MoneyAisle Lets Banks Bid Against Each Other for Customers
The Web has brought comparison shopping to nearly every corner of commerce, including banking. In fact, thanks to years of advertising, LendingTree’s tagline—”When Banks Compete, You Win”—is one of the most familiar on the Internet. But now a startup in Burlington, MA, is arguing that the “competition” on LendingTree and similar financial-industry websites is often rigged to favor the sites’ advertisers. What’s needed to even things out, the company says, is a real competition—one where financial institutions actively bid against one another for customers’ business.
And that’s exactly the service that the startup, neoSaej, is launching today after nearly two years in stealth mode. The company’s consumer-facing website, called MoneyAisle, is an entry point for “reverse auctions” where consumers specify which financial products they’re looking for, then sit back and wait to see which bank responds with the best offer.
At first, MoneyAisle is offering just two kinds of financial products, certificates of deposit and high-yield savings accounts. These products are simple to start off with, explains neoSaej founder and CEO Mukesh Chatter, because they only involve a few variables. The buyer specifies how much money they want to put into a CD or account, and over what time period (typically 6 or 12 months); then banks compete to offer the best interest rate.
“The key difference is the active competition and the buyer-centric auction—that’s what separates us from the rest of the crowd,” says Chatter. “Also, we’re completely free of advertising, so there is no influence from financial retailers whose links only show up because they paid the vendor for an ad.”
The idea for MoneyAisle was born three years ago when Chatter was searching for flat-screen TVs for his new house in Concord. “I went to Best Buy, Circuit City, and the comparison shopping sites and found a huge price variation,” Chatter recalls. “For 52-inch TVs the price varied from $2,800 to $4,200. That led me to say, why is it that every time you want to buy something you have to go through this comparison process? There has got to be a better way. I asked my wife, who is a much bigger shopper, and she said, ‘That’s the way life is, get used to it.’ A lot of other people said the same thing. But as an entrepreneur, you can either say, ‘That’s the way it is,’ or you can do something about it.”
What Chatter and partners Rohit Goyal, Bob Watterson, and Ray Stata (the co-founder and chairman of Analog Devices and a major benefactor behind MIT’s Ray and Maria Stata Center) decided to do was build an online system that lifted the burden of comparison shopping for commodity items off of consumers by allowing vendors to bid for their business. But the privately backed company, which now has 41 employees, couldn’t tackle the entire e-commerce world at once—so Chatter and his partners decided to focus first on the banking sector.
The choice made sense for several reasons. For one thing, most financial products are pure commodities—a 12-month, $50,000, FDIC-insured CD is the same no matter what bank you’re putting your money in. Just as important, banking was an industry where Chatter and his colleagues believed they’d be able to round up lots of participants for their reverse-auction platform. In the United States, a handful of mega-banks like Citibank (NYSE: C) and ING (NYSE: ING) spend hundreds of millions every year on marketing and advertising, driving up the cost of pay-per-click Web advertising and making the customer acquisition process very expensive for small- and medium-sized banks. At the mortgage comparison site BankRate.com, for example, ads for CDs cost advertisers roughly $6.50 per click, according to Chatter—and the “conversion rate” for such ads, the fraction that lead to actual purchases, is only 0.5 percent to 2 percent. Ads sold through Google’s AdSense network are even more expensive: $14 per click.
Small and mid-size banks “have to pay for those clicks in advance regardless of the conversion rate, and regardless of whether the person is going to deposit $2,000 or $20,000,” says Chatter. “So the INGs of the world are really eating away at their business, and there is nothing they can do to grow. It’s the same thing whether you want to raise deposits or give out loans or offer credit cards.”
In other words, Chatter and his partners see the Web’s existing comparison sites and advertising networks as expensive middlemen getting in the way of efficient connections between buyers and sellers of banking services. So, like good Internet entrepreneurs, they came up with a way to cut out those middlemen.
MoneyAisle is essentially an automated, Web-based reverse-auction platform with consumers on one side and banks on the other. Behind the scenes is a technology Chatter and his partners call “Seller Automated Engines” (the SAE in neoSaej). Say someone comes along with $10,000 in pocket change that they’d like to put into a 12-month CD. They enter those parameters into MoneyAisle, and their request goes out to dozens or hundreds of private SAEs, each one programmed to submit bids against competitors based on formulas determined by the individual bank.
“Say a bank needs to raise $10 million in seven days,” Chatter explains. “They’ll put an upper limit on the interest rate they are willing to pay and how quickly they want to raise the money. For example, they could set it to bid aggressively in the early days, but as the engine wins bids and starts to fulfill its target, it could slow things down. That’s where most of our intellectual property is—those algorithms that shift the bidding based on what is happening in the market and where they are in respect to their targets.”
Because the whole process is automated, many rounds of bidding can occur in just a couple of minutes; at the end, the prospective customer is presented with an offer from the bank that offered the highest interest rate. “The customer is guaranteed to win at the end of the day,” says Chatter. “It only takes a couple of minutes, it’s free, they don’t have a commitment to buy, and they get a better rate.” On the other side of the equation, the banks get a shot at new business without having to shell out for expensive and unpredictable online ads. The winning bidder pays a flat fee to neoSaej, and participants’ only other cost, says Chatter, is a small fee for joining the MoneyAisle network.
“At the end of the day, a bank has nothing to lose by joining,” says Chatter, who co-founded and led network router makers Nexabit and Axiowave prior to his latest venture. “If they succeed, they pay. If they don’t succeed, they don’t pay.”
For its public launch today, neoSaej has talked 102 banks into joining its network. Within months, consumers will be able to buy more complicated financial products through the network; while the company isn’t talking about the details yet, Chatter says it will use a number of mechanisms to help consumers make clear comparisons between competing bids for products where the interest rate isn’t the only variable.
The SAE network “is empowering the small banks and the mid-sized guys by giving them a chance to become the next ING,” Chatter argues. “They don’t have to open new branches, they don’t have to spend a dime on Google ads. Consumers will share the benefit when the middleman is cut out—since the credit card companies are booking 25 to 30 percent of their business today through Web advertising, and that cost is passed on to the consumer.”
To be accurate, Chatter and his partners at neoSaej aren’t cutting out the middlemen entirely—they’re just nominating themselves as a less expensive alternative. But that’s the way business has worked for thousands of years, says Chatter. “Our model is really just the medieval bazaar of 500 years ago. The sellers stand around and keep lowering their rate until eventually you get the best one. We may be transforming it using the power of software and the Internet, but it’s exactly the same process.”
Addendum, September 28, 2008: The New York Times’ business section has discovered MoneyAisle, in a piece published today in its “Novelties” column.