It's been a strenuous battle for Internet-only banks since they emerged in 1995. The concept of a bank surviving solely on the Web seems promising-unlike other online businesses, banks don't have to deal with inventory, warehouses or product returns. But customers aren't signing on, and profits are slim to none.
Still, Internet-only banks would seem to be the way to go for entrepreneurial businesses, whose finances are more complex than the average consumer's but usually small enough to be handled in-house. Why not choose banking at the comfort of your own desk over trekking down to the local bank branch to stand in line?
Also, because Internet-only banks save money by handling operations online-for example, there's no need to rent office space and then outfit it-they pass those savings on to you in the form of high interest rates on checking and savings accounts, beating traditional banks' typical 1 percent or less interest rate with a more robust 5 percent.
Many online banks are also trying to add value by offering additional services, such as online bill payment, loans and insurance plans. The banks thought online bill payment, in particular, would be a big draw for companies, but many independent bill payment services have beaten them to the punch. As far as loans and insurance plans go, analysts say businesspeople prefer face-to-face dealing.
One underlying challenge plaguing online banks is consumers' security concerns. Although no online bank has experienced major security problems, handing over money to a bank that exists only in cyberspace is too big of a leap of faith for some entrepreneurs. Note, however, that just like their brick-and-mortar counterparts, online banks are protected by the Federal Deposit Insurance Corp. (FDIC).
"It's about trust," says Jim Bruene, founder and editor of The Online Banking Report, an independent newsletter that analyzes the online banking industry. "People are concerned with the soundness of their money; you want to put it in a place you trust. Internet-only banks are new, and they're on the Internet-that's two strikes against them right there."
Also making it tough is the exceedingly blurry line between online-only and traditional banks with online services. Traditional banks now offer almost everything Internet-only institutions do, stealing the convenience advantage and adding the trust factor of an established institution.
Despite the obstacles they face, however, Internet banks may not be down for the count just yet. Gomez Inc. gave them a good notice in its winter 2000 "Top Internet Banks," which listed a handful of Internet-only banks, including First Internet Bank of Indiana, NetBank, Security First Network Bank and WingspanBank.com . Despite the good press, online banks continue to fight an uphill battle. As Bruene says, "The [negative] perception surrounding the Web right now is having a big impact on Internet-only banking."
D.R. Grimes, CEO of NetBank, agrees with Bruene about the current impact of poor perception, but it doesn't have him worried. "The Internet doesn't make you successful or unsuccessful," Grimes says. "If you've got a strong business model and strong management, you're going to make it. We certainly have."
decide for yourself whether internet-only banks measure up.
Mie-yun lee is the editorial director of BuyerZone.com . Diane O'Brien contributed to this article.