Banks favour a `clicks and bricks' strategy

What an about-turn? Allied Irish Banks (AIB) was convinced a stand-alone Internet bank was an essential development less than a year ago. And Merrion Stockbrokers was favouring the group over Bank of Ireland because it appeared to be "more aggressive" at rolling out its strategy this year. Bank of Ireland would continue to suffer from poor sentiment towards UK mortgage banks for several months, the brokers said.

Around the same time, the Dublin-based financial services company First-e Group and Banque d'Escompte of France were pointing to the advantages of stand-alone Internet banks. Because premises were not occupied, costs were lower, they said. Now AIB has abandoned the stand-alone strategy. Instead, it favours a more integrated approach. And First-e, is to adopt a "clicks and bricks" policy by opening a number of branches in Britain and Germany to boost customer confidence.

At a time when even the more traditional banks are looking at branch closures, this is a changed strategy.

It could well erode the main advantage of the Internet which provides easy access, at less cost. And without the bricks and mortar shop front.

First-e's website says "without expensive branches to run, we offer convenience, great service and high rates of interest". Granted, if it sets up a chain through retail outlets like Marks & Spencers the costs would not be anything as high. Group marketing costs could be reduced, but margins could be shaved as the retailer shares in the benefits.

Enba, the Dublin-based holding company of First-e Group, has an interesting array of shareholders. These include: Apax Partners & Co, an Internet venture capital company; Capital Z, a private equity fund; Intel, the chip-maker; Morgan Stanley Dean Witter, the US investment bank; and Vertex, a high-tech venture capital company which is part of the Singapore Technologies.

So far these groups have invested €135 million in four tranches. This will rise to €410 million when the merger with Uno First Group is complete.

But these well-known shareholders have not given the bank instant credibility. Enba has admitted it has had a difficult first year in Britain following adverse press reports on the concept of offshore Internet banking. "That hurt us and I think it was unfair", its chief executive, Mr Gerhard Huber told The Irish Times last week.

Nevertheless, it has built up 120,000 customers in Britain and Germany. Yet this has been at an undisclosed cost.

First-e offers a cheque and deposit account and offers interest rates of 6.8 per cent gross.

However, tax residents in this State cannot apply, so it is directed at people who want gross interest, though this would be taxable in the depositors' respective countries. The intensity of competition among the banks is clear from visiting their websites.

First-e offers 4.88 per cent gross on current accounts. And Ulster Bank has a promotion offering a special introductory annual percentage rate of just 3.9 on its Visa cards until November 30th. AIB offers an introductory rate of 6.9 per cent on its MasterCards. But by far the greatest offer is from Egg, the Internet bank owned by British Prudential - in what it calls a "mind blowing" offer, it has zero APR for six months for people in Britain.

The proposed moves by AIB and First-e are clearly an admission that the Internet path is not paved with gold, so expectations have had to be cut back. The environment for stand-alone Internet banks has changed over the past six months. Other banks, such as the Tokyo-based Sanwa Bank have adopted a similar stance.

The moves are prudent as the relatively recent rush into ill-fated lending to seemingly glamorous ventures will attest - property and Onassis types in the seventies, loans to developing countries. And the over-burdened telecoms are now coming under scrutiny.

In Britain, the Centre for the Study of Financial Innovation opined that the rapid growth in Internet banking was presenting the industry with new banana skins. Also projections for growth in the sector have been sharply cut back.

AIB, Bank of Ireland, and Ulster Bank already provide some useful Internet banking services but these are very limited. Funds, for example, can only be transferred to nominated accounts within that bank's operations so it is not possible to transfer funds to a person in another bank.

However, this ensures safety. If a hacker, for example, managed to gain access to a person's PC and codes to a bank account, transfers could only be made to the specified accounts.

Apprehension about security is the greatest deterrent to the development of Internet banking. This fear has not been helped by the exposure of a few Barclays Bank's customers on the web. But as decryption technology is increasing at roughly the same rate as encryption technology, security will continue to be an evolutionary process.