Internet-only banks face survival of the fittest

While some Internet banks in the United States have suffered setbacks in recent months, the carnage does not appear to be nearly as bad as in Europe where Internet banks seem to be bellying up at a fast pace.

Institutions in Europe rolled out Internet-only banking ventures later than many US banks, but they did so with a vengeance, with contributions such as Smile, Egg, Cahoot and y-o-u.

Many of these banks continue to thrive but an alarming number have fallen by the wayside in recent months, with some aborted before they even got started. A hesitancy by consumers to give up branches, combined with more realistic expectations about the potential of Internet businesses propelled the demise of some. Several instances of Internet fraud did not help matters.

Many executives of would-be Internet banks are regarding their brief forays as learning experiences. And many have gained a new appreciation for traditional methods of reaching out to customers.

"We clearly learnt from our experience," said Mr David Roberts, Internet marketing manager at Allied Irish Bank, which in January pulled the plug on what was to be a separately branded Internet institution. "People are reasonably slow to change their behaviours. They do trust established brands and they want multiple access points.

"It would have been hard for us to establish full relationships with new customers and we couldn't really see where the revenue was going to come from."

In March, ABN Amro Bank and KPN Telecom, a Dutch telecommunications firm, which is also a shareholder in Eircom, ended an eight-month collaboration in Money Planet. The collaboration was a joint venture that would have provided mortgages, insurance and savings accounts over the Internet in the Netherlands, Germany and Belgium.

"The worsened sentiment around Internet companies played a role" in the venture's folding, said Mr Tanno Massar, an ABN Amro spokesman in Amsterdam. So too did research showing that the investment of $180 million (€200 million) by both companies would not provide a sufficient return quickly enough. The companies had spent a "few million" dollars before folding the effort and its 40 employees returned to jobs at their parent companies.

"The market for Internet financial services companies offering products from different parties under a standalone brand name is not convincingly viable," Mr Massar said.

Vontobel Holding AG, Switzerland's second-largest independent private bank, terminated its year-old y-o-u Internet bank project, which would have offered private banking services to emerging affluent individuals, in February, after losing nearly $90 million on the project last year and taking a charge of $60 million this year.

Vontobel's y-o-u "didn't meet our time and cost frame and so we decided to stop it", said Ms Elisabeth Meyerhans, corporate communications officer at Vontobel in Zurich. "Clearly the market's and people's expectations have changed. The whole Internet euphoria has gone a little and people want things differently. The technical infrastructure also has to be faster for people to use [the Internet]," she added.

Royal Bank of Scotland earlier this year cancelled a $100 million joint venture with Scottish Power to provide a portal site for small and medium-sized businesses called Work24. The site, one year in development, "would have required a great deal of development work, investment, and marketing", leading both parties to decide to fold the venture after a "small number of millions of pounds" had been spent, said a Royal Bank of Scotland spokesman in Edinburgh.

Other banking companies have curtailed their original plans. The Dublin-based Internet incubator Enba, which has invested in several e-financial services companies, laid off 120 employees at the end of last year and recently abandoned plans for larger office space. Enba continues to run First-e, an online bank established in Britain and Germany, but last week called off its plans to form Unofirst Group, an Internet bank for Europe and Latin America, with Banco Bilbao Vizcaya Argentaria of Spain.

Lloyds TSB Bank has revised its original plan to open its Internet-only Evolvebank in Britain. Evolvebank has been operating since January throughout Spain, where Lloyds determined it would be cheaper to introduce a new brand.

Instead of bringing the Evolvebank brand to Britain as originally planned, Lloyds formed a partnership with Centrica, a British energy and gas supplier that offers a variety of financial products under the Goldfish, Automobile Association and British Gas brands. The firms will open a bank called Goldfish in the second quarter.

"We don't plan for it to be an Internet-only bank like Evolvebank," said Ms Collette Graham, director of communications for Goldfish in Basingstoke, south-east England. "Goldfish bank will be multi-channel," she said.

Lloyds will benefit from the brand-name recognition that Centrica already has built up around its Goldfish credit card, which has one million users.

The bank will specialise in offering loyalty schemes with high-street retailers, and expects to break even by 2003 and have two million customers by 2005, Ms Graham said.

In the US, Houston-based Compubank, which reported a loss of $26.2 million at the end of last year and laid off 10 per cent of its staff in January, last month sold its 50,000 customer accounts to Atlanta-based Netbank.

Earlier this month, USABancshares.com, a Philadelphia-based bank that had made serious investments to become an Internet bank, announced that it was returning to its roots as a community bank. A new management team hopes to stem losses that last year more than tripled from a year earlier to $9.7 million.

Last week, Brookline Bancorp said that it had decided to sell its year-old Lighthouse Internet bank, or merge it back into the parent bank in the second or third quarter. The decision follows a $25 million investment in Lighthouse and a net loss on the venture of $751,000 in the first quarter of 2001.

"There's a consensus today in the United States and Europe that a successful strategy is multi-channel," said Mr Gwenn Bezard, manager of Celent Communications' Paris office.

However, several Internet banks appear to be holding their own. Egg, Prudential's online bank, says it is on track to break even in the fourth quarter. The London-based bank had 1.35 million customers at the end of December and has expanded its product range to include investments, insurance and credit cards. Although Egg had losses of $220 million at year end, it continues to explore partnerships with a number of European businesses aimed at expanding its presence outside of Britain.

France has been host to about six Internet-only banks that have opened operations there during the past 12 months. Among them are ebanking.fr, introduced by the Dutch bank Fortis; banqueagf.fr, part of AGF, the French subsidiary of German insurer Allianz; and Covefi, co-owned by a French mail-order company and Cetelem, a BNP Paribas subsidiary. France also has banquebipop.fr set up by the Italian bank Gruppo BipopCarire; and Zebank, an online bank owned by Groupe Arnaud and Dexia, a European banking group.

ING Direct, a unit of Amsterdam-based ING Group, has had considerable success in France, signing up 75,000 customers in six months, versus the 100,000 BNP Paribas has signed up over six years for its online bank, Banque Directe.