Bank On It

You haven't seen a bank teller since you got your first ATM card? Now virtual banks are eliminating reason after reason for us to go to physical banks at all.
Magazine Contributor
11 min read

This story appears in the April 2000 issue of Business Start-Ups magazine. Subscribe »

Do you do banking business with a brick-and-mortar bank? If so, ask yourself these questions:

  • How much time do you spend waiting in line to make a deposit with a teller who treats you like some suspicious character?
  • How often do you find yourself educating your newest loan officer on the same business information when you go in to review your line of credit or accounts-receivable financing?
  • How many of your precious dollars do you spend every month on bank fees for your business checking account?

If you shake your head wryly and answer "A lot' to one or more of these questions, the latest progeny of the computer age wants you. For years, traditional brick-and-mortar banks have touted their online business checking accounts as the best thing since sliced bread-faster, cheaper and easier to use. They were all of those things, and business owners everywhere logged on, bringing new efficiency to their financial operations.

Now the virtual bank-that is, the bank that exists exclusively, or nearly so, on the Web-promises to do all that and more for the business customer. And if you aren't among those lining up to take advantage of it, you probably will be soon.

To hear Michael Reardon tell it, virtual banking is the only way to go if you run a small business. Reardon, 33, and his partner, Scott Patten, 31, own the North East Brewing Co., a popular Boston microbrewery, restaurant and pub, and they do most of their banking business through a Boston start-up called, one of a rapidly growing number of virtual banks targeting consumers and small businesses.

Like its fledgling competitors, puts as much distance between itself and old-fashioned brick-and-mortar banking as it can; indeed, calls itself an "unbank" and doesn't hold a bank charter at all. Instead, as a unit of OneCore Securities Inc. of Bedford, Massachusetts, a registered broker, dealer and member of the SIPC and NASD, offers most traditional banking services, including money-market operating accounts, online bill payment services, payroll processing, credit-card services, and even 401(k) plan administration. All of which made signing up for's payroll services a no-brainer for Reardon.

"We had been using one of the big payroll services," Reardon says, "and I'm going to be conservative and say it was maybe 80 percent cheaper with And this is the tip of the iceberg, because we expect them to have credit-line capability, and we've signed up for the bill-pay services, too. It used to take two people half a day to pay all our bills. Now, I can do it online in one hour."

Virtual banking is also paperless, or nearly so, and easy to use. Reardon has instant, 24-hour, secure Internet access to his business account, allowing him to manage cash flow with a degree of sophistication possible in the past only to big businesses running proprietary computer links to their banking institutions.

"I'll be able to log on to my account information from a boat off of Cape Cod when I go on vacation in the summertime,' Reardon says. "Any time, day or night, I can make sure cash flow is OK.'

Last but not least, virtual banking is cheap. The virtual best banks commonly charge very low fees, or none at all, for certain basic services, including automated bill paying and wire transfers. They also offer business customers ATM cards, credit cards and direct-deposit services. At present, they don't lend money over the Web as a rule, but that, too, will come with time.

Virtual Banking Benefits

Not New, But Improved
Online banking itself is nothing new; indeed, traditional brick-and-mortar banks began offering many online services in the early 1990s. What's different about the virtual bank is that, because it exists almost exclusively on the Internet, it enjoys a significant cost advantage that can be passed on to the customer.

How? Traditional banks build branch offices complete with elaborate vaults and security systems, and they employ tellers, managers and loan officers. Sure, banks don't typically pay tellers and managers big salaries, but customers still foot the bill for these costs as a variety of fees that quickly add up.

The virtual bank, in contrast, needs no brick-and-mortar branches, no secure vaults, no tellers and no managers, so it brings significant costs savings to the game. Indeed, according to Richard Parlontieri, chairman and CEO of Atlanta-based Inc., industry figures show that a typical transaction involving a teller costs a brick-and-mortar bank about $1 and a typical ATM transaction 25 to 30 cents. The cost of a typical Internet transaction? One cent, Parlontieri says.

Lest you think the information is a little less than objective, consulting firm Booz Allen & Hamilton offers similar numbers: $1.44 for a teller-assisted transaction and four cents for an online transaction.

If you think these numbers make brick-and-mortar bankers nervous, you're right-because the future of banking, like the future of any business, lies with the cost-effective. Traditional banks are responding to this hard fact by offering online banking for consumers and business owners; many operate subsidiary units as virtual banks, and as time passes, their number will grow.

As yet, only a handful of virtual banks exist, but their number, too, will grow, according to Paul Murphy, author of Banking Online for Dummies (IDG Books Worldwide). "Virtual banking is empowering, and it's absolutely the wave of the future,' Murphy says. "You know exactly how much money you have in your account, what checks you can write against it, and how much you can sweep into an interest-bearing account until you need it-for example, on payroll day.'

Murphy makes a distinction between virtual banks and the online services offered by most brick-and-mortar banks. Virtual banking is Web-based banking, Murphy notes. You connect through the Internet-a simpler process than dialing into your brick-and-mortar bank's online system using a modem and special software-and you get a real-time view of the activity in your account.

Virtual banking also allows you to reconcile your account automatically, he adds; with online banking, you commonly compare your own account data against your bank's and manually reconcile any differences, deposit by deposit, debit by debit. That takes time, Murphy notes, and can prove frustrating. Virtual banking, says Murphy, turns the ordinary business owner into a professional money manager capable of improving the company's bottom line.

"Web-based virtual banking works today, and it's robust,' Murphy says. "There are still some wrinkles to be ironed out with online banking.'

Latest On Lending

While virtual banking already offers many services to business customers, the fledgling industry has a way to go before it makes getting a business loan as easy as it already makes managing cash flow.

By and large, you still have to meet with a loan officer to get a loan from a brick-and-mortar bank, and although virtual banks dispense with tellers and managers, they have yet to get rid of the business loan officer. They also have yet to figure out how to market the business loan. As a consequence, most virtual banks don't offer business loans at all, and those that plan to offer them expect to do so in traditional ways, with loan officers working out of ordinary offices in business and industrial areas. Simply put, although many Internet lenders target consumers, virtual banks don't yet serve business borrowers.

That doesn't mean you can't get a business loan on the Internet, however. Richard Warman, who runs Warman & Co., a small commercial cleaning service and supply house, in San Bruno, California, can tell you that doing so is fast and easy.

Last summer, responding to a radio commercial, Warman visited the Web site of LoanWise and filled out a simple application for $25,000 in working capital. Warman employs half a dozen people, and, like many other business owners, he needs working capital to smooth out the peaks and valleys of his receivables.

"It was quick,' says Warman, 37. "I applied online in the morning, and I got e-mail approving the loan at 1:10 p.m. on the same day-pretty exciting. Ten days later, I had the funds.'

A working capital loan of $25,000 isn't much by the standards of many small businesses, but it was crucial to Warman. He was all the more surprised to get it because, having filed for bankruptcy in 1991, he struggled for years to re-establish his credit, and his brick-and-mortar bank wouldn't lend him a penny, even though the bankruptcy is now off his record.

"They didn't ask for tax records or financial statements,' Warman says. "They asked basic questions-my name, the name of the business, the address, and so on-and I guess they pulled a credit report. It was much easier than going through all the paperwork with a bank branch.'

Warman's experience notwithstanding, it remains true that Internet lenders, like their brick-and-mortar competitors, target consumers not business owners. "You can't get a business loan from us today,' says Jonathan Lack, executive vice president of marketing and strategic planning at Compubank, "but you probably will be able to within the next year. There was so much concern about security when we launched that we decided to focus on core services on the theory that as customers become more confident about virtual banking in general, they'd feel more confident about borrowing money over the Internet, too.'

On the issue of expansion, Parlontieri expects to transform EBank's lending activities from a network of offices in the Southeast to a nationwide system within five years-and he, too, sees a continuing need for face-to-face meetings between loan officers and business borrowers. "We know small business, and we're going to use the Internet to create value for the business owner,' he says. "We'll rent office space and staff it with ATMs and loan officers. But we won't make loans over the Internet.'

The bottom line: If you need to borrow for your business, you need a brick-and-mortar bank-at least for now.

Different Internet Banking Services

What's Ahead
According to Murphy, lending aside, virtual banks may offer many services valuable to small businesses-or they will soon. Murphy expects virtual banks to offer payroll services, employee benefits management, bill presentment and even tax-filing services at a reasonable cost in the near future, allowing business owners to manipulate a vast sea of financial information affecting the profitability of the enterprise.

"Virtual banking offers the business owner an exceptional opportunity to understand your exact financial position at any time,' he says. "That's really valuable.'

What Have You Done For Me Lately?

As yet, there are only a handful of virtual banks targeting business customers, among them Compubank and Inc. Most large brick-and-mortar banks in the country offer online banking services to both consumers and businesses, as do many small and regional banks.

But virtual banking and online banking are not the same thing. And, according to Chris Musto, director of financial services for Lincoln, Massachusetts-based Gomez Advisors Inc., which maintains a useful Web site on e-commerce in its many guises, both are still evolving

"Small business tends not to get a great deal of value from online banking,' Musto says. For one thing, online banking requires that you dial into your bank using a modem and download your account information using software that must be compatible with the bank's.

Doing virtual banking over the Web, in contrast, connects the business to its bank through a Web browser, not a modem, eliminating the need for compatible software. The Web-based interaction, says Musto, allows the business to engage in a variety of sophisticated cash-management transactions.

Whatever form it takes, however, electronic banking can't do everything for the business customer, Musto adds. "With consumers, online bill payment means sending money to somebody,' he says. "With the business customer, it's one person's job to get all the payables together and another person's job to approve the payment, and one person may have an ATM card allowing deposits and another a card allowing withdrawals. The needs of small businesses are very distinct.'

In short, Musto adds, electronic banking is still finding new ways to meet the demands of the business customer. "But the Web opens up a new cost equation for business banking, and I think we'll see banks and nonbanks alike competing for the loyalty of the business customer on price and on the quality of the interaction. "

Juan Hovey writes a weekly column on business finance and insurance for The Los Angeles Times. He lives in Thousand Oaks, California.


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