The debate over whether Internet banks need branches to survive is far from dead.

The matter seemed close to being settled two weeks ago when executives from WingspanBank, VirtualBank and First-E Group announced during an American Bankers Association marketing conference in Orlando that they would open physical locations. The basic tendency of humans to seek out fellow humans for help in opening their accounts and doing banking is too strong to disregard, they said.

"People need a physical presence," said Wingspan president Mr Michael Cleary during a panel discussion. "It's psychological, like a security blanket."

The Bank One subsidiary will test different types of physical presences at 1,800 of its parent company's branches this autumn to determine what Wingspan's 175,000 customers want. It will try "Schwab-type offices", kiosks, ATMs, and even traditional tellers, Mr Cleary said.

But Wingspan is not going so far as to support full-service branches, he said. "We don't want to give full access to the banking centres. There will be limited access, primarily for account opening."

The Internet bank also plans to accept deposits through 30,000 ATMs.

VirtualBank's attitude towards branches has changed completely since it was founded in April, 1999. At the time the bank's headquarters in Palm Beach, Florida, was closed to the public, said Mr Rory Brown, chairman and chief executive officer. All the same, people queued up outside the office, hoping to get in, he said.

The human idiosyncrasies did not stop there. About half of VirtualBank's new accounts are being opened by people who apply online, print out the application form, and come to the office to hand it in, Mr Brown said. "People want to see somebody."

VirtualBank will open physical locations in the next 12 to 18 months, and it hopes to follow the example of Charles Schwab, which opens 70 per cent of its new accounts through its 365 branches, Mr Brown said.

He foresees a smooth transformation. "It's quicker for us to get to 400 branches than for a bank like Wells Fargo with more than 1,800 branches to get to 400."

Across the Atlantic, enthusiasm for Internet-only banking is showing its first signs of waning. First-E, the pan-European Internet banking subsidiary of the Unofirst Group of Dublin is considering a physical presence that could make it as ubiquitous as McDonald's, said Xavier Azalbert, chief executive officer of First-E Bank.

"We could partner with an airline like British Airways and put stores in executive lounges in airports in the UK and Europe," he said.

For now, First-E's plans are more modest. It plans to open its first store in London within the next few weeks. "It is our expectation that we will open a certain portion of accounts in branches," Mr Azalbert said.

Wingspan, First-E, and VirtualBank expect the addition of branches will offer benefits beyond a safe haven for customers. Mr Cleary said Wingspan hopes that a bigger branch presence will cut down on calls made to its customer service centre. Because customers have no branches to visit, they tend to call the bank several times during the first month of their relationship, he said.

Mr Brown hopes the branches will combat fraud. "About 10 per cent of checking account applications we receive online involve some type of fraud," he said.

Mr Eric Rajendra, partner and global head of e-business in the financial institutions practice at A.T. Kearney in New York, said Internet banks' embrace of physical branches is inevitable.

"Internet banking as an experiment was good, but it was unrealistic to think consumers would dump the physical bank network," he said.

However, during separate interviews last week, Everbank, Principal Bank and NetBank reaffirmed their commitment to "pure" Internet banking.

"We do not have plans to open branches," said Mr Frank Trotter, president and chief executive officer of nine-month-old Everbank.com. "We feel comfortable with the online model and feel strongly that it's a great long-term approach to the business."

Everbank, the Internet-only division of Wilmington Savings Fund Society, attracted more than $125 million (€146 milion) in deposits in its first six months and continued to be "right on track" in adding customers and deposits, Mr Trotter said.

Mr Steven Ollenburg, president and chief executive officer of Principal Bank, the Internetonly operation of the life insurer Principal Financial Group of Des Moines, Iowa, called Internet-only banking "still very opportunistic."

Principal Bank turned a profit in the fourth quarter of 1999 after about 18 months of operation. Mr Ollenburg, who has no intention of opening branches, characterised the decisions by others to do so as hasty and misguided.

He also faulted Internet-banking business plans for requiring immediate hyper-growth.

"In any Web-oriented business, it is easy to be swayed by changes in the marketplace, by technology, and by consumer behaviour patterns," Mr Ollenburg said. "If you have a solid business plan, you can remain focused and it's not necessary to change."

Principal Bank has attracted 40,000 accounts and $230 million (€261 million) of assets by cross-selling accounts to customers of its parent company. The bank now plans to strike affinity partnerships to help it expand beyond Principal's customers, Mr Ollenburg said. It also is considering using Principal's network of insurance field personnel and brokers to cross-sell banking products.

Atlanta-based NetBank has no plans to open branches in the foreseeable future, said D.R. Grimes, chief executive officer, though he conceded, "I will never say never".

Branches can give customers a sense of reality, and offer them a place to make deposits and get commercial loans, Mr Grimes said. But none of these reasons are enough to spur NetBank to open a branch network, he said.

NetBank is exploring the possibility of using ATMs to accept new deposits. Mr Ollenburg also was amenable to the idea of using ATMs to add a physical dimension. "I don't think you can equate a $10,000 to $30,000 ATM with a $1 million to $2 million branch building," he said.

E-Trade Bank of Arlington, Virginia, a wholly-owned subsidiary of the online brokerage ETrade Group, said its acquisition of the ATM network, Card Capture Services, had enabled it to operate a network of 9,600 ATMs for the same annual cost of four bank branches. "Our position is not to focus on branches at all," an E-Trade Bank spokeswoman said. "Clearly ATMs are a way to get street corner presence without sinking in the operating cost of a branch."

E-Trade Group is slowly broadening its physical reach. By year end, it will have a store and corporate offices on Madison Avenue in New York City. This outlet will have E-Trade ATMs along with Web-connected terminals and information kiosks.

Last week, E-Trade opened its first financial services centre at a SuperTarget store in Roswell, Georgia, to offer target customers banking, brokerage and investment planning services through terminals connected to the Web and ATMs. If successful, the centres could be rolled out to SuperTarget stores nationally.

Most analysts remain convinced that Internet banks need branches. Internet banks will "increasingly choose to create a physical presence like a standalone store, an employer work site, or a private label opportunity because access to an ATM network will not be enough," said Asheet Mehta, a principal at McKinsey & Co. in New York.

"Internet-only banks targeted at certain demographic segments may survive, but they will never be mass market," said Mr Peregrine Riviere, European Internet and financial services analyst at Morgan Stanley Dean Witter.