Internet banks combine virtual branches, real thing

After dot-com collapse, realists carve out a niche


Internet banks suffered the fate of most dot-com dreams as the "New Economy" faded a couple of years ago.

Now, a more realistic generation of bankers is populating cyberspace and turning profits in record time. They carve out modest roles for their Internet presence and make sure that customers can reach a human being when they need one.

"It will take customers many years to feel comfortable doing most of their banking over the Internet," said Walter L. Tillman Jr., president of Earthstar Bank in Southampton, Pa.

Earthstar and area start-ups have grown rapidly by gathering deposits on the Internet, but they mix virtual branches with the real kind.

For its part, ING Bank of Wilmington, Del., targets customers' saving and borrowing needs at and tells them to leave the rest of their banking business where it is.

The banks are getting a lift from the sour financial markets, says Jim Bruene, editor of the Online Banking Report, an industry newsletter. Nervous savers want the protection of the Federal Deposit Insurance Corp., he said.

But Bruene predicts that the strategy will trail off as more banks use the Internet to garner deposits and as investors return to the market. "The pie is probably not going to get much larger," he said.

For the moment, high yields and the Internet translate to stunning growth. ING was paying 2.28 percent on money-market accounts recently, according to, the fourth-highest rate nationally.

Amassing $8.2 billion in deposits in roughly two years of existence, the U.S. arm of the giant Dutch bank turned profitable in the quarter that ended Sept. 30, according to FDIC data.

Internet rankings substitute for conventional advertising, says Greg McBride, a senior analyst at Rankings of high yields have "long been followed by fixed-income investors," he said.

The banks trolling in cyberspace today are different from the first generation, says James Eckenrode, a vice president at TowerGroup, a research firm in Needham, Mass. Traditional banks assumed that customers would flock to an online version offering the same services. In many cases, they did not raise rates or cut costs.

They were disappointed, Eckenrode said. "Everyone thought Internet banking would quickly be able to stand on its own."

The new crop of Internet banks aims lower. Gathering deposits from local customers as well as distant ones, the banks coax wary customers online.

At American Bank's headquarters in Allentown, Pa., employees steer customers to a reading room showcasing its online capabilities. Operating as, American became a hybrid start-up in 1997.

At ING, human beings figured in the bank's plans from the start, says David Lewis, its chief marketing officer. Instead of bank branches, it opened Internet cafes in New York and Philadelphia. And the bank's call center in Wilmington is as important as the Web site, he said.

"We have to answer calls in 20 seconds, and everyone's bonus depends on it," Lewis said.

"People still want to touch and feel" the institution that holds their money, said Hal J. Shaffer, chairman and chief executive of interState Net Bank, in Cherry Hill, N.J.

Low costs are key. Earthstar's humble base is a storefront in a Southampton shopping center. With no marble lobbies or expensive real estate to support, Earthstar made money in its first year of operation, in 2001.

The start-ups follow classic business plans otherwise. They are run by seasoned banking executives and well-connected boards of directors, and they focus on local commercial loans.

Do not expect these banks to emerge as national giants, says Chris Musto, a vice president of research at Gomez Inc., a research firm specializing in online commerce.

"It is a way for a community bank on the edge of a city to target the metropolitan area itself," Musto said. To go national requires name recognition that only money can buy, he said.

ING is spending that money in a national bid, after a successful launch in Canada using a similar strategy.

Hybrid Internet banks let their rates do their talking, and for the moment they've persuaded millions of depositors to listen.

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