March/April 2008

Bidding for Interest Rates

NeoSaej's algorithms could change the rules of online auctioning.

By Erica Naone

Ray Stata, Priti Chatter, Rohit Goyal, and Mukesh Chatter Credit: Christopher Churchill

NeoSaej of Burlington, MA, has developed a novel online auction strategy that it says should produce better interest rates for bank depositors. Its proprietary algorithms allow online vendors to engage in sophisticated behind-the-scenes bidding against each other before their offers are presented to customers.

Let's say you want to deposit $20,000 in a six-month CD. You enter that request at NeoSaej's website. Members of NeoSaej's network of participating banks make bids that suit their business objectives--to raise money quickly, say, or to sell certain products. Before the customer sees these bids, NeoSaej sends the best ones back to the network for counter­offers. The process continues automatically, producing progressively better bids until one bank is left offering the best rate. The company will initially apply the system to CDs and high-yield savings accounts but expects to expand into loans.

Mukesh Chatter, the company's CEO, says the process is far more efficient than today's online marketing. Banks now pay heavily for advertising on search-engine and content-aggregation sites, but only 1 to 2 percent of people who navigate to a bank's website deposit or borrow money. It ends up costing a bank between $400 and $1,000 to attract each new customer online, Chatter says. Such costs are reflected in lower interest rates for savings accounts and higher interest rates on loans.

NeoSaej, which plans to launch this spring (and whose cryptic name ­Chatter did not explain), says it makes money by collecting a small fee--"substantially smaller" than banks' current marketing costs, ­Chatter says--on every completed transaction. "Our business model is that if we succeed, then we get paid," he says. That's the same business model used by the online-­auction giant eBay. But ­NeoSaej's process fundamentally differs from eBay's because the "seller," in this case a bank, is continually adjusting its terms to suit business objectives, to beat competitors, and to respond to the market. It's also different from Priceline's model, in which customers name a price and promise to buy from any company that matches it: ­NeoSaej customers won't have to commit to making a purchase before learning the best rate.

NeoSaej is focusing on banking in part because federal deposit insurance eases a customer's need to research sellers, but the company hopes to move into other forms of commerce. Robert Freund, a professor of management science at MIT's Sloan School who sits on NeoSaej's advisory board, says the company's technology "has the potential to change the way business is conducted on the Internet."