Guide To Online Banking: Netting the customers

A journey round the pitfalls and pleasures of online banking,

The first bankers in Britain were Italian goldsmiths from Lombardy, commemorated in the name of Lombard Street in the city of London. We also owe them the name, bank, which is a corruption of the Italian banco, meaning bench, at which goldsmiths worked.

In the days when banks really did look after our gold and silver, the need for imposing edifices to inspire confidence was obvious. As promissory notes replaced precious metals we still needed the re-assurance of solid bricks and mortar and bars and, these days, bullet-proof glass.

Now, most salaries or wages are paid directly into bank accounts. We pay most of our household bills by direct debit or standing order. We buy with debit or credit cards. When we need cash we may use a hole in the wall ATM. Whether we actually bank on the Internet, most of us have already graduated to the world of virtual money and virtual banking.

The banking business has changed but it has left many banking institutions struggling. If most, if indeed not all, the services we require as customers may be accessed over the telephone or via the Internet, what need of an expensive high street property portfolio of overblown cod-Georgian monuments to another age of banking probity?

The first bank to embrace banking on the Web was, as you might expect, American. The San Francisco-based Wells Fargo bank launched its first online service in 1990. Customers could check balances on their PC screens and transfer funds between accounts. In 1994 the bank set up a website and in May 1995, Wells Fargo was the first to offer banking via the Internet.

In the UK in the early 1990s several banks experimented with their own intranet services. The oldest-established of these is still going strong - Bank of Scotland's Home and Office Banking System (HOBS). The first web-based banking service in the UK was Nationwide Building Society's Online Banking website, in May 1997. The first bank offering current account services over the Internet was Royal Bank of Scotland, hard on Nationwide's heels in June 1997.

It is disingenuous of Smile, which launched in October 1999, to claim to be the first full service Internet bank. What Smile actually represents is the first purely Internet-based banking offshoot of an existing banking institution, the Co-operative Bank.

US bank Citibank has 750,000 customers online around the world. Barclays has the most active Internet accounts among UK institutions, with 400,000 customers online. Lloyds TSB has 100,000 customers online and ambitions to reach one million by the end of next year. Lloyds plans to launch a new Internet subsidiary, provisionally branded e-bank.

PC banking via a bank's intranet requires customers to use extra software, either custom-provided by the bank or personal accounting programs such as Microsoft Money or Quicken. Online Internet banking does not require you to have extra software although many people do use programs like these to manage their money and most of the online banks will allow you to download your account data into the program or spreadsheet of your choice.

When you apply for an online bank account you will receive a PIN (personal identification number). This will not be the same as the PIN you already have for use with ATMs. You must also agree to the bank's terms and conditions. These are governed by the Unfair Contract Terms Act of 1977. This means most of the liability for any fraud is placed on the bank.

All banking services available to UK customers are supposed to work with PCs running Windows 95/98/NT. But fewer function satisfactorily with Apple Macs running Mac OS8 or later. You will need to be using Internet Explorer 4.0 or Netscape Communicator/Navigator 4.0 or later versions. Among the banking services which proclaim their Mac compatibility are Lloyds TSB, the Co-operative Bank (but not Smile) and Citibank.

The services available vary widely, several allow the option of viewing six months' statements but Lloyds TSB, for example, offers you only the current statement. Some banks allow you to schedule future payments out of your account and all have different rules on standing orders and direct debits. You may view them but can you establish, amend or cancel them? That depends on the particular institution.

Cost savings in using online services are beginning to be passed on, evident in the market-leading 9.9 per cent APR charged by the Egg Card and the juicy interest rates paid on current account balances by Citibank (2.5 per cent gross) and Smile (4 per cent gross).

The downside to the attractions of Internet banking include how much you like watching paint dry. Some of the sites are very slow to load. Few lessons have been learned from the US experience of online banking, which is much less popular than online stockbroking. A US survey showed half of the people who had tried to bank online had closed their accounts and almost two thirds would not bother to try again.

Already stories of pages failing to load, system freezes, and of unanswered or interrupted helplines are familiar. Egg's credit card has been a victim of its own success and Citibank and Lloyds TSB have experienced problems as customers tried to sign on.

Most of the services make no charge above what customers pay for the Internet connection. But you are likely to tend up spending time chatting to the bank's help desk. Some are on free phone numbers and some make you pay for a national rate call rather than the local rate for your Internet connection. Yet others, including the Smile technical help line, are premium rate numbers and you will be charged 50p per minute.

More Net banking services are on the way. Halifax is on the Internet but planning its discrete brand, developed under the working title of greenfield.co. Tesco has plans for a full-service online bank. Abbey National is working on two Internet banking services, one of which has the working title Aquarius and will not feature Abbey National branding.

Even no-frills airline easyJet, which has a chain of Internet cafes, easyEverything, says it plans an Internet bank next year. The entry cost into the banking market is now minimal, a website replacing a chain of high street locations.

And foreign institutions also have designs on our accounts. Sweden's Svenska Handelsbanken will be on the Internet looking for UK customers early next year, as will Australia's AMP, using its UK-base Pearl brand, in the second quarter.

Indeed, the best available interest rate for savers is offered by first- e, the pan-European online offshoot of the French institution Banque d'Escompte, which is paying 6.51 per cent gross. UK taxpayers face the minor annoyance of having to pay tax due on the interest after the end of the financial year.

But the Internet is not the only way banking will come into your home. HSBC has unveiled its TV banking service via digital satellite television. Abbey National and Barclays will have similar services within a couple of months.