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An industry goes back to its roots and branches
4 September 2002

As legend has it, the employees of Virtual Bank, headquartered in Palm Beach, Florida, turned up at the office one day to find a line of customers waiting outside the front door. The crowds were hoping to make deposits, transfer funds, withdraw cash and perform any number of other activities associated with everyday banking.

But it did not take long for the lingering consumers to realise they were out of luck: disappointed to learn that they would not be able to perform transactions at the corporate headquarters - and only physical location - of the "pure-play" internet-based bank, the nonplussed customers were forced to head back to their desktop computers.

Pure-play online banks have had a hard time over the last year. The highly-publicised decision by US-based Bank One to fold its online banking arm, Wingspan, back into its other internet initiatives led to a flurry of comment questioning the survival of virtual banks. Indeed, many web-only banks, such as G&L Bank, a Florida bank catering to gay and lesbian customers, and the Phoenix-based NextBank, have gone out of business.

Meanwhile, the industry had seen a high level of consolidation: traditional banks have bought up online banks, as in the case of Canadian-based CIBC's acquisition of Juniper Bank, and large pure-play banks have acquired their smaller rivals. According to a study of US online banks by TowerGroup, a Massachusetts-based research company, the pure-play web bank sector decreased to about 20 banks by early 2002, compared with around 40 two years ago.

The anecdote about Virtual Bank suggests that despite predictions to the contrary in the late 1990s, traditional bank branches are not going to disappear any time soon.

"There will always be people who won't use an ATM and people still like to visit branches for complex transactions," says Mariah Campbell-Holt, banking analyst with Gomez, a Massachusetts-based internet quality measurement firm. "Branches will be here for some time."

In the early days of internet banking, pure-play online banks offered several notable advantages over their offline counterparts. Apart from offering high interest rates and low or no fees, the original pure-play banks also implemented some of the industry's most cutting-edge technologies. Unlike most of their traditional competitors, many of these banks offered (and continue to offer) real-time transaction processing and multi-channel capabilities, from 24-hour telephone service to offering access to brokerage and bank accounts via a single screen.

But in more recent times, traditional banks have begun to develop similar services. "The pure-plays made real-time and multi-channel banking possible, but traditional banks have copied these crucial capabilities and because of their marketing strength they are able to convince customers to adopt them," says Hubert Tardieu, president of finance industry solutions at SchlumbergerSema, the IT solutions company.

As online banking begins to look more attractive to the general consumer, the role of the conventional walk-in branch is changing. Aided by the growing acceptance of multi-channel banking via phone and the internet, branches are gradually evolving into high-tech financial hubs with top-notch customer service. "Banks are attempting to migrate non-essential branch activity to other channels through education and pricing while focusing on the branch as a place for conducting more complex transactions," says Penny Gillespie, senior e-finance industry analyst at technology consulting firm Giga Information Group.

In the US, branch banks have begun to offer kiosks and internet access. CIBC, for example, provides internet access to customers visiting its kiosks at supermarkets. Meanwhile, Bank of America is creating self-service financial emporiums. Bank of America customers can make trades while being supervised by investment brokers, as well as consult with financial planners and mortgage brokers.

And at its Wal-Mart branch in Jacksonville, Arkansas, First Arkansas Bank & Trust has relocated its staff to the back-office, linking specialists to branch customers via video link. "I expect to see more of this strategy of linking customers to specialists," says Ms Gillespie.

Many believe that the "super-branch", multi-channel bank, integrating high-level customer service with real-time services is the way of the future. "The winners in the future will be those who blend the physical and the technical," says Chris Gentle, director of research at Deloitte Consulting. "Those that gradually modify customer behaviour towards lower cost channels for routine transactions, while providing excellent face-to-face service will survive and prosper."

With no offline presence and the difficulty of attracting customers away from the well-recognised brand names of the newly souped-up "brick-and-mortar" banks, it looks like pure-play online banks are headed for oblivion. Yet the remaining core of web-based contenders feels confident about the future.

Douglas Freeman, chief executive of NetBank, a major - and profitable - web-based bank headquartered in Atlanta, Georgia, believes that a branchless bank can compete against brick-and-mortar institutions, "No one doubts that online banking is fast becoming a significant, if not dominant channel, for the delivery of financial services," says Mr Freeman.

"With operating costs at approximately half those of a branch bank, we are able to pay higher deposit rates, charge fewer fees and provide better service."

Many internet banks, in any case, are recognising the need for some sort of physical presence. For instance, customers of Nationalinterbank, a web-based bank headquartered in Indianapolis, Indiana, can now make deposits by visiting their local branch of the mail services outlet, Mailboxes Etc.

Ultimately, in the future, it may become increasingly difficult to distinguish an internet bank from its traditional offline counterpart. Already, in this climate, the word "pure-play" seems like a misnomer.