Online banks discover that 'e' is not the key for their customers

The future was internet accounts, they said. But the future hasn't happened

The quirky ads of internet bank First-e could not have been more disparaging about traditional banks. They depicted a computer screen with queues, closing times and charges being dragged into the trash can. They were designed to attract the young, affluent and adventurous. They seemed to tell the future.

Two years ago, internet banking was going to be the source of great riches. Local branches were under particular threat in the race for cyberspace. But the bubble has burst. There has not been the expected revolution and the market is not now an easy one for internet banks. Local branches are biting back.

The fall from grace of First-e, the financial services industry's highest-profile casualty, highlighted the diffi- culties. First-e was Dublin based and French owned. It attracted more than 200,000 customers in less than two years, including around 50,000 in the UK, but earlier this month it shut its operations in the UK and Germany.

"The rise of internet banking anticipated two years ago is very unlikely to occur," says Rob Fox, principal consultant at Wolff Olins, a corporate identity firm.

At the beginning of 2000, Barclays predicted that by the end of the year, 10 million people would be banking online. That figure, today, is thought to be closer to five million.

One problem is that people are conservative with their cash. Research shows that just 2 per cent of 30 million bank customers move their current account in any one year; many keep their account for life. So the initial impetus for online banking provided by "rate tarts" – people who keep moving banks and chasing the best deals – has not been sustained.

Issues of security and privacy of bank details have also held back e-banking. As recently as the end of last year, almost a third of high-street banks were running online operations from which hackers could steal sensitive information. The finding was made by Clicksure, an inter-net accreditation company which conducted an audit of the top 13 banking sites.

In the past, hackers have got into sites run by both Barclays and Egg, the online bank 80 per cent owned by Prudential.

"There are people who have great concerns about internet banking primarily because of the vulnerability that exists on the user's PC," says John Ross, managing director of Security and Standards, a security-software development firm.

But the outlook is not entirely bleak. "There is definitely a future for internet banking. It is growing by the day as more people come on-line but it will take a lot longer than we ever predicted to get more people," says Ambrose McGinn, retail e-commerce and strategic development director for Abbey National.

At the beginning of this month, research by Mori for Egg found the British are becoming increasingly confident about carrying out financial transactions over the web. The number of people who bought or accessed a financial product, credit card or bank account online grew by 25 per cent between last September and April 2001 to five million. More than a quarter of all internet users now bank online, the survey claims.

But the biggest development in the past year is that traditional players such as Abbey National, Halifax and the Co-op have established a strong online presence. Analysts believe these "click and mortar" banks, rather than the stand-alone operations with their higher interest rates, are going to be the winners. "For internet banks to succeed in the UK, they need to be linked to a traditional bank or a big financial player," says Chris-tophe Uzureau, an analyst at Gartner.

Analysts also say consumers are more likely to feel secure on the web with a known, established company. "On the internet –a hugely promiscuous medium – a brand that stands for something but is founded in trust is absolutely vital," believes Mr Fox.

This is partly the reason for the failure of First-e. Patricia Lueer, an analyst at Jupiter MMXI, says it was difficult for customers to trust First-e and to find a reason to bank with it because of this lack of brand and tradition.

The most popular online banks in the running for future success are new variants on some very old names. They include lloydstsb.com, barclays.co.uk, as well as capitalone.co.uk and nationwide.co.uk. Egg, one of the few online banks not to have any branches, is bucking the trend and looks like it will succeed. But this is mainly because it has the power of the Prudential behind it.

Egg, which says it will make a profit by the end of the year, takes what it calls a multi-channel approach. It has launched a credit card with the high-street retailer Boots and sells financial products from different companies, including competitors, on its site to attract traffic. As a result, it says that business is continuing to grow.

As many as 370,000 new customers have joined and stayed with the site during the first six months of this year, an Egg spokeswoman says.

"We've got confidence in the robustness of our business model," she adds. "There is a future for a company that will adopt a multi-channel strategy in which the internet plays a primary role."

But the questions are still circulating around Egg, which was initially a telephone bank.

Observers question whether it can retain customers in the long term. As its rates drop, to help the business move into profit, the customers that were attracted in the first place – rate hoppers constantly searching for the best deal – are likely to move on.

The online banks also have to look at their sites and their marketing.

"Banks really have to work at the usability of their pages and they have to make sure that the customer really understands what the different services are and what the value add is," says Ms Lueer.

Online banks have a place in the future, despite their limitations, but there is now no doubt that banks are going to own bricks as well as websites.