The new web bank, which will operate under the distinctive brand of "smile.uk.co", plans to offer a full service bank account from 28 October.
Unlike Egg, which has scored a spectacular success in pulling in pounds 6.7bn of hot money deposits but has struggled to develop its lending side, smile.co.uk will offer an interest bearing cheque account with full overdraft facilities and access to a nationwide cash-dispenser network from day one.
Smile also differs from the Internet banking services offered by the other high street banks in that it is a stand-alone Internet service rather than just another means for existing bank customers to access their account.
Barclays claimed earlier this year to be Britain's biggest Internet bank after signing up nearly half a million customers to its free Internet access service, but this is integrated within its existing banking operation.
It is also a genuine web-based service, unlike the Egg offering which started as a telephone banking but moved to Internet-only in an attempt to choke off demand.
As well as the Smile current account, customers will also be offered preferential credit card terms and a no-notice high-interest savings account.
Mervyn Pedelty, the Co-op Bank chief executive, said that unlike Egg which has been open about the fact that it is running its accounts at a loss in order to get customers on board, Smile is not subsidising its accounts, merely passing on the lower costs of doing business over the Internet to its customers.
"These rates are sustainable," Mr Pedelty said. "This is a brand new account which offers all the products, services and convenience of a high street bank but based on the Internet. This means we will pass on to customers the benefit of our lower costs."
Analysts Datamonitor reckon the costs of processing an Internet transaction at 13 cents, compared with 29 cents over an automatic teller machine, 65 cents over the phone and $1.70 for payments handled through a branch.
Smile will pay 4 per cent interest on credit balances offering an automatic, no-charge pounds 500 overdraft with an agreed overdraft rate of 9.9 per cent. There will also be a special account for students, with a totally free overdraft of up to pounds 2,000. Smile current account customers will be offered a credit card with an introductory rate of 4.9 per cent until the end of April 2000 with a standard rate of 9.9 per cent after that. The no- notice savings account will enjoy an interest rate of 5.25 per cent from pounds 1 upwards.
Mr Pedelty said that one of the reasons why the bank was able to offer a stand-alone service and pass on the lower cost to customers was that with 30,000 customers, it did not face the same issue of canabilising existing customers that would be faced by a bank with, says, 25 per cent of the market.
The Co-op Bank says that Smile will maintain the ethical lending stance which has proved to be a major selling point for the bank.
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