Internet Banks Struggle
To Attract New Business
By AARON ELSTEIN
THE WALL STREET JOURNAL INTERACTIVE EDITION
With its kickoff ceremony Monday at New York's Museum of American Financial History, First Internet Bank of Indiana joined the growing ranks of banks that do business exclusively via the Internet.
Over the past six months business in this arena of electronic commerce has boomed, analysts say, at such companies as Net.Bank Inc., CompuBank, and Telebanc Financial Corp. Indeed, NetBank earlier this month reported that accounts had grown 348% since Sept. 30, and Bear, Stearns & Co. deemed the Atlanta bank "one of a handful" of Internet ventures that actually makes money.
The chief attraction of Internet banks to consumers has been their high-yielding certificates of deposit and money market accounts, plus low costs to set up and maintain checking accounts that often pay interest. With a $100 deposit, customers on NetBank can open a free checking account that pays a hefty 3% rate of interest. To get an interest-bearing account at Citigroup's Citibank, a person would need to maintain a $6,000 balance and pay a monthly fee of $12, according to Bank Rate Monitor, a research firm.
But despite these types of aggressive promotions, upstart Internet banks have had little success in persuading customers to bring them their credit and checking account business.
James Bruene, editor of the newsletter Online Banking Report, said that while people frequently complain about the fees traditional banks charge to maintain a checking account, the fees are usually not so high to force large numbers to take their to take their money out of a brick-and-mortar bank branch and entrust it with a company that operates solely online.
But it might be more than just consumer reluctance to accept new technology. Particularly for people who do most of their banking via automatic teller machines, or ATMs, an online checking account might not be such a bargain.
'Virtual' Banks Draw Interest, but Some Analysts Shy Away (Feb. 19)
Internet banks all offer free ATM cards to their customers and do not charge for transactions. But traditional banks that operate those ATMs typically levy fees of $1 to $1.50 for each transaction conducted by consumers who don't have an account at that bank.
Considering that the average consumer uses an ATM eight times per month, according to PSI Global, a Tampa, Fla., research firm, the potential savings of online banking can be eaten away by frequent trips to the cash machine.
For the most cost-conscious customers, such extra fees "would be a disadvantage," said Bear Stearns analyst Sean Ryan.
Mindful that such fees might be discouraging potential customers, officials at the Internet banks are trying to find ways to circumvent the ATM charges.
Telebank (www.telebankonline.com), a unit of Telebanc Financial Corp. of Arlington, Va., earlier this month began offering to reimburse any ATM charges incurred by customers who sign up for a new account via Yahoo! Inc.'s Internet portal site.
"There is general unhappiness for having to pay to withdraw money,'' said David Lau, senior vice president at Telebank. "Our intention is to offer refunds to all our customers if the program is successful."
David Becker, chairman of First Internet Bank (www.firstib.com), said his company is contemplating refunding ATM fees to customers who do $5000 worth of business with his online bank. "We want to show our flexibility with fees," he said.
Mr. Ryan of Bear Stearns said Net.Bank also has considered offering rebates on ATM fees, although no such program is currently in place.
In the meantime, the Web sites of Net.Bank (www.netbank.com) and CompuBank (www.compubank.com) both include information on where to find free ATMs. CompuBank suggests that customers avoid ATM fees by asking for extra cash back when paying for goods with a debit card.
Higher ATM fees aren't the only place where the online banking charges can add up. Net.Bank charges customers $5 for a copy of a canceled check, while many traditional banks return canceled checks free with monthly statements.
And overdrafts costs $25 for checking account customer at CompuBank, while many traditional banks charge less. BankAmerica Corp. of Charlotte, N.C., for example, charges its checking account customers $10, according to Bank Rate Monitor. Bouncing a check costs $30 at Citibank. Seattle's Washington Mutual Inc., the nation's largest savings and loan, charges $18.
Still, the upfront charges of online banking are low.
CompuBank charges nothing for a no-interest checking account and $10 in monthly fees for an interest-bearing account unless the customer keeps a balance of at least $1,500. Telebank says it charges no maintenance fees, and NetBank's checking account that pays 3% interest is free, but its checking account that yields 4% costs $4.50 per month.
The fight against ATM fees is likely to become just one of many ways the nascent Internet banks will be fighting for business in the coming year. Analysts say the online banks need to increase the number of checking accounts they have because, theoretically, these customers would turn to the online banks first when they need a loan -- and loans are where banks make most of their money.
According to Bear Stearns, about 90% of Net.Bank's income comes from the difference between the cost of the loan and the price it charges customers for the loan. But over the past few quarters, only 5% to 10% of its customers have taken out loans with Net.Bank. Most of the loans on Net.Bank's books were purchased from other lenders.
In the meantime, the rapid success of the Internet banks has not gone unnoticed by their brick-and-mortar brethren. Traditional banks, which have offered online bill payment and ways for customers to check their balances for several years, are expected to expand their Internet capacities in the coming year.
"Wells Fargo & Co. has many times more Internet customers right now than the Internet banks combined," said Chris Musto, an analyst at Gomez Advisers of Concord, Mass. And, he says, even more attractive to consumers looking for banking services at bargain prices, Wells Fargo has its own ATMs. |
