BOSTON – A battle is brewing among vendors as more and more financial institutions seek the technology partners they need to handle the online banking needs of small businesses, according to a new report from Celent Communications. The market is relatively limited now, but those small businesses – defined by Celent as less than $10 million in annual revenue – “far exceed the number of large organizations, and their aggregate revenue potential makes it extremely worthwhile for financial institutions to focus greater attention on them and their needs,” writes Celent analyst Christine Barry. The Internet will be a major area of that new focus for credit unions and banks alike, and browser-based solutions are continuing to steadily take the place of Windows-based cash management systems, the Celent report says. It predicts that 21% of small businesses will be banking online by 2005, nearly four times the number that do now. The report – “Ranking the Vendors of Small Business Banking: Segmenting the Client Base” – analyzes the solutions of 11 vendors on the basis of criteria that include successful deployments and financial viability, features and functions, client support and ease of use. Celent ranked as its top three, in order, Digital Insight, S1 (the current leader in market share) and Magnet, but added that “many providers have made significant progress over the last year in improving solutions.” Barry also gave “honorable mentions” to Corillian, Open Solutions, Politzer & HANEY, Financial Fusion and Metavante. Small businesses – and there are more than 25 million of them – have long been in a “no-man’s land” between retail and corporate arenas “where neither banking solution could sufficiently meet their individual needs,” says Barry. But now, “fierce competition has arisen as both retail and corporate banking solution providers battle for market share of this untapped sector,” Barry says. And the competition now includes non-banks like Costco, OfficeMax, Wal-Mart and Staples, which offer such things as accounts receivable financing and management, payroll and debt collection. “While their threat is not severe yet and they will not necessarily replace what banks do, they can replace some of what banks offer and charge for,” Barry says. “Perhaps more significantly, these non-banks are already offering services not generally offered by banks, such as electronic pre-population of retirement fund application forms with employee data,” the Celent analyst says. Barry’s conclusion? “There is little doubt that online penetration rates will rise,” she says. “The real question is which solutions will dominate the market. “Traditional retail vendors have taken a quick lead, but will have to continue to improve their feature/function depth to succeed in this fiercely competitive space going forward. “Those vendors in the best position are likely to be those offering single-platform solutions that meet the needs of retail, small business and large corporate customers,” Barry says. -

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