It's goodbye to branches in banking's brave new world

Internet banking may still be a minority activity, but it will soon become mainstream and it is already having a massive impact on the industry

Banking over the internet may still be a minority activity, but the signs are it is on the verge of becoming mainstream. Rates offered on some online savings and current accounts are so good they will surely take a growing share of the market.

Banking over the internet may still be a minority activity, but the signs are it is on the verge of becoming mainstream. Rates offered on some online savings and current accounts are so good they will surely take a growing share of the market.

Internet banking is already having a massive indirect impact on the industry. The slowness of NatWest's response to the Web was seen as a factor in its takeover by the Royal Bank of Scotland, and the financial burden of large branch networks upagainst branch-free internet banks has encouraged the branch closure programmes that have been unrolling, and which damaged Barclays' reputation in particular.

Initial research in the United States suggested internet transactions would cost banks only one-hundredth of the cost of branch-based transactions. Those figures now appear over-optimistic and the reality - as the Co-operative Bank has stated - is it costs banks about 10 times more to carry out transactions through a branch than over the internet.

Those realities will increasingly be passed on to customers. The major banks offer negligible rates of interest on current accounts, and they will surely have to change their costing structures to keep most of their business. This move will be given a boost next year when measures are introduced by all the banks to make it easier to move bank accounts - with all direct debit and standing order details automatically transferred to a new account.

Several banks have internet-only offshoots, partly to prevent existing customers getting upset at the much better rates available online. Sites such as Cahoot (from Abbey National), Smile (the Co-op) and IF (Halifax) look good, and Cahoot and Smile operate well. Due to technical problems, IF's launch has had to be delayed. Egg does not yet offer a current account, but will do so by the end of the year. Smile, Cahoot, IF and Egg all promise their rates are long-term and sustainable.

Not all banks offer good services online. This week a survey from the consultants Amacis found the best responses to e-mail questions came from Cahoot, the Co-operative Bank and Birmingham Midshires.The study also concluded that internet banking would be the most important channel for banking within three years, driven by the lower operating costs for the internet. Make no mistake, a financial revolution is underway.

Interest rates on internet-only savings accounts Smile CAT Mini Cash ISA, £1 min, 7.25 per cent; Nationwide e-savings, £1 min, 7 per cent; Halifax Web Saver, £1 min, 6.35 per cent; Abbey National eSaver, £2,000 min, 7 per cent (with introductory bonus); Newcastle BS Net Savings, £10,000 min, 6.60 per cent; Bank of Scotland Fixed Rate Bond, £3,000 min, 7 per cent (fixed rate).

Source: Moneyfacts

Best providers for e-mail responses Internet banks - 1 Cahoot; 2 Smile; 3 Egg. Banks: 1, Co-operative; 2 First Direct; 3 Northern. Building societies - 1 Birmingham Midshires; 2 Bristol & West; 3 Britannia

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