Who's Afraid Of Online Banking?

Consumers, that's who. But it's becoming a viable alternative to banks

For the past three years, I've been a PC-banking junkie. It takes me 10 minutes a month to pay bills. I can track every transaction online and transfer funds between accounts with a mouse click--or have it done automatically. And I, for one, am surprised--no, shocked--that someone with a PC would not want to bank online. But according to a recent survey, Net-only banks and traditional banks operating on the Net are doing a lousy job. So bad, in fact, they're sending customers fleeing for the cyberexits.

Here's a statistic bound to wrinkle the pinstripes at WingspanBank.com and other banks on the Web: In the year ended July 31, 3.2 million consumers signed up for Net banking--while 3.1 million closed their accounts. That means the net increase in Internet banking customers was a skimpy 100,000, or 2%, for a total of 6.3 million customers. This is according to Cyber Dialogue Inc., a New York research firm that surveyed 2,000 Net users and non-Internet users. These numbers contradict other studies that show Net banking growing 50%-plus a year. Cyber Dialogue claims that many accounts counted in those studies are probably not active.

BELLS AND WHISTLES. So are the prospects for Net-only banks and traditional banks on the Web bleak? Not at all. Bet on many of the frustrated consumers eventually being wooed back to the Net. That's because as competition increases, banks online are exploiting their sharply lower operating costs to pay higher interest rates on deposits and reduce fees. What's more, competition is forcing cyberbanks to make speedy improvements in service and Web site design. There now are nearly 1,000 banks online, and more are coming: Numerous Net-only banks will be launched within a year, while traditional players like Citibank are building branches in cyberspace. Even brokers such as Schwab are planning forays.

WingspanBank.com is the latest online-only bank to raise the industry bar. Launched in June, the Bank One Corp. spin-off charges virtually no fees, absorbs ATM surcharges of up to $5 a month, and pays interest on checking of 3.1% for balances between $1,000 and $10,000. (Traditional banks often pay less than 1% on such balances.) Its Web site has a host of bells and whistles, including access to mutual funds and brokerage services through a private-label deal with DLJdirect. But it does not yet have certain services that are available elsewhere on the Net, such as online bill receiving.

Still, Wingspan is a compelling alternative to old-line banks. Many brick-and-mortar banks now make more than 50% of their profits from nickel-and-diming customers with fees. Industry consolidation has reduced competition, and banks are raising the minimum balances required to avoid monthly fees, adding surcharges for certain ATM transactions, and paying paltry interest rates on deposits. Consider Wingspan's parent, Bank One Corp. The bank charges some customers $2 if they go to a teller for certain transactions that could be made at an ATM, including making a deposit.

That's not to say online banking doesn't have its problems. Some 57% of those surveyed by Cyber Dialogue said banking on the Net was either too complicated or that customer service was poor. A basic problem is that Net banks don't have branches where customers can withdraw money or talk to a teller. And Web banking can be slow because of heavy security measures.

Even the best of the banks operating online have customer service issues. Market researcher Gomez.com ranks Security First Network Bank and Wells Fargo as the top two banks on the Net. But customers commenting on Gomez' message boards have a different opinion: They awarded the banks two out of a possible five stars.

Banks online still haven't found their sea legs. But once you get up and running with an account, their advantages are clear. Net banking eventually will save consumers billions of dollars in fees. And you may never have to write checks and lick those godawful stamps again.

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