solutions firm Digital Insight, which has strong roots in the credit union industry, had enough economies of scale and income to survive the dot-com bust, but it still wasn't profitable. The company reports that it will reach EBITDA (earnings before interest, taxes, depreciation and amortization) profitability in Q3 and pro forma profitability in Q4. "Prior to '98 and '99 a company couldn't go public before it was profitable. The old standard was you had to have two consecutive profitable quarters," said Digital Insight CEO John Dorman. Dorman said the market became so euphoric about the Internet that the capital markets began funding firms that had anything to do with the Net, regardless of their profitability or lack thereof. Digital Insight itself went public while it was still seeking out profitability. "The market got ahead of itself and created quite a bubble that burst. That's what drove the relentless pressure and concern about Net companies' (profitability)," said Dorman. "Unless you're profitable you're burning capital. When the markets were denying capital to unprofitable companies, it made it all that much more important (to be profitable)," said Dorman. He said the company is on target for sustainable profitability with $65 million in cash and no debt. The key to profitability has been surging economies of scale stemming from rising end user numbers (see related chart). The Internet banking market has clearly matured from 1995 when Digital Insight came on the scene, so how does the firm plan to keep growing? "We've gotten to the point now that increasing user adoption is driving more growth than signing new clients," said Dorman. He said DI works hard on increasing Net banking penetration among its existing clients. There are DI clients that boast penetration rates of 40%, while others are still stuck around 10%. Fortunately, said Dorman, there are some common threads among high-adoption financials that other financials can mimic. "The encouraging thing is it's not rocket science. First (what's needed) is a strategic commitment on the part of the management and the CEO to really drive Internet adoption and view it as a strategic delivery channel. The thing proven to be the most successful is really making it highly visible to all the members. You need to let your members know you have it. Give a little tag line and Web address on everything the members may see." He said for whatever reason some financials do what's called a "soft roll-out" of Net banking, meaning it's up and running, but the CU isn't publicizing it. Staff training is also key, said Dorman, so any employee that touches a member can tell them how to get started with Net banking. DI benefits as its clients' user penetration rates increase, but Dorman said the real winner is the financial. He said the higher the adoption rate for Net banking, the more cost savings a financial will see. That's because transaction volumes will decline through other channels. This is key, said Dorman because a Net-based transaction is the cheapest a member can make. As for competition, Dorman said it's as dogged as ever, but fragmented. There are a number of smaller firms it sees in sales calls, such as Liberty-Cavion, FundsXpress and Virtual Financial, but there is also increasing competition from data processors which are now offering their own Net banking solutions. Aside from DI, the other large Net banking firm is Corillian which was formed by a former CU exec, Ted Spooner. (DI was formed by two former XP Systems' execs). Dorman said Corillian, which reached the three million active end user milestone recently, isn't a main competitor because it is targeting the very large banks and credit unions, while DI is stronger in the mid-size range. "Below the top 10 or 20 credit unions, we don't see Corillian that much." "The competition is fairly fragmented. The strongest things about DI are our size, experience and the broadest product line. We aggressively sell the fact that in order to maximize the potential of the Internet you not only have to offer the basics of allowing members to check balances, transfer funds, and pay bills, but have to use the Internet as another channel to sell them other products," said Dorman. Net banking should just be one part of a CU's online presence. Things like online lending and aggregation make the online relationship more fertile. Dorman said DI has spent considerable efforts broadening its product line to include just about everything that can be done online from a financial's perspective (see related box). Look for a DI acquisition coming soon. "We will likely be doing some additional acquisitions this year. In this tough financial market, most of the competitors have gotten financially weaker and don't have enough capital," said Dorman, which opens them up as prime acquisition marks. DI has used acquisitions in the past to increase marketshare, including the acquisition of nFront, which at one point was its largest competitor. The company got deeper into the CU space when it acquired AnyTime Access, a leading CU call center/lending firm. It also acquired an aggregation firm with plans to roll out its own product, but eventually turned to a partnership with market leader Yodlee to offer aggregation. – [email protected]

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