Net puts world of banking at your fingertips

Consumers' banking needs have changed. Traditional banks' failure to address this shift and poor customer service levels in branches have left many customers worldwide disillusioned about how, and with whom, they conduct their financial transactions. In the Republic, recent tax-evasion scandals in the sector have added to these concerns.

Internationally, some Internet banks and service providers are capitalising on industry weaknesses by offering a full range of banking services over the computer, television and mobile phone.

Traditional bricks and mortar institutions are now competing for customers with both virtual, or online-only, banks and "clicks and mortar" banks. Virtual banks are standalone concerns offering many of the services provided by a traditional bank but using the Internet as their main delivery system.

Clicks and mortar is a term used to describe a virtual bank that is part of a traditional financial institution. For example UK-based Internet bank Egg is part of Prudential, but maintains its own brand identity.

By their nature, online banks may react more quickly to the needs of consumers and some are using this flexibility and customers' increasing discontent with banks in their marketing campaigns. Internet bank First-e's UK website says it was founded by financial experts who, "Like so many other people, they were fed up with not being able to get to the bank during short and inconvenient opening hours, and paying such outrageously high charges when they got there."

Convenience and cost are the main reasons people switch to a virtual bank.

Customers may use the online services for account opening, credit card applications, transferring funds between different accounts, bill payment, account transaction and statement details.

Virtual banks also offer services unavailable from their traditional bank: the ability to download account information to financial spreadsheet programmes and personalisation.

Online financial information website Finfacts' Mr Michael Hennigan has said personalisation allows customers to set up their personal preferences within a bank website. E-mail messages may also alert customers that their balance has fallen below a certain specified level.

Some countries, such as the Republic, have a high concentration of branches due to perceived customer demand. Although most Irish banks still believe this is what customers want, the virtual model offers customers an attractive one-stop shop by integrating all of their financial information. It also provides banks with a low-cost, high-service alternative to an extensive branch network in the long run.

Unfortunately, the Internet banking model does not always work. Depending on the design of the site, customers may not receive the service for which they had hoped. The low level of faceto-face contact also makes it difficult for banks to sell products or advise on complicated financial instruments.

Last August, online market researcher Cybercitizen Finance found that the number of online banking customers was not growing as quickly as expected. Although 3.2 million people opened accounts since the previous July, another 3.1 million stopped using theirs altogether. Fifty per cent of those who discontinued using the sites said they found them too complicated or the customer service was dissatisfying.

The most practical difficulty for online-only banks lies in taking deposits - if a virtual bank does not have a physical site how do customers put cash in their account? In some cases, customers are paying more than anticipated because they are forced to deposit funds by mail, wire transfer or ATM.

Despite such difficulties, customer movement to online banking is transforming the industry. In Europe, many companies are scrambling for their piece of the online pie. Dublin-based start up First-e and established institutions such as Barclay's Bank, Deutsche Bank, Credit Lyonnais and Axa Group are looking for a way to expand existing services into pan-European Internet banking.

There is an expectation that many American banks will also enter the European market. Online trading brokerage E*Trade has already done so with the acquisition of Internet-only Telebanc. The transformation to web-based services makes sense commercially as it is forecast that by 2003 there will be 170 million Internet users in Europe, about the same number forecast for the US.

However, there is a strong belief in industry circles that virtual banks will have a tough time against the big boys of banking once the traditional providers get their Internet house in order.

In the Republic, AIB and Bank of Ireland are developing online banking products for customers. Although much of the technology is not fully developed, some aspects of Internet banking - such as viewing statements and making transfers between their own accounts - are available to Irish consumers.

Now that basic Internet banking services are available in many parts of the world some web banks are developing a one-stop shop or financial supermarket for their customers. This seamless structure allows consumers to manage their banking and investments using the same Internet banking facility.

They have the option to manage their checking account, purchase insurance, buy investment products like stocks and unit trusts. Some will even offer estate planning services like trusts and wills.

As always, consumer protection is a concern when it comes to financial services offered over the new medium. Last October, the Central Bank issued an advisory to members of the public regarding financial services on offer over the Internet.

A spokesman recently told Family Money that: "There is nothing to stop Irish residents from using firms outside the jurisdiction but they are not protected by any Irish legislation, including compensation rules, unless authorised by the Central Bank. If they choose to use an unauthorised firm outside the jurisdiction it would be wise to know the relevant consumer and compensation legislation in advance of investment."

The future of Internet banking is a bit cloudy and even those at the coalface disagree on its approach going forward. Charles Schwab's co-CEO Mr David S. Pottrock, who coined the term clicks and mortar, has said: "Sooner or later you need more than an outpost in cyberspace. Online commerce has to be about technology plus people."

Although many believe combining traditional and online banking is the solution, president and chief executive of Softbank Corporation, Mr Masayoshi Son, believes pure play Internet companies will win out.

At the annual meeting of the World Economic Forum, Mr Son said companies should develop their Internet businesses as a completely different entity and ensure they compete head to head. "Assign a totally different CEO and tell them to go kill this sister company," he said.

In such a competitive market, the consumer is sure to win.